INTG 201 Lecture 15: INTG201 Capital Budgeting 2 Lecture Notes
22 Nov 2016
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in the future interest rate: reflects money today, compared to money tomorrow. Impatience: nobody likes to wait, but everyone wants immediate benefits. Value in 1 year = principal + interest: +50 = . If you reinvest everything for another year at the same conditions, what is the future value in 2 years: . Fv = pv x (1 + r)^t. The process to compute future values is called compounding (cid:862)si(cid:373)ple i(cid:374)terest(cid:863): (cid:272)o(cid:373)puti(cid:374)g (cid:448)alues of i(cid:374)terest. Discount rate: when we evaluate investment projects in general, we use a rate to discount future cash flows to the present. Discount rate captures 2 ideas: the time value of money, riskiness of the investment projects: in contrast to the previous examples, cash flows in most investment projects are uncertain. One way to deal with this uncertainty is to estimate them but then discount the at a higher rate. This makes them less valuable thereby taking into account the fact that they are risky.
