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Things to remeber
- PV is a value of future cash flows relative to today.
- Always use the same lenght of periods.
- It is only possible to compare or combine values at the same point in time.
- The present value formula for the perpetuity already discounts the cash flows to one period prior to the first cash flow.
- The effective annual rate(EAR) is often referred to as the effective annual yield(EAY) or the annual percentage yield(APY).
- When computing the present value of an annuity, a common mistake is to use the annuity formula with single interest rate even though interest rates vary with the investment horizon.
- The real interest rate(the rate of rowth of your purchasing power, after adjusting for inflation) should not be used as a discount rate for future cash flows(it can only be used if the cash flows have been adjusted to remove the effect of inflation(cash flows are in real terms))
NPV profile of 'PV/FV(many flows)'
One of the oldest rules in the investing world says that if you seen an article about the event in the news it is too late.