RSM230H1 Lecture Notes - Lecture 2: Basis Point, Net Present Value, Interest
Document Summary
Time value of money: a dollar today is worth more than a dollar in the future. Opportunity cost of money: interest rate that would be earned by investing. Required rate of return/discount rate: market interest rate (k); investor"s opportunity cost. Interest rate * number of years = 72. Compound return: average annual growth rate in value of invested. Search for higher returns can lead to underestimation of risks. Amount to put in bank today to get x in future. Discounting: finding present value of future value by accounting for time value of money. Find value of projects such as building new factory, buying a competitor. Maximizing current share price does not mean maximizing current profits. Share value will go up when people know about it. When news of new factor with positive npv comes out. Present value interest factor (pvif)/discount factor: 1 / (1+k)n. Discount rates always <1 if discount rate is positive.
