Corporate Finance

Topics: Time value of money, Compound interest, Net present value Pages: 2 (261 words) Published: February 14, 2013
FORMULAS TIME VALUE OF MONEY
PV (simple without compounding) = FV/1+r
FV (simple without compounding) = PV (1+r)

PV (compounding) = FV / (1+r)n
FV (compounding) = PV (1+r)n

PV (for monthly, daily or bi-annually basis) = FV / (1+r/m)n*m FV (for monthly, daily or bi-annually basis) = PV(1+r/m)n*m

To find interest rate: FV = PV (1+r(?))n (FV and PV are given) APR (Annual Present Rate) = r * Total days in a year/given days In Excel: =RATE(n,pmt,PV)

EAR (Effective Annual Rate) OR EAY (Effective Annual Yield): EAR/EAY = [1+r/m]m – 1 (m = no. of periods)
In Excel: =EFFECT(r,n)

Continuous Compounding (to find FV) = Co * er*t
Co = initial investment
e = 2.718 (constant)
r = APR (rate of interest)
t = No. of years (periods)
Continuous Compounding (to find PV) = Co * 1/er*t

PERPETUITY
PV = C/r (C = Cash inflow)
PV of Growing Perpetuity = PV = C/r-g (r = initial rate, g = growth rate) * Initial rate is always greater than growth rate.

Perpetuity Interest Rate
Perpetuity Interest Rate

Annuity
PVA (Present value of annuity) = C[1/r – 1/r(1+r)t ]

PV Of Growing Annuity = C[(1+r)t -1/r]

FVA (Future value of annuity) = PMT/r-g[1- (1+g)n/(1+r)n]

NET PRESENT VALUE
NPV = - Cost (PV) + Benefit (PV)
* ‘-‘sign shows outflow of cash while ‘+’ sign shows inflow of cash.

Investment is profitable, if-----------------------Cost (PV) Benefit (PV) Investment is not profitable, if-------------------Cost (PV) Benefit (PV)
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