Terms
WHAT IS PRESENT VALUE?
The current value of a sum of money that will be received or paid in the future.
WHAT DOES POSITIVE AND NEGATIVE CASH FLOW MEAN?
Positive cash flow means more money is coming into the business than going out, while negative cash flow means more money is being spent than received.
WHAT IS FUTURE VALUE?
The value of money at a specific time in the future, considering interest or growth.
Which of the following is an example of outgoing cash flow?
A) Sales revenue
B) Loan repayment
C) Investment returns
D) Stock dividends
B
SURPRISE = BONUS $100
WHAT IS TVM?
(TIME VALUE OF MONEY)Money today is worth more than the same amount in the future due to its earning potential i.e. a dollar today is worth more than a dollar received on a future date.
Why is money today considered more valuable than the same amount in the future?
Because of its earning potential and investment opportunities
WHAT IS DISCOUNT RATE AND COST OF CAPITAL?
It is the rate of return used to discount future cash flows back to their present value.
the minimum rate of return necessary to invest in a particular project or investment opportunity.
SURPRISE = BONUS $200
If you have a future value of $20,000, an annual discount rate of 5%, and a time period of 3 years, what is the present value?
(PV = FV / (1 + r)^n = 20,000 / (1 + 0.05)^3 = 20,000 / 1.157625 = 17,233)
WHAT IS CASH FLOW? AND THEIR TYPES
The movement of money into and out of a business or investment.
•Incoming Cash Flow: Revenue, loans, etc.
•Outgoing Cash Flow: Expenses, investments, loan repayments, etc.
What is the present value of $12,000 to be received 5 years from now if the discount rate is 6% per year?
(PV = FV / (1 + r)^n = 12,000 / (1 + 0.06)^5 = 12,000 / 1.338225 = 8,953)