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∞

The NPV Rule at Work, and Choosing the Rate

How can a lighting system that costs more than three years of savings still be worth buying?

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Your summary note

1. The many names of $r$ , and asset versus value
  State the framework $V_0 = \sum_t C_t/(1+r)^t$ with the investment cost as a date-zero cash flow, list the names $r$ travels under, and record the distinction between an asset and its value.
2. The present value of $1 received in year $t$
  Work $1 forward at $r = 5\%$ to 1.05, 1.103 and 1.158, write both directions of the equivalence, and sketch the present-value curves at 4%, 8% and 12% over thirty years.
3. The lighting-system investment at 4%
  Lay out the cash flows of 230,000 paid at date zero and 90,000 in each of years one to three, discount them to 86,538, 83,210 and 80,010, and total to $19,758.
4. Choosing $r$ , and the CNOOC interest subsidy
  Record what a 10% opportunity cost does to the decision, state that $r$ is a rate the market actually gives you, and value CNOOC's $7 billion of cheap loans against an 8% borrowing rate.
Attempt 1 of 2