# Fundamentals of Financial Management Chapter 5

Time line:

An important tool used in time value analysis; it is a graphical representation used to show the timing of cash flows

Future value (FV):

The amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate

Present value (PV):

The value today of a future cash flow or series of cash flows

Compounding:

The arithmetic process of determining the final value of a cash flow or series of cash flows when compound interest is applied

Compound interest:

Occurs when interest is earned on prior periods’ interest

Simple interest:

Occurs when interest is not earned

Opportunity cost:

The rate of return you could earn on an alternative investment of similar risk

Discounting:

The process of finding the present value of a cash flows; discounting is the reverse of compounding

Annuity:

A series of equal payments at fixed intervals for a specified number of periods

Ordinary (Deferred) annuity:

An annuity whose payment occur at the end of each period

Annuity due:

An annuity whose payments occur at the beginning of each period

Future value the annuity:

The future value of an annuity over N periods

Perpetuity:

A stream of equal payments at fixed intervals expected to continue forever

Uneven (nonconstant) cash flows:

A series of cash flows where the amount varies from one period to the next

Payment (PMT):

This term designates equal cash flows coming at regular intervals

Cash flow (CFt):

This term designates a cash flow that’s not part of an annuity

Two important classes of uneven cash flows:

1- A stream that consists of a series of annuity payments plus an additional final lump sum (e.g., bonds)

2- All other uneven streams (e.g., stocks and capital investments)

2- All other uneven streams (e.g., stocks and capital investments)

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