Finance Ch. 5
the expression (1+r)^t is called the
future value interest factor
compound interest is
gets bigger every year
FV
the amount an investment is worth after one or more periods
One of the basic problems faced by the financial manager is how to determine
the cash flows expected in the future
PV
the current value of future cash flows discounted at the appropriate discount rate
compounding
the process of accumulating interest on an investment over time to earn more interest
discount rate
the rate used to calculate the present value of future cash flows
simple interest is
constant each year
compound interest
interest earned on both the initial principal and the interest reinvested from prior periods
interest on interest
interest earned on the reinvestment of previous interest payments
simple interest
interest earned only on the original principal amount invested
the discount rate is called the
rate of return
discount
calculate the present value of some future amounts
discounted cash flow (DCF) valuation
calculating the present value of a future cash flow to determine its value today
increasing the discount rate
decreases the PV value and vice versa