Basic Terms Flashcards
The acquisition of long term assets involves…
capital budgeting
Net Present Value
dollar measure of an investment’s effect on the value of the company’s assets
Future Cash Flows can also be known as
incremental cash flows
The calculation of NPV
does not depend on the source of financing
What is a main drawback to NPV analysis?
NPV misses the value of options that managers have to expand, scale back, or abandon investment projects once they are undertaken
NPV is dependent on…
the discount rate
As discount rate increases what happens to NPV?
it decreases
Internal Rate of Return (IRR)
is the discount rate that implies a zero present value for a series of cash flows
What exactly will IRR tell you?
the return that you expect to earn each year
When initial inflow is followed by outlows
you would prefer a low IRR
Payback Period
the time is takes to get our money back
Payback and cash flows
payback does not discount cash flows
ignore it!
Payback and investing
Payback does not correspond to a measure of an investments effect on the value of the firm
2 tasks in evaluating investment proposals
measure FCF
determining the appropriate discount rate
Free Cash Flow =
Operating Cash Flow
- Changes in net working capital
- capital spending
