Chapter 7, Problem 1Q

To determine

The basic principle of finance that can be used for the valuation of any investment asset.

Explanation of Solution

The basic principle of finance which helps in the valuation of any investment asset is the present value of cash flows. With the help of the present value formula, the future values of cash can be determined in the present values. The different types of comparison such as data comparison can be possible after the determination of the present value of various future cash flows.

A formula that is used for the purpose of computation of present value is:

$P{V}_0=\frac{C{F}_n}{{\left(1+r\right)}^n}$

Where,

$P{V}_0$

• is the present value of cash flow.
• $C{F}_n$ is cash flow in future value.
• $r$ is the interest rate.
• $n$ is the total number of years.

Economics Concept Introduction

Introduction:Finance is that stream that provides the knowledge of money, investments, and financial instruments such as securities, credit, and bonds.