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