General exam technique Flashcards
Money rate
Money rate = real rates adjusted to incorporate general inflation
(1 + m) = (1 + r)(1 + i)
Money method - adjust individual CFs to specific inflation (money CFs) + use money rate
Real rate
Does not incorporate general inflation therefore use CFs which have not been adjusted with specific inflation
Real method - unwind inflation from CFs + discount using real rate
What happens if inflation was incorrect?
The money CFs would not affect the NPV as discounted using money rate
CFs not affected by inflation would result in a change of NPV
Sensitivity analysis: revenue, cost, volume
Volume + revenue = use contribution + tax
Cost = use revenue + tax
Sensitivity : CoC
IRR - CoC / CoC
Hard capital rationing
Externally imposed factors - no stakeholder is prepared to invest
May be due to potential returns not being high enough to compensate for the perceived risks
Soft capital rationing
An organisation could raise more funds, but has decided not to - internally imposed restrictions.
May be due to the cost of raising finance is too expensive or may result in a loss of control
Real options
Follow on options - launch future products off the back of this one
Abandonment options - exit the project early + sell the assets or use the assets
Timing options
Growth options - try with a small investment and then grow ie by launching in additional locations
Flexibility options - change suppliers/materials/locations in the future
IRR
when NPV = 0
= the actual annual return on the project, based on future cash flows
Non-financial factors (not real options)
Compliance with future/current legislation
Impact on staff morale
Reputation of the company
Impact on suppliers and customers
Sustainability
Political risks
Quotas = limits on quantities of goods a sub may buy from its parent to sell
Tariffs = extra tax or duty applied to foreign goods to make domestic goods more competitive
Increase QC
Nationalisation = the government nationalises the foreign company and its’ assets without compensation
Insistence of a minimum shareholding by residents
Restrictions = ie from buying local companies in certain industries
Dealing with political risks
Negoitate with host government - agree concessions, quotas
Insurance - the Exports Credit Guarantee Department (ECGD) provide protection against nationalisation, currency problems, war and revolution
Production strategies - contract out some to local sources
Mgmt structure - use of joint ventures with domestic companies or selling some shares to local investors
Prescriptive analytics
Combine predictive analytics w/ AI + algorithms - calculate OPTIMUM OUTCOME
= capital rationing, replacement analysis, optimal gearing %
(+) considers impact of lots of variables
(-) complex, requires specialist data science skills; reliability of models depends on the reliability of the data inputted into the model
Data bias
= data not representative of the population
self-selection bias
when people select themselves
