Financial Models

  1. LO 3.3 Learn how to use financial concepts, such as the efficient frontier and risk/return models.

Another important series of models rely on financial analysis to make project selection decisions. In this section, we will examine three commonly used financial models: discounted cash flow analysis, net present value, and internal rate of return.

Financial models are all predicated on the time value of money principle. The time value of money suggests that money earned today is worth more than money we expect to earn in the future. In other words, $100 that I receive four years from now is worth significantly less to me than if I were to receive that money today. In the simplest example, we can see that putting $100 in a bank ...

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