Laarne Sarte

FIN31m

1. Time Valu of Money
The idea that money available at the present time is worth more than the
same amount in the future due to its potential earning capacity. This core
principle of finance holds that, provided money can earn interest, any amount
of money is worth more the sooner it is received.

Also referred to as "present discounted value".

2. Annuity
A financial product sold by financial institutions that is designed to accept and
grow funds from an individual and then, upon annuitization, pay out a stream
of payments to the individual at a later point in time. Annuities are primarily
used as a means of securing a steady cash flow for an individual during their
retirement years.
3. Present Value
The current worth of a future sum of money or stream of cash flows given a
specified rate of return. Future cash flows are discounted at the discount rate,
and the higher the discount rate, the lower the present value of the future
cash flows.
4. Future Value
The value of an asset or cash at a specified date in the future that is
equivalent in value to a specified sum today. There are two ways to calculate
FV:

1) For an asset with simple annual interest: = Original Investment x
(1+(interest rate*number of years))

2) For an asset with interest compounded annually: = Original Investment x
((1+interest rate)^number of years)

5. Annual Percentage Rate - APR'
The annual rate that is charged for borrowing (or made by investing),
expressed as a single percentage number that represents the actual yearly
cost of funds over the term of a loan.
6. Annual Percentage Due
An annuity whose payment is to be made immediately, rather than at the end
of the period.
7. Capital Investment
Funds invested in a firm or enterprise for the purposes of furthering its
business objectives. Capital investment may also refer to a firm's acquisition
of capital assets or fixed assets such as manufacturing plants and machinery
that is expected to be productive over many years.

8. Payback
The length of time required to recover the cost of an investment. The payback
period of a given investment or project is an important determinant of
whether to undertake the position or project, as longer payback periods are
typically not desirable for investment positions.

9. Discounted payback
a discounted payback period gives the number of years it takes to break even
from undertaking the initial expenditure. Future cash flows are considered are
discounted to time "zero."

10. Profitability Index
An index that attempts to identify the relationship between the costs and
benefits of a proposed project through the use of a ratio calculated as:






11. Net Present Value
The difference between the present value of cash inflows and the present
value of cash outflows. NPV is used in capital budgeting to analyze the
profitability of an investment or project.
12. Internal Rate of Return
capital budgeting that makes the net present value of all cash flows
from a particular project equal to zero. Generally speaking, the higher
a project's internal rate of return, the more desirable it is to undertake
the project. As such, IRR can be used to rank several prospective
projects a firm is considering. Assuming all other factors are equal
among the various projects, the project with the highest IRR would
probably be considered the best and undertaken first.