This document provides a comprehensive summary of the AFM course, covering all major topics and key insights discussed throughout the program. Additionally, a brief section is included with notes from the final guest lecture.
Normal people think in nominal terms for example, the amount of money we get. However,
inflation means that, in the future, the nominal amount will be worth less in real terms.
k:= nominal interest rate (5%) i := expected inflation (10%) r := real interest rate
Rule: discount nominal CF with k and discount real CF with r
If available capital is infinite invest in all positive NPV projects. In reality, this is seldom the
case. Solution:
1) Create all combinations.
2) Eliminate not realistic combinations.
3) Choose the combination with the highest NPV
Important
To compare project, we should look at them in the same time frame:
However, the time is not equal, so we must make them equal.
,For example, when you need to buy a new machine, we need to double the investment and double
the timeframe.
Annuity:
P = profitability index = PV of cash flows! (so npv – investments) / investments
You can’t tell which investment is better.
IRR = internal rate of return
, Generally, if irr is greater than the cost of capital then accepts the project.
A changing IRR is difficult, in case of changing cash flows this is the case.
Internal rate of return is not scalable. Highest IRR does not have to be the best project, because
the npv might still be lower.
IRR is only useful in combination with the NPV.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller danielhuijgen. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $6.43. You're not tied to anything after your purchase.
