Introduction to Finance-University of Michigan

1.1 Introduction to technical terms

r=Interest
pv=Present Value
fv=Final Value
1.2 How to calculate in excel
Key in =fv(.) according to the format. R=INTEREST, NPERS=Number of
Why is the value negative when you deposit the value? Well, YOU are
depositing the valuehence the value being in negative at first.
1.3 Present Value
Discounted cash/money means value that has become smaller. It could be
due to a variety of factors such as calculating the actual value of money in
the past, etc.
Next lecture will be on multiple payments.
2.1 Future value of annuity
Annuity can be in either the form of C(Cash) or PMT(Payment)
A classic annuity is a loan. You typically pay back a fixed amount to the
bank
Typically, nothing is happening at time period 0
2.2 Future value of an Annuity: Formula
FV=C(1+R)
2
+C(1+R)+C=C[(1+R)
2
+(1+R)+1
2.3 PMT
Derives present value from the future value
Calculates value at this point in time
=PMT( Etc.,etc.,etc.)
2.4 Present value of annuity
Compounding backwards to the present value is essentially what youre
trying to do!
C/(1+R)
N
, where N is the number of years away from present value
All value is determined at a point in time and looking forward
Value is created not by borrowing or lending money, but by creating new
ideas in society
2.5 Perpetuity
A perpetuity is simply a set of equal payments that are paid forever, with
or without growth.
Examples include: Stocks and Bonds
Bonds are limited in maturity
Stocks goes on forever (ideally)
PV=C/(R-G) (Present value of a constant growth perpetuity)
PV=C/G (Present value of a perpetuity)
3.1 NPV
Net Present Value calculates value at this point in time
Cash flow is a euphemism for profit
R captures the opportunity cost of investing in the idea. Opportunity costs
is the benefit derived from doing the next best thing.
Value is always incremental
But to what?
=npv(rate, 1
st
cash flow, 2
nd
cash flow)