Capital
Budgeting
GROUP 02
Valuing Cash Flows at Different
Points in Time
Rule 1: Comparing and Combining Values
It is only possible to compare or combine values at the same point
in time.
To compare or combine cash flows that occur at different points in
time, there is a need to convert the cash flows into the same units
by moving them to the same point in time.
Classification: GENERAL
Valuing Cash Flows at Different
Points in Time
Rule 2: Compounding
To calculate a cash flow’s future value, you must compound it.
This process of moving forward along the timeline to determine a
cash flow’s value in the future (its future value).
Future value – the value of a cash flow that is moved forward in
time
Classification: GENERAL
Valuing Cash Flows at Different
Points in Time
Time value of money – difference in value between money today
and money in the future.
Classification: GENERAL
FV – Future Value
C – Cash Flow
n – periods into the future
r – interest rate
Valuing Cash Flows at Different
Points in Time
Rule 3: Discounting
To calculate the value of a future cash flow at an earlier point in
time, we must discount it.
Discounting is the process of finding the equivalent value today of
a future cash flow.
Classification: GENERAL
Valuing Cash Flows at Different
Points in Time
Classification: GENERAL
PV – Present Value
C – Cash Flow
n – periods into the future
r – interest rate
Net Present Value
Difference between the present value of cash inflows and the
present value of cash outflows over a period of time. NPV is used
in capital budgeting and investment planning to analyze the
profitability of a projected investment or project.
Classification: GENERAL
Perpetuities and Annuities
Perpetuity - a stream of equal cash flows that occur at regular
intervals and last forever
Classification: GENERAL
Perpetuities and Annuities
Annuities - a stream of equal cash flows arriving at a regular
interval over a specified time period.
Classification: GENERAL
Perpetuities and Annuities
Classification: GENERAL
Growing Perpetuity
Growing perpetuity - a stream of cash flows that occurs at regular
intervals and grows at a constant rate forever
Classification: GENERAL
Growing Annuity
Growing annuity - a stream of growing cash flows, paid at regular
intervals.
Classification: GENERAL
Growing Annuity
Classification: GENERAL
Net Present Value and Time Value
of Money
The process of analyzing the company’s financial statements for
decision-making purposes.
Used by both external and internal stakeholders.
Evaluates a company’s performance or value through a company’s
balance sheet, income statement, or statement of cash flows.
Classification: GENERAL