Finance Theory I

Present Value Relations I 现值关系I

- Cashflows and Assets

What is an asset?

Business entity; property, plant, and equipment, patents, R&D; Stocks, bonds, options; Knowledge, reputation, opportunities, etc.

Patent [monopoly] - a legal agreement, grant ability of the sole user of the product for a finite period of time, sharing ideas

secret trading - keep it yourself

An asset is a sequence of current and future cashflows

- relatively to a pattern of time

- ordered in time, can be positive/negative, real numbers

Valuing an Asset Requires Valuing A Sequence of Cashflows

Value of Asset =

*Always draw a timeline to visualize the timing of cashflows

The Present Value Operator

- cashflows at different dates are different currencies

- given exchange rates [get from the market], either currency can be used as "numeraire"

steps to get the present value:

1. a numeraire date should be picked, typically t = 0 or "today"

2. cashflows can be converted to PV

Net Present Value: "net" of initial cost or investment, 

- if there is an initial investment, then  <0

- any future cashflow can be negative (costs)

- discount factor(due to impatience): a dollar today is not the dollar in the future, pay me 97 cents today and give you back $1 tomorrow

The Time Value of Money

Implicit assumptions/requirements for NPV Calculations:

- exchange rates are known (focus on this, where do they come from, how are they determined?)

- assume there is no frictions in current conversions

What determines the growth of $1 over T years? What determines the value today of $1 in Year T?

opportunity cost of capital r