Describe the factors that are used in the NPV and the FV formulas.

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The NPV (Net Present Value) and FV (Future Value) formulas are used to calculate the present or future value of cash flows based on certain factors.

The primary factor that is used in both NPV and FV calculations is the discount rate, which is typically an interest rate. This rate takes into account market conditions and inflation, and it’s used to determine how much money will be generated from investing a given amount in the future. NPV uses this discount rate to calculate the present value of expected cash inflows; whereas, FV uses it to calculate the future value of expected cash inflows given a set timeframe.

Another important factor when calculating both NPV and FV is the duration or length of time for which these projections are made. Shorter durations often result in more conservative estimates as they do not include any compounding interest that may occur over longer periods of time. In addition, shorter durations may also mean lower returns due to higher levels of risk associated with shorter-term investments.

In addition to these two essential factors, other variables such as taxes, transaction costs, reinvestment rates, and other expenses should be taken into consideration when determining NPV or FV values. Tax implications can significantly reduce returns on investment if taxes apply; similarly transaction costs can add up quickly resulting in reduced projected returns if not accounted for properly upfront. Reinvestment rates might also play a role by taking into account potential capital gains which could increase overall returns depending on market performance during the period being considered for analysis purposes; however these variables should generally only be considered after accounting for all other aforementioned variables unless specifically needed for decision making purposes otherwise stated upfront.. Finally one last variable worth noting would be inflation – as having some knowledge about how prices might fluctuate over time can help inform expectations regarding any changes which could happen while funds are held so investors have some idea about their purchasing power down the line once adjusted accordingly according respective inflation indices at that particular point in time.