[h] CPCU 410 – Module 8
[q] Time value of money concept
[a] Indicates the value of an amount received today is greater than the value of receiving that same amount in the future.
[q] Simple interest
[a] Interest earned only on the amount that was originally invested.
[q] Compound interest
[a] The interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.
[q] Future value
[a] The value of a current asset at a future date based on an assumed rate of growth.
[q] Stated interest rate
[a] The quoted rate of interest that does not consider the frequency of compounding.
[q] Effective annual interest rate
[a] The real return on a savings account when the effects of compounding over time are taken into account.
[a] The process of reducing a future value amount to a smaller present value.
[a] The process of increasing a present value into a larger future value.
[q] Present value
[a] The current value of a future sum of money or stream of cash flows given a specified rate of return.
[q] Discount rate
[a] The rate of return used in present value calculations.
[q] Net present value (NPV)
[a] Represents the difference between the initial cash outflow and the present value of future cash inflows. A common technique used to evaluate capital projects. Can be positive or negative.
[q] Limitations of net present value
[a] Limitations include:
Amounts and timing of actual cash flows may differ from the expected cash flows.
Analysis does not factor in the effect of uncertainty in the calculations.
Analysis disregards an organization’s non-financial goals.