Chapter 5: Essential Formulae in Project Appraisal. A Coverage of the Formulae and Symbols Used to Evaluate Investment Projects . Fundamentals in Financial Evaluation. Money has a time value: a $ or £ or € today, is worth more than a $ or £ or € next year.
A Coverage of the Formulae and Symbols Used to Evaluate Investment Projects
PV = FV (1 + r)-t
- the present value of a dollar to be received at the end of period t, using a discount rate of r.
is known as an annuity.
There are four types:
2. Annuities due; the cash flows occur at the start of each time period.
Annuities: types 3 and 4.
3. Deferred annuities; the first cash flow occurs later than one time period into the future
4. Perpetuities; the cash flows begin at the end of the first period, and go on forever.
Common worksheet errors are:
Methods to reduce errors:
1.The Time Value of Money is a cornerstone of finance.
2. The amount, direction and timing of cash flows, and relevant interest rates, must be carefully specified.
3. Knowledge of financial formulae is essential for project evaluation.
4. NPV and IRR are the primary investment evaluation critertia.
5. Most financial functions can be automated within Excel.
6. Spreadsheet errors are common. Error controls should be employed.
7. To reduce spreadsheet errors: -document all spreadsheets, keep a list of authors and a history of changes, use comments to guide later users and operators.
8. Financial formulae and spreadsheet operation can be demanding. Seek help when in doubt.
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