### Finance Theory I - Week 2

Chapter 2 - Value - How to Calculate Present Values

How are asset values determined?
Is the present value positive? - The value today exceeds the investment that is required
A positive net present value implies that the rate of return on investment is higher than your opportunity cost of capital.

Perpetuity investment - steady stream of cash flows forever
Annuity investment - steady stream for a limited period

Money has a time value - \$ x (1 + r)t
Value of investment
1 year \$ x (1 + r)
2 year \$ x (1 + r)2
in year 2 you earn interest on both your initial investment and the previous year's interest - compound interest

Calculating Present Values

How much do you need to invest today to get a certain amount at the end of a year?

Lecture starts at 19:17

Professor continues to mention that we won't understand everything right away and that we have to build knowledge. It will all come together and we will have an epiphany of understanding.

Cash Flow - money that is coming or going away from you

Asset -Business entity, property, plant, equipment, knowledge, reputation, research and development.

An asset is a sequence of cash flows - a combination of present and future cash flows

Assetₜ = (CFₜ, CFₜ₊₁, CFₜ₊₂, …)

Value of an Assetₜ = Vₜ(CFₜ, CFₜ₊₁, CFₜ₊₂, …)
Draw a line to visualize the timing of cash flows

Numeraire - a standard by which we measure everything - a base - use what money is equal to today
Cash flows at different points in time are like different currencies
Time₀ - cash flows can then be converted into present value
NPV - net present value operator - date 0 value of the cash flows - you have to figure out how to convert all the numbers to the same value, today's dollars

We can value cash flows
-we know the cash flows in advance
-we know the exchange rates (market)
-there is no friction in the exchange rates

We want to move money back and forth through time - any two dates you have to have an exchange rate

Recitation