Page 190 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Chapter 14

Recap of discounted cash flows (P2)

2.1 Time value of money

 Key concept is the time value of money. This is expressed as a discount rate.

 Discount rate reflects:
– risk

– inflation

– cost of finance

– alternative investment opportunities.

2.2 The basics of discounting

Discount factor Single Tables are provided in
n
=1/ (1+r) CF the exam

Annuity

factor=
1− (1+ r) − n Annuity Discounting Perpetuity

r

Tables are Perpetuity
provided in the factor = 1/r
exam
Perpetuity
with growth

Present value of a growing
perpetuity = CF t=1 × 1/ (r–g)

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