Arbitrage
NPV = PV(Benefits) - PV(Costs)
No arbitrage should exist in competitive markets
Law of one price: The law of one price is the economic theory that the price of a given security, commodity or asset has the same price when exchange rates are taken into consideration
Cash flows:
Future value of a cash flow: C * (1 + r) n
Present value of cash flow: C/ (1 + r) power n
Stream of cash flows: PV = sum of the present value of individual cash flows: Cn/((1 + r) power n
Perpetuity: PV of perpetuity = C/r
Annuity: PV of annuity = C/r ( 1 - 1/(1+r) power n)
PV(Growing perpetuity) = C/ (r -g)
PV(Growing Annuity) = C/(r - g) * (1 - (1 +g) power n)
_____________
(( 1 + g) power n)
IRR (internal rate of return) is the rate at which the NPV = 0
