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Annual Percentage Rate (APR) Definition: Periodic rate times the number of periods in a year. How it is used: The APR is used to determine the interest rate on a certain amount invested or borrowed. Formula: m= periods per year r= periodic rate Example: A customer walks into a bank to get a loan for a new car, they find out that the interest rate of the loan is 2% a month (12 months in a year). What is the APR? Therefore the APR would be 24% (APR) or borrowed. erest rate of the loan Rate of Return (ROR) Definition: The ratio of money that was gained or lost in an investment. Another way of saying it is the amount of money returned per unit of time expressed as a percentage of the cost How it is used: The ROR is used based on the loss or gain of an investment. ROR Formula: Example: Say you bought stock for $30.00 and it paid you $0.50 dividend at the end of the year, and is now worth $45.50. Plug in those numbers into the Rate of Return Formula as follows. The rate of return for the above example would be a 53% ) y of saying it rcentage of the cost s now worth $45.50. Net Present Value (NPV) Internal Rate of Return (IRR) Definition: (NPV) The difference between present value cash inflows and the present value of cash outflows. (IRR) The rate of growth a project is expected to get back. How it is used: Does the capital budget expected return exceed the required return? IRR Formula: Example: The table below shows the numbers that we can imput into the formula. Year (n) Cash Flow (Cn) 0 -1,500 1 1000 2 1330 3 1680 4 1500 1000 1330 1680 1500 ������������10%= -1500+(1.10)1 + (1.10)2 +(1.10)3 + (1.10)4 = +2795 ) IRR) Future Value Formula (FV) Definition: To find out the future value of an investment. How it is used: Using this formula will help a manager decide what an investment will be worth in the future. FV Formula: Example: An investor invests in a stock that is $3,000 and pays an interest rate of 10% per year for 10 years. What would the future value be? The future value of the $3,000 purchase (as long as the interest rate stays the same) is $7,781 FV) orth in the future. ear for 10 years. Present Value Formula (PV) Definition: The amount of an investment that is made at the time of purchase. How it is used: To know how much you would have to invest if wanting a certain amount of profit. PV Formula Example: A client wants to know the present value of $5,000 to be received 10 years from today if the return is 10% per year. What would the present value be? So if the client wanted to make $5,000 in the next 10 years then he would have to put down $1,927.72. (PV) e return is 10% per year. n $1,927.72. Profitability Index Formula (PI) Definition: The present value of the future cash flows divided by the initial investment. Also known as the benefit-cost ratio. How it is used: This method is used to evaluate capital budgeting projects. A manager should approve the project if the PI is g PI Formula: Example: A new business has an NPV of $350 and required an initial cash flow of $-2,000. What would the businesses PI be? So, with a PI of 1.18 a firm would get back $1.18 of present value back for every $1 that was invested or an NPV of $0.18 for e la (PI) known as the benefit-cost ratio. d approve the project if the PI is greater than 1.0. What would the businesses PI be? s invested or an NPV of $0.18 for every dollar invested.

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posted: | 1/16/2013 |

language: | English |

pages: | 12 |

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