Financial Modeling and Analysis (B3)

Question 1

What are discretionary costs? Are they relevant?

Answer 1

Costs arising from periodic (usually annual) budgeting decisions by management
Yes, they are relevant

Question 2

How is Net Initial Outflow calculated?

Answer 2

Invoice + Shipping + Installation
+ Increase in working capital
< Cash proceeds on sale of old (net of tax) >

Question 3

How are Net Proceeds on Sale of Old (net of tax) calculated?

Answer 3

Proceeds on sale (inflow)
< Tax paid on gain (G * TR) > (outflow)
+ Tax saved on loss (L * TR) (inflow)

Question 4

How are Discounted Cash Flows calculated based on net present value?

Answer 4

Step 1: Calculate after-tax CFs = Annual net CFs * (1-TR)
Step 2: Add depr’n benefit = Depr’n * TR
Step 3: Multiply result by appropriate PV of an annuity
Step 4: Subtract initial cash flow
Result: Net present value

Question 5

What is the objective of the NPV method?

Answer 5

To focus decision makers on the initial investment amount that is required to purchase (or invest) in a capital asset that will yield returns in an amount in excess of a management-designated hurdle rate.

Question 6

What are the 3 steps for calculating NPV?

Answer 6

1) Initial outflow
2) Annual inflow
3) One-time TYCF