Please enable JavaScript.

Coggle requires JavaScript to display documents.

SU3- Time Value of Money - Coggle Diagram

- - - - Accounts for original principal amt only i.e. fixed % over a certain period
      - Interest earned- does not further generate additional interest
    - - Accounts for original principal amt + interest earned in prior periods
  - - - Current worth of future cashflow / initial investment for future
      - Discount- calculate PV of future CF
      - Discounting factor- 1/(1+r)
    - - Worth of money at a specific future date
      - Compound- determine FV of present investment
      - Compounding factor- (1+r)
  - - - Time 0- today/now
      - Drawn from 1 single perspective
      - Inflow- positive number e.g. when borrow money from bank
      - Outflow- negative number e.g. when lend money to others
      - Discount rate
        
        Show it unless it is constant thruout
        
        To follow same time unit as the time period
- - - - What?
        
        Fixed/given period of time
        
        Regular intervals
        
        Fixed CF sum
        
        Perpetuity (special annuity)- payment ongoing forever
      - E.g. pension fee
      - Types
        
        When?
        
        Annuity due- payment at beginning of period
        
        Functional differences? Ordinary annuity is less than annuity due by 1 compounding period
        
        Ordinary- payment at end of period
        
        How?
        
        Constant
        
        Growing- payment grows at constant rate
- - - - Positive NPV- accept
      - Negative NPV- reject
      - NPV = 0- indifferent
      - Mutually exclusive- choose project with higher NPV
  - - - IRR > discount rate/required rate of return- accept (cos positive NPV)
      - IRR = discount rate/required rate of return- indifferent
    - - Does not account for discount rate- problematic esp for long-term projects when discount rate likely to change/fluctuate
      - Not applicable when discount rate unknown (no benchmark)
      - Less effective when there are multiple subsequent investment (cash outflow)