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The formula adds up the negative cash flows after discounting them to time zero using the external cost of capital, adds up the positive cash flows including the proceeds of reinvestment at the external reinvestment rate to the final period, and then works out what rate of return would cause the magnitude of the discounted negative cash flows ...
The modified Dietz method [1] [2] [3] is a measure of the ex post (i.e. historical) performance of an investment portfolio in the presence of external flows. (External flows are movements of value such as transfers of cash, securities or other instruments in or out of the portfolio, with no equal simultaneous movement of value in the opposite direction, and which are not income from the ...
Each cash inflow/outflow is discounted back to its present value (PV). Then all are summed such that NPV is the sum of all terms: = (+) where: t is the time of the cash flow; i is the discount rate, i.e. the return that could be earned per unit of time on an investment with similar risk
In calculating current account, exports are marked as credit (the inflow of money) and imports as debit (the outflow of money). Services When an intangible service (e.g. tourism) is used by a foreigner in a local land and the local resident receives the money from a foreigner, this is also counted as an export, thus a credit.
This formula ignores values that arise after the payback period has been reached. Additional complexity arises when the cash flow changes sign several times; i.e., it contains outflows in the midst or at the end of the project lifetime. The modified payback period algorithm may be applied then. The sum of all of the cash outflows is calculated.
Internal rate of return (IRR) is a method of calculating an investment's rate of return. The term internal refers to the fact that the calculation excludes external factors, such as the risk-free rate, inflation, the cost of capital, or financial risk. The method may be applied either ex-post or ex-ante. Applied ex-ante, the IRR is an estimate ...
By an accounting identity, Country A's NCO is always equal to A's Net Exports, because the value of net exports is equal to the amount of capital spent abroad (i.e. outflow) for goods that are imported in A. It is also equal to the net amount of A's currency traded in the foreign exchange market over that time period.
(The initial value is treated as an inflow, and the final value as an outflow.) When the internal rate of return is greater than the cost of capital , (which is also referred to as the required rate of return ), the investment adds value, i.e. the net present value of cash flows, discounted at the cost of capital, is greater than zero.