Chapter 2 Calculate Present Valu

Fundamental formula

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The interest rate is called compound rate (复利率）

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This is called discounted rate (贴现率）

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This is called discounted cash flow formula (DCF)

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This is net present value

Opportunity cost (the cost of capital)

Opportunity cost is the return foregone by not investing in financing markets. For example, a FM should determine whether the company should invest a building with a return at 14%. If he invest the money in the stock market, the return will be 12%. Meanwhile, a bank would lead him the money that you need for the building at 8%.
Question: Is 8% the opportunity cost?
Obviously not, the interest rate on the loan has nothing to do with the risk of project(两者确实没关系）: it reflects the good health of your existing business. Second, whether you take the loan or not, you still face the choice between the building and an equally risky investment in the stock market.

Perpetuities##

Perpetuties are bonds that the government is under no obligation to repay but that offer a fixed income for each year to perpetuity (This definition is based on bonds, i.e. Consols).

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Growing perpetuities

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Assumption: r is greater than g

Annuities##

Basic idea to calculate annuities stems from perpetuities

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An annuity is an asset that pays a fixed sum each year for a specified number of years

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Growing annuities

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Quoted annual interest rate & effective annual rate##