Capital Budgeting Techniques wk 2

Question 1

List formula or NPV

What are two key parts to NPV

Answer 1

-CF0 + (CF/(1+r)^T)

Accept NPV > 0
Accept highest NPV

Question 2

Benefits to NPV

Answer 2

Discounts all CF

Includes all CF in project

Question 3

What formula can you use if NPV CF are constant?

Answer 3

You can use PVIFA formula = 1/r (1/(1+r)^t)

NPV = -CF0 + CF1 * (PVIFA)

Question 4

What is IRR?

List features of IRR

Answer 4

Internal rate of return

Accept when IRR makes NPV = 0
Accept the highest IRR value
Accept IRR > required return

Question 5

What is MIRR?

Why do you need to use MIRR?

Answer 5

Modified internal rate of return

Use it for non-conventional CF (mixed CF)
If you use normal IRR, you will receive multiple IRR

Question 6

What is Mutually exclusive projects?

Answer 6

Only accept ONE project out of several other projects in same category

Question 7

Independent Projects

Answer 7

Accepting one or rejecting doesn’t affect the decision on other projects

Question 8

What is the payback method?

Answer 8

How many periods does it take to pay back the project

Question 9

What are some negatives towards payback period

Answer 9

Doesn’t include CF after PB period

Bias towards with larger CF at start

Question 10

What is Profitability Index

Answer 10

A measure of a projects attractiveness

Question 11

Accepting rules around PI

Answer 11

Accept when PI > 1

Accept highest PI