DCF (OT) Flashcards
Cost of capital menaing?
The cost of money (the interest we’re paying)
Cash surplus?
Accept
Cash deficit?
Reject
If there’s interest?
Surplus will be lower
Initial cost in year 0 (positive or negative)
Negative as outflow
Cash inflow?
Always positive
What does examiner’s expect?
I use tables for the discount factor
What does discounting do?
Remove the interest
Accuracy of estimated cash flows?
If cash flow is overstimated, NPV will be lower
Life or a project?
Can’t be predicted, machine can’t be guaranteed to last 4 years
Operating cash flows assumption in DCF?
Operating cash flows occur at the end of years
Just financial factors in DCF?
No. What about the effects on the environment
DCF and profit?
Cash flows not profits
Why is cash > profit?
Cash is needed to pay dividends and buy machines
Shareholders and profit?
Profit is more important than cash
Higher cost of capital?
NPV is lower
What is IRR?
Rate of interest for which NPV equals 0
How many decimals do we give NPV or IRR?
Two decimal places
Issue with IRR (multiple)
There can be more than one IRR
Issue with IRR (comparison)
Cannot use to compare investments
What is an annuity?
An equal cash flow each year
Do annuities have their own discount table?
Yes
What are perpetuity
An equal cash flow each year forever (annuity has a time limit)
Perpetuity’s and tables?
Unlike annuity, it doesn’t have own set of tables. Must be calculated
Is ARR DCF?
NO
What is the accounting rate of return based on?
The profit, not cash flows
Depreciation and profit/
Profit is calculated after deducting depreciation
Profit calculation?
Cash - total depreciaition
What is the payback period?
Number of years it takes in cash terms to get back the initial investment
ARR limitation?
It is based on profit
Payback period dsiadvantage?
Longer projects require more estimation as project may never be paid back
