DCF (OT)

Question 1

Cost of capital menaing?

Answer 1

The cost of money (the interest we’re paying)

Question 2

Cash surplus?

Answer 2

Accept

Question 3

Cash deficit?

Answer 3

Reject

Question 4

If there’s interest?

Answer 4

Surplus will be lower

Question 5

Initial cost in year 0 (positive or negative)

Answer 5

Negative as outflow

Question 6

Cash inflow?

Answer 6

Always positive

Question 7

What does examiner’s expect?

Answer 7

I use tables for the discount factor

Question 8

What does discounting do?

Answer 8

Remove the interest

Question 9

Accuracy of estimated cash flows?

Answer 9

If cash flow is overstimated, NPV will be lower

Question 10

Life or a project?

Answer 10

Can’t be predicted, machine can’t be guaranteed to last 4 years

Question 11

Operating cash flows assumption in DCF?

Answer 11

Operating cash flows occur at the end of years

Question 12

Just financial factors in DCF?

Answer 12

No. What about the effects on the environment

Question 13

DCF and profit?

Answer 13

Cash flows not profits

Question 14

Why is cash > profit?

Answer 14

Cash is needed to pay dividends and buy machines

Question 15

Shareholders and profit?

Answer 15

Profit is more important than cash

Question 16

Higher cost of capital?

Answer 16

NPV is lower

Question 17

What is IRR?

Answer 17

Rate of interest for which NPV equals 0

Question 18

How many decimals do we give NPV or IRR?

Answer 18

Two decimal places

Question 19

Issue with IRR (multiple)

Answer 19

There can be more than one IRR

Question 20

Issue with IRR (comparison)

Answer 20

Cannot use to compare investments

Question 21

What is an annuity?

Answer 21

An equal cash flow each year

Question 22

Do annuities have their own discount table?

Answer 22

Yes

Question 23

What are perpetuity

Answer 23

An equal cash flow each year forever (annuity has a time limit)

Question 24

Perpetuity’s and tables?

Answer 24

Unlike annuity, it doesn’t have own set of tables. Must be calculated

Question 25

Is ARR DCF?

Answer 25

NO

Question 26

What is the accounting rate of return based on?

Answer 26

The profit, not cash flows

Question 27

Depreciation and profit/

Answer 27

Profit is calculated after deducting depreciation

Question 28

Profit calculation?

Answer 28

Cash - total depreciaition

Question 29

What is the payback period?

Answer 29

Number of years it takes in cash terms to get back the initial investment

Question 30

ARR limitation?

Answer 30

It is based on profit

Question 31

Payback period dsiadvantage?

Answer 31

Longer projects require more estimation as project may never be paid back