Formulas Flashcards
1
Q
NPV
A
Present Value of Cash Flows -
Cost/Initial Investment
2
Q
What does an NPV of 0 indicate?
A
That the cash inflows and the cash outflows are identical and exactly adequate to repay the invested capital.
3
Q
The greater the risk involved in a project, the higher the ____ should be.
A
Discount Rate
4
Q
The discount rate should also be viewed as the ______ for a given project or investment
A
Opportunity cost of capital
5
Q
Internal Rate of Return (IRR) definition
A
IRR is the discount rate such that the NPV equals 0
OR
the rate at which the cash inflows and cash outflows are equal
OR
break even interest rate
6
Q
What are the problems with using the IRR?
A
IRR makes an assumption that the cash inflows are being reinvested at the IRR itself
