NPV and Taxes

The NPV (net present value) of an investment is calculated by adding together the present value of each of the individual cash flows associated with the investment. The purpose of this tutorial is to discuss the effect of taxation and depreciation on each of the investment cash flows and, as a result, on the NPV of the investment itself.

NPV and Taxes October 5th, 2016Team
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Flat Interest Rate

The term flat interest rate is sometimes used in relation to loan agreements (particularly car loans) to show the rate of interest based on the original principal loan amount (PV).

Flat Interest Rate October 5th, 2016Team
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Profitability Index

The profitability index (PI) of a series of cash flows is found by calculating the present value of all the cash flows from a project (PV) and dividing the value by the initial investment (I). The profitability index is sometimes referred to as the value investment ratio.

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Continuous Compounding

Normally when computing compound interest the compounding period is a discrete interval, annually, quarterly, monthly, weekly etc. There is nothing however to stop the compounding period getting smaller and smaller until eventually interest is calculated on the balance of the principal amount plus accumulated interest on a continuous basis.

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Simple and Compound Interest

Simple interest and compound interest are methods used to calculate interest based on a principal, rate, and term.

For the same principal, rate, and term, simple interest is always lower than compound interest due to the fact that interest is calculated on interest when using the compounding interest method.

Simple and Compound Interest October 5th, 2016Team
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Effective Interest Rate for any Time Period

The effective interest rate adjusts the stated nominal rate to allow for the effects of compounding over a specific time period, referred to as the effective period. Different compounding periods earn different amounts of interest and the effective interest rate allows comparisons to be made by converting these to an equivalent rate as if compounding took place once every effective period,

Effective Interest Rate for any Time Period October 5th, 2016Team
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Effective Annual Rate (EAR)

The effective annual rate adjusts the stated nominal rate to allow for the effects of compounding. Different compounding periods earn different amounts of interest and the effective annual rate allows comparisons to be made by converting these to an equivalent rate as if compounding took place once at the end of the year, hence the alternative name of annual equivalent rate (AER).

Effective Annual Rate (EAR) October 5th, 2016Team
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IRR Internal Rate of Return

The net present value of a series of cash flows is the sum of the present values of each of the cash flows. The internal rate of return (IRR) is the discount rate which will produce a net present value (NPV) of zero.

IRR Internal Rate of Return October 5th, 2016Team
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