Chapter 7 - CBDC Flashcards
Expansion Project
Invest in new areas of business or markets
New Product projects
Introducing a new product in current business or markets
Replacement project
Replacing assets in one business with new ones
Three methods to decide if you should accept a project
Payback period
Net Present Value (NPV)
Internal Rate of Return
Payback Period
How long it takes for the initial cost of a project to be recovered.
Net Present Value
Determines the Present value of all future cash flows minus the inital investment cost. Amount of wealth generated after the project, after accounting for TVM.
Accept or Reject Project
NPV> 0 = accept
NPV < 0 = reject
Cost of Capital
Percentage cost for a firm to raise capital. Firms are not given free money, there are costs associated.
Independent Projects
projects are independent when the decision to undertake one project does not affect the decision to go ahead with another project
Dependent Projects
Companies can only choose to go ahead with one project instead of multiple due to a number of reasons, such as lack of capital, limited resources etc.
why is NPV and IRR better than Payback period
They take into account risk, all cash flows and time value of money.
NPV golden rule
Businesses hsould use as it is also considers total value created for the firm
What is capital budgeting
weighing the costs and benifits of a project and deciding whether it is worthwhile to take on. There are three methods to capital budgeting
IRR
Internal rate of return, rate of return in the NPV formual that gives NPV of 0 - the return of the project.
