Explain what is meant by the time value of money.

Money received in the future is worth less than the same sum today, because today's money could be invested to earn a return and because inflation erodes its purchasing power.

What is discounted cash flow?

Discounted cash flow is a method that reduces each future cash flow to its value in today's money before the flows are compared with the cost of the investment.

What is a discount factor?

A discount factor is the number a future cash flow is multiplied by to convert it into its present value at a chosen rate of interest.

State the decision rule for net present value.

A project is worth undertaking if its net present value is positive, and where funds are limited the project with the highest net present value is preferred.

WJEC A-Level Business 601-5238-2

Enterprise and Starting a Business

Topic overview Enterprise and the entrepreneur Stakeholders in a business Business plans and sources of support Legal structures of business The public and private sectors Business location Sources of finance for a new business Business revenue, costs and profit

Markets and Market Research

Topic overview Types of market Market size, market share and market trends Market segmentation The degree of competition in a market Perfect competition and monopolistic competition Oligopoly and monopoly Consumer protection Demand and the demand curve Supply and the supply curve Market equilibrium and changes in price and quantity Price and income elasticity of demand Inferior, normal and luxury goods The value of market research Primary market research Secondary market research Qualitative and quantitative data Sampling and avoiding bias

Marketing

Topic overview Market orientation, product orientation and asset-led marketing The marketing mix Product and the product portfolio Branding, USP and differentiation The product life cycle Extension strategies The product life cycle and cash flow The Boston matrix Pricing strategies Choosing the right pricing strategy Promotion: above the line and below the line Place and distribution channels The marketing mix in different contexts and global marketing New technology in marketing

People in Business

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Operations Management

Topic overview Added value Job, batch and flow production Choosing the right method of production Productivity Capacity utilisation New technology in operations Lean production and kaizen Just-in-time and cell production Quality control and quality assurance Total quality management Stock control and stock control diagrams Purchasing and working with suppliers Innovation, research and development Internal economies of scale External economies of scale Diseconomies of scale and the survival of small firms

Business Finance and Accounts

Topic overview Internal sources of finance Loans, overdrafts and trade credit Share capital and venture capital Leasing and debt factoring Choosing an appropriate source of finance Finance for entrepreneurs and SMEs in Wales Revenue, costs and profit Types of cost Contribution and break-even Break-even charts and the margin of safety Budgets and budgeting Cash flow forecasting Improving cash flow The income statement Gross and net profit margins

Business Analysis and Decision-Making

Strategy and Implementation

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Managing Change and Risk

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The External Environment

Topic overview Government and the framework for business The economic environment Social and demographic change Technology and business Business ethics and corporate social responsibility The legal environment Business and the environment

Global Business

Topic overview International trade and protectionism Globalisation and its causes Global growth strategies and multinationals The European Union and the euro

Business Analysis and Decision-Making

Net present value and discounted cash flow

2 things to know
A2 Unit 3

Overview

What is meant by the time value of money, discounted cash flow and discount factor.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

Explain why discount factors get smaller the further into the future you go.

Key term

Define net present value.

Questions from this subtopic

Each one with the model answer underneath.

1
Explain what is meant by the time value of money.
Model answer
Money received in the future is worth less than the same sum today, because today's money could be invested to earn a return and because inflation erodes its purchasing power.
2
What is discounted cash flow?
Model answer
Discounted cash flow is a method that reduces each future cash flow to its value in today's money before the flows are compared with the cost of the investment.
3
What is a discount factor?
Model answer
A discount factor is the number a future cash flow is multiplied by to convert it into its present value at a chosen rate of interest.
4
Explain why discount factors get smaller the further into the future you go.
Model answer
The longer the wait, the more interest that money could have earned in the meantime, so a given sum is worth progressively less in today's terms.
5
Define net present value.
Model answer
Net present value is the total of the discounted future cash inflows from an investment, less the cost of the investment.
6
State the decision rule for net present value.
Model answer
A project is worth undertaking if its net present value is positive, and where funds are limited the project with the highest net present value is preferred.

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Enterprise and Starting a Business

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