Forecasting Cash Flows to Evaluate Projects Flashcards
What does cash flow gauge in a property?
The financial position of a property.
What is the internal rate of return (IRR)?
A discounted-cash-flow measure.
How is IRR calculated without a financial calculator?
Through trial and error using interest-rate tables.
What complicates IRR calculations compared to fixed mortgage calculations?
Changes in estimated cash flow and difficulty in predicting future cash flows.
What is cash-on-cash return?
A ratio used to assess trends in the performance of an investment.
Why is calculating IRR quicker with a computer or business calculator?
Due to the software’s number-crunching prowess.
What type of payments do mortgages have?
Predictable payments.
What type of cash flows do buildings have?
Variable cash flows.
What is the significance of the equation shown for finding IRR?
It traditionally calculates IRR using hand calculations and compound interest tables.
What must be subtracted to arrive at aftertax proceeds?
Depreciation, mortgage balance, various taxes, commissions and fees.
What is the initial equity investment entered as in the cash flow chart?
A negative amount.
True or False: Yearly cash flow remains constant in real-life scenarios.
False.
What is the goal of the cash flow analysis?
To find the percentage (internal rate of return) that makes the present values of estimated cash flows add up to $1,000,000
What does PVIF stand for?
Present Value Interest Factor
Fill in the blank: The present value is higher than $1,000,000, so the discount estimate should be ______.
slightly lowered
True or False: The present value interest factor is used to calculate the present values.
True
What is the formula used to express the fraction in the interest calculation?
X/2%
Fill in the blank: The final result of the calculations is obtained using a _______.
[computer or financial calculator]
What does IRR stand for in financial decision making?
Internal Rate of Return
IRR is used to evaluate the profitability of potential investments.
What decision can be made if the IRR equals the company’s desired rate of return?
The project can be accepted or rejected, depending on other factors.
What does it indicate if the IRR is higher than a company’s desired rate of return?
The project is acceptable.
What should be done if the IRR is lower than a company’s desired rate of return?
The project most likely should be rejected.
What does cash-on-cash return measure?
The investor’s rate of return on an initial investment base.
How should cash-on-cash return be used?
To assess trends in performance over time, rather than a single year’s performance.
