Forecasting Cash Flows Flashcards
What is NPV
Net Present Value
present value of a project
extended cash flows, discounted at the appropriate risk adjusted rate
NPV Steps
Calculate present cashflows of each discounted cashflow
sum the discounted cashflows
how do you decide to do an independent project
if the NPV Exceeds zero
how do you decide which project to do if there are two mutually exclusive projects
whichever has the highest NPV
if both are negative, don’t do any
what is IRR
discount rate that forces the PV of the expected cashflows to equal the initial cashflow
NPV = 0
IRR>WACC = good return
what are normal cashflows
one or more negative cashflow inflows, or the reverse
what are non normal cashflows
cash flows that are both positive and negative
when can you have more than one IRR?
when you have non-normal cashflows
If the NPV and IRR conflict, which do you pick?
NPV
What is MIRR
regular IRR, but assumes projected cashflows are reinvested at WACC, not the project
Project Value Heiarchy
NPV
MIRR
IRR
What is a probability index
how much value a project creates per dollar of project cost
what is the profitability index formula?
PV of future cashflows / Initial Cost
What is Payback Period
number of years required to recover the funds invested in a project
what is a discounted payback
payback, but using cashflows discounted at WACC
how do you determine incremental Cashflows?
Cashflows with the project - Cashflows without the project
in an expansion project, what costs are incremental?
Cash
Sales
Revenue
Operating Costs
When evaluating a replacement project what do you evaluate
cash flow difference becomes cashflow
what are sunk costs
costs that cannot be recovered, regardless of the acceptance of a project
what is an opportunity cost
an asset a firm already owns
what are externalities
impacts of a project on other parts of a business
what is cannibalization
negative internal externality
what are project risks?
standalone risk
corporate risk
market risk
what is standalone risk
uncertainty of cashflows
