Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Simple Interest:
Interest continues to accrue over a period of time at a given rate.
SI = P(r)(n)
Compounding of interest:
compensation for the investor not actually receiving interest periodically.
A = P (1+ r)n
Future & Present value
Future Value:
Value that money will acquire in future, if compounded at a given rate of return.
FV = PV (1+r)n
Present Value:
Value of money that is expected in future, today.
PV = FV/ (1+r)n
What is Capital Budgeting?
NPV:
If we consider a series of cash flows, and compute present values of all the
cash flows at a particular discounting rate, and then sum up the present
values, the result is called net present value.
NPV = CF0 – (CF1/(1+r)1 +CF2/(1+r)2+ .....+CFn/(1+r)n)
IRR:
The word internal or implicit is only to state that on the face of it, the rate was not explicit.
Profitability Index:
A ratio of whether and how much an investment will result in a profit. It is
calculated by taking the NPV of expected future cash flows from an
investment and dividing by the investment's original cost. A ratio above one
indicates that the investment will be profitable, while a ratio below one
means that it will not.
PI=PV of future cash flows/ Initial Investment
Payback Period:
The length of time it takes to recover the cost of an investment. It is
calculated as shown here:
PB= Cost of Project/ Annual Cash Inflows
Relevant Risks in Capital Budgeting
Stand-alone risk
Corporate risk
Market (or beta) risk
Stand-Alone Risk
Scenario Analysis
Simulation Analysis
Decision Tree Analysis
Scenario Analysis
Worst 0.25 $ 15
Base 0.50 82
Best 0.25 148
E(NPV) = $ 82
σ(NPV) = 47
ANIL SALEEM
FAhAD ALI
ADIL RAhMAN