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Money has a time value: a $ or £ or € today, is worth more than a $ or £ or € next year. A risk free interest rate may represent the time value of money. Inflation too can create a difference in money value over time. It is NOT the time value of money. It is a decline in monetary purchasing power. | Chapter 5: Essential Formulae in Project Appraisal A Coverage of the Formulae and Symbols Used to Evaluate Investment Projects Fundamentals in Financial Evaluation Money has a time value: a $ or £ or € today, is worth more than a $ or £ or € next year. A risk free interest rate may represent the time value of money. Inflation too can create a difference in money value over time. It is NOT the time value of money. It is a decline in monetary purchasing power. Moving Money Through Time Investment projects are long lived, so we usually use annual interest rates. With compound interest rates, money moved forward in time is ‘compounded’, whilst money moved backward in time is ‘discounted’. Financial Calculations Time value calculations in capital budgeting usually assume that interest is annually compounded. ‘Money’ in investment projects is known as ‘cash flows’: the symbol is: Ct Cash flow at end of period t. Financial Calculations The present value of a single sum is: PV = | Chapter 5: Essential Formulae in Project Appraisal A Coverage of the Formulae and Symbols Used to Evaluate Investment Projects Fundamentals in Financial Evaluation Money has a time value: a $ or £ or € today, is worth more than a $ or £ or € next year. A risk free interest rate may represent the time value of money. Inflation too can create a difference in money value over time. It is NOT the time value of money. It is a decline in monetary purchasing power. Moving Money Through Time Investment projects are long lived, so we usually use annual interest rates. With compound interest rates, money moved forward in time is ‘compounded’, whilst money moved backward in time is ‘discounted’. Financial Calculations Time value calculations in capital budgeting usually assume that interest is annually compounded. ‘Money’ in investment projects is known as ‘cash flows’: the symbol is: Ct Cash flow at end of period t. Financial Calculations The present value of a single sum is: PV = FV (1 + r)-t - the present value of a dollar to be received at the end of period t, using a discount rate of r. The present value of series of cash flows is: Financial Calculations: Cash Flow Series A payment series in which cash flows are Equally sized And Equally timed is known as an annuity. There are four types: Ordinary annuities; the cash flows occur at the end of each time period. 2. Annuities due; the cash flows occur at the start of each time period. Financial Calculations: Cash Flow Series 3. Deferred annuities; the first cash flow occurs later than one time period into the future 4. Perpetuities; the cash flows begin at the end of the first period, and go on forever. Annuities: types 3 and 4. α Evaluation of Project Cash Flows. Cash flows occurring within investment projects are assumed to occur regularly, at the end of each year. Since they are unlikely to be equal, they will not be annuities. Annuity calculations apply more to loans and other types of .
