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)