# toolbox

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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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 views: 2 posted: 1/16/2013 language: English pages: 12