Topic 6- Investment Analysis Flashcards
Project
a decision that requires any use of resources
Capital Expenditure
Up front cost to get started/buy assets
Types of Projects
expansion
new product
replacement
Which type of project is new ventures within the business?
new product
What type of project is the firm entering new areas or markets?
expansion
What type of project is the firm replacing existing assets with new ones?
replacement
An example of each type of project
Expansion: disney entering real estate
New product: coke making vanilla coke
Replacement: disney replacing old rides
The 2 categories of projects
mutually exclusive
independant
the 3 decision types
payback period
net present value
internal rate of return
payback period decision looks at __
how long it takes to pay back initial $$
which decision type is biased towards projects that return cash quickly/liquid?
payback period
Cons of payback period
doesn’t account for TVM, Cf beyond t
Formula for payback period
add up in cash flows during payback t and see if it equals or is greater to initial
Net present value is the ___
PV of the project including all outflows
For a NPV if independent what is decision rule?
if NPV> accept
For a NPV if mutually exclusive what is decision rule?
whichever has higher nPV
2 pros of NPV are accounts for ___ and aligns with __
TVM
increasing value of firm
NPV formula
NPV = C1/(1+r)^1 ….. - CF0
What is the internal rate of return decision?
IRR that makes project break even (NPV=0)
For a IRR if independent what is decision rule?
IRR> r accept
IRR
For a NPV if mutually exclusive what is decision rule?
whichever has the higher NPV
An increase in r means what to NPV
decrease
Con of IRR decision
no indication of size of value
non-conventional CF means there is a ____ problem if CF ____
multiple IRR
changes sign
non-conventional CF means there are ____ R FOR
more than one
NPV=0
Mutually exclusive
One is not possible with the other so only choose one
