| Corporate finance course | How to calculate present value |
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| • Since PV are all expressed in current USD, we can add them up. PV = C1 /1+r + C2/(1+r)2 +.... PV= sum Ct/(1+r)t NPV = C0 (negative figure) + somme Ct/(1+r)t Ex: You are Sodi, in Devnya. You produce soda ash. You want to buy a new equipment. It costs 500 000 DM and brings 200 000 DM cash flow during 3 years. At the end the machine is worth 100 000 DM. If the occ is 10 %, what is the NPV. Recall that we suppose that we pay at the begin of a period and receive money at the end. • compound interests and simple interests compound: the interests generate interests: 100-110-121-133,1 simple: 100-110-120-130 Most of the time, we use compound interest rates. Interest rates can also be paid continuously. Then PV tables help us. • Real rates of interest We oppose: - current/nominal USD or CF to - constant/real USD or CF Real CF = nominal CF/1+inflation rate • remarks NPV must be calculated with the occ, and not with the interest of a loan associated to this project that you get from your bank. Your loan was given by your bank according to the health of your company, and not according to the risk of the project. If your loan is at 15 %, and the expected return of the project at the expected return of stocks with similar risks at 18 %, you should not accept the project. It would be more logical to accept the loan and invest the money in stocks that have a similar risk and an expected return of 10 %. The central element: cash flows >> |
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Corporate finance PART ONE: CAPITAL EXPENDITURE PART TWO. BASICS OF FINANCE PART THREE FINANCING DECISIONS PART FOUR FINANCIAL MANAGEMENT Course created and updated by Dr David Chelly, PhD in Management sciences from the University of Tours.
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