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13 Cards in this Set
- Front
- Back
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time value of money |
is a fact that money makes money, explains how the amount of money changes over time for both money owed and money borrowed (inflation, oppertunity costs, etc) |
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economic equivelence |
a combination of time value of money and interest rate that makes different sums of money at different times have equal economic value |
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cash flow |
the flow of money into and out of a company, project or activity. revenues are cash inflows and carry a positive (+) sign. expenses are outflows and carry a negative (-) sign. |
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end of period convention |
to simplify calculations cash flows (revenue and costs) are assumed to occur at the end of a time period. an interest period or fiscal period are typically 1 year . A half year convention is typically used for depriciation calculations. |
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cost of capital |
the interest rate incurred to ontain caital investment finds. COC is usually a weighted average that involves the cost of dept capital ( loans, bonds, mortgages) and equity capital ( stocked and retained earnings) |
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Minium Attractive Rate of Return (MARR) |
a reasonable rate of return for the evaluation of of an economic alternative. also called the hurdle rate. MARR is based on cost of capital, market trend, risk etc. the inequality ROR >MARR>COC is correct for an economically viable project? |
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opportunity cost |
a forgone opportunity caused by the inability to pursue a project. numerically it is the largest rate of return of all the projects not funded due to lack of capital funds. stated differently its the ROR of the first project rejected because of inavailability of funds. |
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nominal or effective interest rate (r or i) |
a nominal interest rate does not include any compounding: for example, 1% per month is equal to 12% a year. effective interest rate is the actual rate over a period of time because compounding is imputed. for example 1 % a month, compounded monthly is 12.683% a year. inflation is not included |
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placement of present worth (P or PW) |
in applying the (P/A,i%,n) factor, P or PW is always located one interest period prior to the first A amount. the A or AW is a series of of equal end of period cash flows for n consecutive periods, expressed as money per time |
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placement of future worth ( F: FW) |
in applying the (F/A, i%,n) factore, F or FW is always located at the end of the last interest peiod (year) of the A series |
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placement of gradient worth (P/G) |
the (P/G, i%,n) factor for an arithmetic gradient finds the P/G of only the gradient series 2 years prior to the apperence of the constant gradient G. the P/A factor for a geometric gradient determines p/G for the gradient and initial amount A 2 years prior to the appearence of the first gradient. |
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equal service requirement |
not done |
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LCM or Study period |
not do |
