Capital

Budgeting
GROUP 02
 Valuing Cash Flows at Different
Points in Time
Rule 1: Comparing and Combining Values
It is only possible to compare or combine values at the same point in
time.
To compare or combine cash flows that occur at different points in
time, there is a need to convert the cash flows into the same units by
moving them to the same point in time.

Classification: GENERAL
 Valuing Cash Flows at Different
Points in Time
Rule 2: Compounding
To calculate a cash flow’s future value, you must compound it.
This process of moving forward along the timeline to determine a
cash flow’s value in the future (its future value).
Future value – the value of a cash flow that is moved forward in time

Classification: GENERAL
 Valuing Cash Flows at Different
Points in Time
Time value of money – difference in value between money today and
money in the future.

FV – Future Value
C – Cash Flow
n – periods into the future
r – interest rate

Classification: GENERAL
 Valuing Cash Flows at Different
Points in Time
Rule 3: Discounting
To calculate the value of a future cash flow at an earlier point in time,
we must discount it.
Discounting is the process of finding the equivalent value today of a
future cash flow.

Classification: GENERAL
 Valuing Cash Flows at Different
Points in Time

PV – Present Value
C – Cash Flow
n – periods into the future
r – interest rate

Classification: GENERAL
 Net Present Value
Difference between the present value of cash inflows and the present
value of cash outflows over a period of time. NPV is used in capital
budgeting and investment planning to analyze the profitability of a
projected investment or project.

Classification: GENERAL
 Perpetuities and Annuities
Perpetuity - a stream of equal cash flows that occur at regular
intervals and last forever

Classification: GENERAL
 Perpetuities and Annuities
Annuities - a stream of equal cash flows arriving at a regular interval
over a specified time period.

Classification: GENERAL
 Perpetuities and Annuities

Classification: GENERAL
 Growing Perpetuity
Growing perpetuity - a stream of cash flows that occurs at regular
intervals and grows at a constant rate forever

Classification: GENERAL
 Growing Annuity
Growing annuity - a stream of growing cash flows, paid at regular
intervals.

Classification: GENERAL
 Growing Annuity

Classification: GENERAL
 Net Present Value and Time Value
of Money
The process of analyzing the company’s financial statements for
decision-making purposes.
Used by both external and internal stakeholders.
Evaluates a company’s performance or value through a company’s
balance sheet, income statement, or statement of cash flows.

Classification: GENERAL