LT Lecture 1 - Capital Budgeting and NPV Rule

Question 1

Applications of NPV

Answer 1

􏰃 Profitability Index
􏰃 Inflation
􏰃 Equivalent Annual Costs (EAC)

Question 2

Definition of NPV

Answer 2

Question 3

Advantages of NPV

Explain in terms of precision and convenience

Answer 3

Question 4

**State and explain the formula of Free Cash Flows

Answer 4

Question 5

Why need to subtract CAPEX from FCF calculation?

Answer 5

Question 6

Why do we subtract Depreciation in EBIT calculation and then add it back for FCF?

Answer 6

Question 7

State the formula of Depreciation Tax Shield

Answer 7

Question 8

State the formula of Net working capital (NWC)

Answer 8

Question 9

Why need to subtract the change in NWC?

Answer 9

Question 10

State and explain the formula for cash flow from salvage

Answer 10

Question 11

Book rate of return

Answer 11

Question 12

Explain payback period and why it is flawed

Answer 12

Question 13

Internal Rate of Return

Answer 13

Question 14

Pitfalls of IRR

Answer 14

􏰁Lending vs. Borrowing
􏰁Multiple Rates of Return

􏰁Non-existence of Internal Rate of Return

􏰁Scale of the Projects

Question 15

Formula of Equivalent Annual Cost (EAC)

Answer 15

Equivalent annual cost (EAC) is the annual cost of owning, operating, and maintaining an asset over its entire life.

Equivalent annual cost (EAC) is the annual cost of owning and maintaining an asset determined by dividing the net present value of the asset purchase, operations and maintenance cost by the present value of annuity factor.