Investment is the act of committing money or capital to an endeavor with the expectation of obtaining additional income or profit. Key investment concepts covered in the provided articles include time value of money, future value, present value, cash flows, and net present value. These form the foundation for evaluating and comparing different investment options. Python code examples are also provided to calculate these quantities.
Time Value of Money is Fundamental to Understanding Investments
The time value of money is a core principle underlying investments and financial calculations. Simply put, money available now is worth more than the same amount in the future due to its earning potential. This is illustrated through the future value calculations done in the articles – an amount of $10,000 invested today at 5% annual interest will grow to over $43,000 in 30 years. Platforms like NumPy provide convenient functions like numpy.fv() to perform such calculations.
Present Value Allows Apples-to-Apples Comparison of Cash Flows
Present value provides a way to directly compare cash flows occurring at different points in time. It converts a future cash flow amount into what it would be worth today by discounting it based on things like inflation and opportunity cost. The numpy.pv() function can calculate the present value – for example, $10,000 received 10 years from now with 3% annual inflation has a present value of only $7,440.
Net Present Value Sums a Series of Cash Flows into One Number
For investments with varied cash inflows and outflows over time, net present value aggregates these into a single metric for easy comparison. As illustrated, Project 2 has higher NPV than Project 1 when properly accounting for time value of money, event though their nominal cash flows over 5 years are equal.
Python Provides Convenient Functions for Investment Analysis
Python packages like NumPy equip the investor with easy-to-use tools to apply core investment concepts like future value, present value and net present value. Functions like numpy.fv(), numpy.pv() and numpy.npv() reduce manual calculations and enable quick analysis for comparing investment options.
Key concepts covered include time value of money, future value, present value, cash flows and net present value. Python provides convenient functions to calculate these quantities for analyzing and comparing investments.