Where C is cash flow, r is interest rate and t is time
Example: if you deposit 100 eUR into a saving account that gives 10% interest and you keep it there for 2 years, you will get 121 EUR
Present value of a project C PV =
Exercice: you are recommended to invest in a magazine 85.000 EUR. You are certain thet the next year the magazine will worth 91.000 EUR. Given the discount rate of 10%, should you undertake this investment?
Sensitivity analysis – involves an estimation of how the investment’s figure of merit (NPV) varies with changes in one of the uncertain economic factors that it depens on, such as: price, sales, etc. one approach is to calculate three returns coresponding to an optimistic, a pessimistic and a most likely forecast for the uncertain variables.
Scenario analysis – is a modest extension that changes several of the uncertain variables in a mutually consistent way to describe a particular event
Simulation – is an extension of 1 and 2, in which the analyst assigns aprobability distribution to each uncertain factor. For each set of values the computer calculates particula outcome