Quiz 4 Flashcards
What is NPV and what is the rationale behind using it to evaluate capital budgeting projects?
it is the PV of future cash flows. Determines project cost, estimate projects future cash flows over projects expected life, determines risk and appropriate cost of capital.
What is payback period and what is the rationale behind using it to evaluate capital budgeting projects
How long it takes before the project/investment pays off. How long your money is tied up in a project (does not include TVM)
What is the discounted payback period and what is the rationale behind using it to evaluate capital budgeting projects
How long until NPV of 0
What is the IRR and what is the rationale behind using it to evaluate capital budgeting projects
The discount rate that forces PV inflows = PV cost, forcing NPV = 0. See if the project produces PV cash flows that are greater than the PV of cost
What must be true about the IRR if NPV = 0?
It = cost of capital, indifferent about project
What is the relatioonship between NPV and changes in the cost of capital
Inversely related
What is the MIRR? When is it used?
Can find IRR with unconventional cash flows
What is the profitability index?
Comparing the PV of future cash flows to the initial cost.
What are relevant cash flows? What’s another name for them? Which costs are/aren’t relevant?
1 - costs that will only occur if project is accepted 2 - incrimental cash flows 3 - opportunity cost (Y) side effects (Y) change in NWC (Y) taxes (Y) sunk cost (N) finacning costs (N)
What is the principle that allows firms to isolate cash flows for a particular project from the rest of the firm’s cash flows?
Stand-alone principle
What are pro forma statements?
Projected statements
What information does the depreciation tax shield provide and what is the equation?
Amount you saved in taxes by utilizing depreciation
Deprecation * Tax rate
What is MACRS?
Finding which asset class is appropriate for tax purposes. Pay more up front.
How do you calculate after-tax salvage value?
SV-(SV-BV)*(T)
What is forecasting risk?
How sensitive is our NPV to changes in the cash flow estimates, the more sensitive, the greater the forecasting risk
