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# Net Present Value Calculator

What does Net Present Value mean?

The net present value is a financial calculation that, in essence, elaborates a company's cash flows. The Net Present Value will take an entity's cash flow– both incoming and outgoing flows–and combine them to yield a fundamental indicator. The net present value is a calculation used in discounted cash flow analysis; the calculation is a common method for utilizing the time value of money for appraising a long-term investment.

The net present value calculation is also used for capital budgeting purposes. Throughout finance, economics and accounting, the figure is used to measure the excess or shortfall of cash values, once financing charges are satisfied. When all future cash flows are incoming and the only outflow is represented by the purchase price, the net present value is simply the present value of the future cash flows minus the purchase price.

In general, the net present value refers to the present value of cash flows that are expected by a business model. The net present value formula is used to compare different types of investments, particularly in those situations where different investment values or different expected profits are to be expected at different times. By using the net present value of estimated investments and expected profits, a company’s investment plan can be compared evenly—this ultimately enables the company to render a decision on which investment route to proceed with.

What is a Net Present Value Calculator?

A net present value calculator calculates the present value of an annuity or investment product for a future value based on payments made at a fixed interest rate.  The Net Present Value Calculator will tabulate the present value or the amount that a series of future payments is worth now. The resource is free and may be utilized at a number of financial websites.

The typical net present value calculator will require the user to satisfy five components associated with the investment. The first component of the net present value calculator requires the user to input the interest rate per period; the next component requires the user to submit the number of periods aligned with the investment. Following the input of this information, the net present value calculator requires the user to input the future value of the investment and the payment amount. Once this is accomplished enter when the payment is due; once the information has been entered, simply click on ‘calculate’ and the net present value calculator will yield the present value of the annuity or investment product.

What is the Net Present Value Formula?

Each cash inflow and outflow is discounted back to its present value, and then summed together. As a result, the net present value is the sum of all terms: R(T)/(1+i)^t. In this equation, t= the time of the cash flow, i=the discount rate or the rate of return that could be earned on an investment in the financial markets with similar variables and risk), R(t)= the net cash flow or the amount of cash, inflow minus the outflow at the time.

The discount rate will fluctuate based on the firm’s business model; a number of firm’s will use their weighted average cost of capital; however, many people believe that it is appropriate to use a higher discount rate in order to adjust for risk or other external factors.

# Guide to the Discount Rate

What is the Discount Rate?

The discount rate is a common economic term that can mean the following indicators or maneuvers:
A discount rate can refer to the interest rate a central bank charges various depository institutions that borrow reserves from it. For example, a discount rate can refer to the interest rate that banks in the United States are charged for the use of the Federal Reserve’s discount window.
The discount rate may be used, in regards to computations of present value, synonymously with the interest rate.  It is important to note that the term “discount” in finance, refers a computation of various forms of present value (ie the net present value of a security or a discounted cash flow).
The discount rate may also be analyzed as the annual effective discount rate. The discount rate is significantly lower than the interest rate, because the nominal value is interpreted at a future value. Because this discount rate portrays the initial value as the nominal value minus a discount, it is typically used for Treasury Bills and other financial instruments of the same classifications.
What is the Annual Effective Discount Rate?

The annual effective discount rate refers to the annual interest divided by the capital including the interest, which is the interest rate divided by 100% plus the interest rate. The annual effective discount rate, in summation, calculates the annual discount factor, which is to be applied to the future cash flow. The annual effective discount rate, when applied to the future cash flow, will find the discount, when the figure is subtracted from a future value. For example, the discount rate for a treasury bills that sells for \$95 and pays \$100 in a year would be 5%–100-95/100. The interest rate is then calculated using the 95 as the base: 100-95/95=5.26%. For every annual effective interest rate, there is a corresponding annual effective discount rate.
Why is the Discount Rate Important?
A business, when deciding what to do with their profits (re-invest in the company or distribute to shareholders) will always consider the discount rate. In an ideal setting, the business would only buy an additional piece of equipment if it guaranteed the delivery of increased profits to the shareholders at a later date. That being said, the amount of excess profit that a shareholder requires to allow the company to buy the additional piece of equipment is based on the shareholder’s discount rate.

Elements of the Business Valuation Process:

Before a business can be properly analyzed and measured, the valuation assignment must specify the reason surrounding the business valuation. Once the reasons are stated, the business valuation process will initiate a description of national, regional and local economic conditions at the time of the valuation date. The business valuation process begins with an analysis of the underling businesses’ key economic variables.
A common source of such information is found in the Federal Reserve Broad’s Beige Book, which will list all pertinent statistics and measures associated with the business.

When the information is obtained the business valuation process calls for the undertaking of financial analysis. This process typically involves common size analysis, ratio analysis (evaluation of the firm’s turnover, liquidity, profitability, etc.), industry comparative analysis and trend analysis. Evaluating these statistics enables an analyst to compare the underlying company to other businesses in the same industry and to reveal trends, which ultimately affect the company, or industry as a whole, over time.
In addition to comparing the company with a competitor, the analyst will evaluate the company’s financial statements in different time periods. By doing so, the analyst can forecast and in growth or decline in profits or expenses, changes in capital structure and other financial trends. By analyzing these statistics, the business valuation process can assess the subject company’s level of risk, while, determining the selection of market multiples and the discount rate.

There are three different approaches commonly used in business valuation: the income approach, the market approach and the asset-based approach. Within each of these approaches, there are numerous techniques used for determining the value of a business. In most cases, the income approach is used to determine value by calculating the net present value generated by the business, while the asset-based approaches determine value by adding the sum of the business (net asset value). Lastly, the market approach determines value through a comparison of the subject company to other companies in a similar industry or geographic location.

# Understanding Risk Management

What is Risk Management?

Risk management refers to the identification, assessment of a risk in regards to an investment purchase or the productive procedures of a business entity. The process of analyzing risk is undertaken to minimize damage and the subsequent costs of repairing or replacing such damages in the future. In essence, risk management is simply a practice of systematically seeking cost effective approaches for minimizing the overall effect of a problem to the organization.

Because all threats of risk can never be fully avoided or accounted for, risk management simply aims at mitigating such situations. The procedure is preemptive in nature, but also analytical; the process of risk management will not only point out and subsequently evaluate all threats of a business, but will create a detailed resolution process to limit the damages realized.

Risk management is a critical process undertaken by all companies in the United States to prevent cataclysmic events from completely destroying the company’s business model. As stated before, all companies, regardless of industry face numerous risks. From manufacturing problems to transportation crashes or building collapses, a business is susceptible to not only liability issues but post-disaster problems.

As stated earlier, the risk management process tends to be preemptive; this process is held in contrasts to the business continuity planning model, which is underacted to deal with the consequences of a realized residual risk. The importance of business continuity planning arises because even unlikely events will occur if overlooked. The risk management process and business continuity planning are often and mistakenly lumped together as rivals or overlapping practices.

This assumption is somewhat pointless, because the processes act as compliments to one another. For instance, the risk management process creates fundamental and critical inputs for business continuity planning—risk management will analyze a company’s assets, their cost estimates and impact assessments. Furthermore, risk management will also propose applicable controls for the observed risks. As a result, the risk management process will cover several areas that are essential for the business continuity planning procedure.

That being said, the business continuity planning process is somewhat more in depth that risk management; the risk management is a preemptive approach that automatically assumes disaster will occur at some point in the future.

# Composite Risk Management

Risk Management Defined:

Risk management refers to the identification, assessment of a risk in regards to an investment purchase or the productive procedures of a business entity. The process of analyzing risk is undertaken to minimize damage and the subsequent costs of repairing or replacing such damages in the future. In essence, risk management is simply a practice of systematically seeking cost effective approaches for minimizing the overall effect of a problem to the organization. Because all threats of risk can never be fully avoided or accounted for, risk management simply aims at mitigating such situations. The procedure is preemptive in nature, but also analytical; the process of risk management will not only point out and subsequently evaluate all threats of a business, but will create a detailed resolution process to limit the damages realized.

Risk management is a critical process undertaken by all companies in the United States to prevent cataclysmic events from completely destroying the company’s business model. As stated before, all companies, regardless of industry face numerous risks. From manufacturing problems to transportation crashes or building collapses, a business is susceptible to not only liability issues but post-disaster problems.

What is Enterprise Risk Management?

Enterprise risk management, in business, includes a number of methods and processes used by organizations to manage risks and seize opportunities related to the achievement of their particular objective and business plan. Enterprise risk management provides a basic framework for risk management, which will typically involve identifying particular events or circumstances relevant to the company’s risks and opportunities. Furthermore, the process will also assess these objectives and risks in terms of likelihood and subsequently state the magnitude of impact. Once this evaluation has been affirmed, the enterprise risk management process will determine an appropriate response strategy—one the will mitigate the damages associated with the problem—and monitor the progress of such an effort. By identifying and addressing a company’s risks and opportunities, the business protects itself against cataclysmic destruction, which in turn, creates added value for stakeholders, employees, customers, regulators and society in general.

Enterprise risk management can also be utilized as a risk-based approach to managing a business that integrates various concepts of internal control and strategic planning. The Enterprise risk management process, as a result of its importance and success, is continuously evolving to more effectively meet the needs of various stakeholders, who wish to comprehend the broad spectrum of risks that organizations face. These stakeholders, in order to maintain confidence and their particular investment or deliver of service to the organization, must be comfortable and understand how such problems are managed by the underlying business organization.

# Everything to Know about the CFA

What is a CFA?
A CFA, or chartered financial analyst, is a finance and investment professional, who has obtained a license to signify their mastery in the fields of investment management and the financial analysis of stocks, bonds and their derivative forms. To become a chartered financial analyst (CFA) an individual must pass three six-hour exams; possess a bachelor’s degree from an accredited institution and have at least 48 months of qualified and professional work experience.
In addition to these requirements, all CFA charter holders are required to adhere to a stringent code of ethics and standards that regulate their professional conduct.
The CFA license or charter represents a qualification for investment and investment professionals; the CFA program primarily focuses on portfolio management and financial analysis, while signifying a basic knowledge of other areas of finance. In summation, the CFA is a license offered to those individuals who pass the difficult tests to demonstrate that such professionals possess the ability and moral standing to handle other individual’s or company’s finances.
What is the CFA institute?
The CFA was originally established in 1947 when it was referred to as the Financial Analysts Federation. In hopes of boosting the credentials of the public, the CFA Institute was created as a result of the merger between the FAF and the Institute of Chartered Financial Analysts. The CFA program began in the United States but became increasingly popular overseas, with many professionally becoming charter holders across Asia, Australia and Europe. The CFA designation was first awarded in 1963; currently the CFA institute is home to more than 100,000 members around the world.
CFA Requirements:
At the most level, participation in the CFA Program requires an individual to be in the final year of a university degree or possess at least four years of qualified, professional work experience in an investment-decision making process or firm. That being said, to obtain the CFA charter (the actual CFA license), the candidate must have completed a university degree and four years of qualified, professional working experience. These requirements are added-on to passing the three exams that test the candidate’s aptitude in the aforementioned fields.
Those candidates who are applying for the CFA charter will generally take one exam per year over three years. Fees for each exam range from \$710 to \$955, depending on the date on which the individual register to take the exam. An additional \$400 to \$480 will be attached for new members enrolling in the program. The CFA exams are incredibly challenging; only 42% pass the first level, 39% the second and 46% the third.
The CFA Tests:
All three CFA tests have a strong emphasis on moral ethics. The material differences among the exams are as following:
• The first CFA exam will emphasize tools and inputs and ask questions regarding financial reporting and analysis, portfolio management techniques and asset valuation
• The second CFA exam will revolve round asset valuation, including questions revolving around economics, financial reporting and quantitative methods in alignment with asset valuation
• The third CFA exam will revolve around portfolio management and include strategies for the applying inputs and rolls in managing equity, derivative instruments and fixed income for private investors and institutions.

# CFA Institute

What is the CFA Institute?

The CFA institute is a global not for profit association of investment professionals that is responsible for administering—and subsequently awarding upon completion–the chartered financial analyst and the Certificate in Investment Performance Measurement. In addition to administering the tests and offering the charter, the CFA institute distributes a range of educational resources and services for the charter’s members, program candidates, employers, institutions, the media and investors.

The Chartered Financial Analyst designation is an international professional license or designation offered by the CFA institute to financial professionals who successfully pass a series of three examinations. In order to become a CFA Chaterholder, candidates must successfully complete each of the three six-hour exams offered by the CFA institute and possess a bachelor’s degree from an accredited institution. Furthermore, the CFA institute requires candidates to possess at least 48 months of qualified or professional work experience in a related field. If passed, all CFA charter holders are obligated to adhere to a strict code of ethics and standards which govern their professional conduct.

The CFA Institute was originally established in 1947 when it was referred to as the Financial Analysts Federation. In hopes of boosting the credentials of the public, the CFA Institute was created as a result of the merger between the FAF and the Institute of Chartered Financial Analysts. The CFA program began in the United States but became increasingly popular overseas, with many professionally becoming charter holders across Asia, Australia and Europe. The CFA designation was first awarded in 1963; currently the CFA institute is home to more than 100,000 members around the world.

CFA Institute’s Code of Ethics:

All members of the CFA institute, including all candidates and charterholders for the CFA designation must adhere to the following code of ethics:

• The CFA institute requires all candidates and charterholders to act with integrity, diligence, respect, competence and in an ethical manner with the public, all prospective clients, employers, employees, clients and colleagues in the investment profession.

• The CFA institute requires all charterholders and members of the organization to place the integrity of the investment profession and the interests of the client above their own personal interests

• The CFA institute requires all individual members and charterholders to use reasonable care and exercise professional judgment when conducting investment analysis, offering investment recommendations and affirming investment initiatives.

• The CFA institute wants its members to practice and encourage others to practice their profession in an ethical manner that will reflect responsibility and credit on themselves and their profession.

• The CFA institute promotes the integrity of the capital markets; the CFA Institute aims at achieving this by upholding the rules governing the profession

• The CFA institute maintains and improves the professional competence of its members who in turn must strive to maintain and improve the competence of other investment professionals.

# Guide to the CFA Exam

What is the CFA?

The CFA (or Charter Financial Analyst) is a designation given to professionals in the field of finance that signifies a thorough understanding of financial analysis. A CFA is an international professional designation offered by the CFA institute to those financial professionals who complete a series of three examinations.
To earn a CFA, in addition to passing each of the three six-hour exams, candidates must also possess a bachelor’s degree from an accredited institution and have at least 48 months of qualified, professional work experience. In addition to these requirements the CFA Institute requires all candidates to adhere to a strict code of ethics and standards, which govern their professional conduct.

The CFA is a qualification for finance and investment professionals, particularly in the fields of financial analysis (evaluation of stocks, bonds and derivatives) and investment management. The CFA institute is a non-profit international organization whom developed this program to ensure that portfolio managers and financial analysts are knowledgeable, honest and professional individuals. As of December 2010, the CFA Institute has more than 110,000 members, including roughly 93,000 CFA chaterholders.
That being said, the difference participating in the CFA program and holding a charter is significant—members of the CFA Program solely need a bachelor’s degree, be present in the final year of a university degree or have at least four years of qualified, professional work experience in an analyst or manager role. By contrast, the obtainment of the designation requires the candidate to pass all three levels of the CFA exam.

What is the CFA Exam?

To obtain the CFA charter a candidate must have completed a university degree, four years of qualified, professional work and pass all three levels of the CFA Exam. This academic portion of the CFA program is extremely difficult; each level of the CFA exam is given separately (most candidates take one per year assuming they pass the first attempt).
Each level of the CFA exam is 6-hours in length and will questions test the candidate’s knowledge in various aspects of finance. As of December 2010, fees for each exam range from \$730 to \$965 depending on the date on which the candidate registers to take the exam. In addition to these fees, new members enrolling in the program will be required to pay an additional \$450.

The CFA exam is known for its difficulty; only 42% of candidates pass the first level, 39% pass the second and 46% pass the final level. All three levels of the CFA exam maintain a strong emphasis on ethics; however, each level will focus on different aspects of finance.

What is on the CFA Exam?

• The first CFA exam will emphasize tools and inputs and ask questions regarding financial reporting and analysis, portfolio management techniques and asset valuation

• The second CFA exam will revolve round asset valuation, including questions revolving around economics, financial reporting and quantitative methods in alignment with asset valuation

• The third CFA exam will revolve around portfolio management and include strategies for the applying inputs and rolls in managing equity, derivative instruments and fixed income for private investors and institutions.

# Cash Flow

For businesses, cash flow is an important determining factor for purchasing decisions, financing and assessments of the long term sustainability of a business.  Excessive lines of credit, a poor accounts receivable turnover ratio, too much inventory, or seasonal factors will affect the cash flow of a business.

What can a study of cash flow determine?

Rate of return – the company will be able to assess the efficiency of its operations and purchases and if cash can be better invested in other products or endeavors.

Liquidity – the company will be able to determine how much cash it will have to respond to unforeseen shifts in the market place, financing, business opportunities and other time sensitive events that apply to the normal operation and long term sustainability of a business.

Risk management – the company will be able to determine if operations, financing or investing is straining the company’s liquidity and will take remedial actions, such as buying back stock to prevent the payment of excessive dividends, or paying employees in stock options rather than salary.

What is a cash flow statement?

The cash flow statement is used to determine how much currency is circulating within the organization at that given point in time.  The final destination of the cash is also noted.  The purpose of a cash flow statement is to demonstrate the flexibility of a business, as even profitable businesses may be limited by restricted cash flow.  Examples of businesses limited by cash flow are businesses that have invested heavily in assets that cannot be readily liquidated.  Many companies will provide cash flow statements to give investors and potential shareholders a picture of the current financial health of the company.

How do I generate a cash flow statement?

A cash flow statement, in its simplest form is a listing of cash flowing in and out of a company at a given point in time.  For example:

Cash Flow Statement for Acme Dynamite Co. (10/1/11 – 11/1/11)

– Cash flow from operations \$5,000

– Cash flow from investing (\$500)

– Cash flow from financing (\$1000)

Net Cash Flow                \$3,500

From this statement, we see that Acme Dynamite is very liquid, with a positive cash flow and we can assume the ability to deal with potential issues in the future, or take advantage of investing or expansion opportunities.  For the month, Acme made \$5,000 selling its product, invested \$500 in researching a better fuse for the dynamite product and paid a total of \$1,000 in dividends to shareholders.

In addition to payments made to shareholders, financing activities can include issuing debt, buying back shares of the company and repayment of debts or leases.  Cash flow statements may be more detailed and show specific actions affecting cash flow.  For instance, the \$1,000 Acme spent on financing can be broken down in a cash flow statement to show \$500 to investors, \$200 to repay debts, and \$300 to buy back stock.  Cash flow from operations can include cash from customers, as well as payments made on taxes, interest and payroll.

# What to Know about Investment Banking

What is an Investment Bank?
An investment bank is a financial institution that assists corporations, small businesses, individuals and government agencies with raising capital, financing, underwriting and an assortment of other financial maneuvers. Investment banks, in addition to financing efforts through the issuance of securities and/or underwriting, will assist companies involved in mergers and acquisitions and IPOs. Furthermore, investment banks will provide ancillary services involved in market making, such as providing and/or trading fixed income instruments, derivatives, equity securities, commodities, foreign exchange.
Dissimilar to commercial or retail banks, investment banks do not take deposits. The United States maintains a separation between retail or consumer banks and investment banking institutions. There are two fundamental lines of business in investment banking: trading securities for cash or other securities (investment banks facilitate transactions and create markets) or the promotion of securities (i.e. performing research and underwriting). The latter line represents the “sell side”, where the investment bank deals with pension funds, hedge funds, mutual funds and the investing public—those individuals who consume products and services of the sell-side to maximize their return on investment constitutes the buy side. The majority of investment banks have buy and sell side components. All advisors of investment banks, meaning those individuals, who provide investment banking services in the United States, are required, by law, must be a licensed broker-dealer and subject to regulations instituted by the Securities & Exchange Commission, as well as the Financial Industry Regulatory Authority.

Organizational Structure of Investment Banking:
Investment banking is split into various departments and offices; as a colloquial term, investment banking will be divided into the so-called front office, middle office and back office. That being said, while larger investment banks will offer all lines of business, both sell and buy sides, smaller institutions will focus one broad aspect of investment banking—boutique investment banks will focus solely on investment banking, while small broker-dealers will initiate only sales, trading or research maneuvers.
Investment banking, in a traditional lens, helps customers raise funds in capital markets and lends advice on mergers and acquisitions. Within the firm’s front office, on behalf of the bank and its clients, investment banking’s primary function revolves around the buying and selling of products. In terms of market making, traders will buy and sell financial products to make money on each trade. Within the sales department, the investment bank will contact institutional and high-net worth investors to suggest trading ideas and process orders.
The sales desk will then communicate their clients’ orders to the appropriate trading posts, which will then price and execute trades, or structure different products to fit a specific need. Investment banks will also conduct research to review companies and issue reports about their prospects; investment banks will attach “buy”, “hold” or sell ratings to such investments. The research department of an investment bank may not generate tangible revenue; however, its resources are vital to assist traders in trade, the sales team in suggesting ideas to potential clients and investment bankers by covering their clients.