Foundations of Finance

01Defining Finance and the Financial System 02Valuation and Management: The Two Challenges 03Stocks, Flows, and the Five Cash-Flow Decisions 04Time, Risk, and the Six Principles of Finance 05How to Learn Finance: Practice and Study Habits Problem set0/10 Problem set 20/10 Practice∞

Present Value

01Information and Price: An Auction and Fannie Mae 02Who Pays for the Fannie and Freddie Guarantee?03What Counts as an Asset: Patents, Secrets, Brands 04An Asset as a Sequence of Dated Cashflows 05The Value Operator and the Cashflow Timeline 06Dates as Currencies: Building Net Present Value 07Discount Factors: Market Prices for Future Dollars 08A Worked Net Present Value and Its Assumptions 09The Opportunity Cost of Capital and Present Value Problem set0/10 Problem set 20/10 MIT problem set0/5 Practice∞

01Does the Currency Change an NPV's Sign?02Moral Hazard and Contagion: Where Bailouts Stop 03The NPV Rule at Work, and Choosing the Rate 04The Perpetuity: Why Cash Forever Is Worth C/r 05Reading the Rate Off a Perpetuity's Price 06The Growing Perpetuity, and When Growth Outruns r 07Building the Annuity from Two Perpetuities 08The Annuity Discount Factor and Mortgage Payments 09APR, the Effective Annual Rate, and Compounding Problem set0/10 Problem set 20/10 MIT problem set0/13 Practice∞

A Worked Net Present Value and Its Assumptions

How does converting each cashflow at its own exchange rate make the project decision trivial, and which three assumptions does it need?

Loading…

←Previous Discount Factors: Market Prices for Future Dollars Next The Opportunity Cost of Capital and Present Value →

Your summary note

1. The worked NPV at exchange rates 0.90 and 0.80
  Note the deeper discount farther out, then work the $10 million project paying $5 million and $7 million, converting each cashflow at its own rate, to reach $0.10 million, or $100,000.
2. The NPV decision rule
  Reduce the invest-or-not question to whether you want $100,000, state the rule for positive- and negative-NPV projects and for ranking competing ones, and record which step is the hard part.
3. Three assumptions under every NPV calculation
  List the three requirements on cashflows, exchange rates and conversions, illustrate the third with the fee a real currency exchange charges, and record when and how the course relaxes them.
Attempt 1 of 2