Financial Management Formula Table (Class 1)

Discounted Cash Flow Formula

P=F/(1+i)n or Fx1/(1+i)n
Where:

- F = Future value
- P= Present value
- I= discounted rate
- n= number of time intervals (e.g. years, months, weeks) over which compounding takes
place.

Opportunity cost (?)

F=P/(1+k)
Where:

- P = total sacrifice at t0
- k= opportunity cost of capital (a percentage expresses as a decimal)

Net Present Value

NPV= CF0+CF1/(1+k)n + … CFn/(1+k)n

Where :

- CF0 = Cash flow at time zero (The total value sacrificed at the start of the project)
- CF1= Cash flow at time one (usually this is will be measured in either years, half years,
quarters or months)
- k= opportunity cost of capital (a percentage expresses as a decimal)
- n= number of time intervals over which cash flow is being analysed.

N.B. This formula is iterative over the number of time intervals that the investment is given. E.g. If
you are examining an investment that will run over a 5 year period and the time intervals for analyse
is in years, then you will have to do the CFn/(1+k)n calculation 5 times and sum the total of each
calculation and them add the value of CF0 to get the final NPV value.

Remember, if asked to make an investment decision based on NPV, then you should advise to invest
if the NPV is greater than or equal to 0. Reject if it is below 0.
Internal Rate of Return

CF0= (CF1/(1+r)) + …. +(CFn/ (1+r) n) = 0

This needs more work. There is something to do with interpolation and what I can only describe as
trial and error mathematical investigation.

Simple interest

F=P(1+in)
F=Future value

P= Present value

I= interest rate

n= number of years over which interest is accrued.

Compound interest

F=P(1+i)n
F=Future value

P= Present value

I= interest rate

n= number of years over which interest is accrued.

Present Values

P=F/(1+i)n or P=F x (1/(1+i)n)

F=Future value

P= Present value

I= interest rate

n= number of years over which interest is accrued.

Payback

Payback is a calculation that devises when the return of an investment has paid back the cost of the
initial investment. E.g. an investment the cost €10 is payback after four years if the cash flows for
each year are as follows: yr1=-3, yr2=0, yr3=5, yr4=9.

Discounted Payback

Apply discounted cash flow formula to payback cash flows for each time interval. Let us assume the
rate is 5%.

e.g.
Time interval (years) 0 1 2 3 4 5 Total
Undiscounted cash flow -10 -3 0 5 9 12 13 (Pybk=yr4)
Discounted cash flow -10 -2.86 0 4.32 7.40 9.40 8.26 (Pybk=yr5)
In this case, Discounted payback (Pybk) is achieve at year 5.

Expected Return

The expected return is the mean or average outcome calculated by weighting each of the possible
outcomes by the probability of occurrence and then summing the result. (Miroslava’s Notes
(Slide10.4))

𝑥̅ = x1p1 + x2p2 + … xnpn

X bar = the expected return

i = each of the possible outcomes (outcome 1 to outcome n)
p = probability of outcome i occurring
n = the number of possible outcomes

To put that more simply: Returns x probability of returns occurring = Expected returns

Miroslava’s notes actually do a reasonable job of explaining this:

The product of this …

…. will be this:
Standard Deviation

Again, Miroslava does a reasonable job of explaining the calculations in this slide:

The Important elements to remember here is the multiple formula required to complete this calculation.
There are 3 distinct formulas to remember:
Deviation = xi – X bar
Deviation squared = (xi – X bar)2
Deviation squared times probability = (xi – X bar)2pi
FYI, X Bar is that symbol of the x with a line over it.
Return on Holdings
Dividends received + (Share price at end of period – Purchase price)
= –––––––––––––––––––––––––––––––––––––––––
Return
Purchase price
–––––––––––––
OR

D +P –P
1 1 0
R = ––––––––––––
P
0