Unit 8 (Videos) Flashcards
NPV stands for …
Net Present Value
To calculate the payback, we …
add to the initial investment (the cash outflow) each cash inflow until we get a value equal to or greater than 0
If we our payback is in moment 8, and the total number of terms is 10, do we accept the investment project?
Yes
In discounted payback, we discount, one by one, the cash flows in each investment period to moment ______.
0
In the discounted payback method, we discount each cash flow to moment 0 by …
dividing the cash amount of that moment by (1+cost of capital, K%)^n
where n = the moment we’re in
The cost of capital, K, is calculated by …
finding the internal rate of return on the global cash flows of a project
The global cash flows of a project are the project’s ________.
financing
We calculate the discounted payback by adding the discounted cash flows until the sum is equal to or greater than 0.
True
The discounted payback is calculated the same way as the regular payback, but we …
use the discounted cash flows instead of the investment cash flows
In payback and discounted payback, we accept an investment if …
we recover the investment during the life of the project
We calculate the NPV by …
comparing all the cash flows of our initial investment evaluated at moment 0
We only use the discounted cash flows to calculate the discounted payback.
True
The function NPV is used to discount a group of cash flows.
True
The function NPV is used to …
discount a group of cash flows.
When calculating the NPV, we discount at a rate equal to …
the cost of capital, K
If the NPV is a positive value, we accept the investment.
True
If we calculate the IRR on the financing of a project, we get …
the cost of capital, K
If we calculate the IRR on the investments of a project, we get …
the internal rate of return on the project
Once we have the IRR, can we accept an investment?
No, because we need something to compare the IRR to, and that something is the cost of capital.
The difference between the IRR and the cost of capital gives us sufficient information to accept or reject a financing project.
True
If the IRR > K, we …
accept an investment project
The net return is …
the difference between the internal rate of return and the cost of capital
If the net return is greater than 0, we accept a financing project.
True
The reinvested cash flows are cash flows from our initial cash flows that we have reinvested.
True
We can reinvest by …
compounding each of investment values to the end of the project in moment n at the reinvestment rate, rir
Once we compound an investment, we compare it with the initial investment by …
discounting the total reinvested sum to moment 0
When reinvesting, if we have any negative cash flows, we …
finance til the end at the cost of capital, K
The formula to calculate my reinvestments is the same whether or not I have negative cash flows.
True
reinvestment cash flow = investment*(1+rir%)^n-t, where t = our current moment and n our final moment
rir% is used when there is positive cash flows and K% is used when there is negative cash flows.
True
$$*(1+rir%) is compounding
True
MNPV = initial investment in moment 0 + the sum of all the reinvested cash flows discounted to moment 0
True
We discount our reinvested sum to moment 0 by dividing it by …
(1+cost of capital)^the end of the financing period, n
If the MNPV > 0, we …
accept the investment project
MIRR is calculated by …
introducing the formula MIRR in excel
The rate of financing is also called the …
cost of capital
We can make a decision as to whether or not we will accept an investment if we only have the MIRR
FALSE
We need something to compare the MIRR to, and that something is the cost of capital.
If MIRR - K > 0, we …
accept the investment project
If the MIRR > K, we …
accept a financing project
There is a real internal rate of return
FALSE
Net cash flows are …
the difference between the investment cash flows and the financing cash flows
The cash flows of the investment are …
those cash flows that are calculated as revenues - cost of investment
The modified internal rate of return supposes that …
we have reinvested our cash flows
It is realistic to realize that we reinvest cash flows after …
paying our financing investment
Net cash flows are those cash flows left over after paying back our financing.
True
The reinvested net cash flows are calculated on the net cash flows
True
We compound with the cost of capital for ________ cash flows, which means that we …
negative cash flows
finance because we need money
We compound with the reinvested rate of return for the …
positive cash flows
Reinvested cash flows are evaluated in moment ________.
n
We don’t have a real internal rate of return because …
we don’t do anything in moment 0
Reinvested cash flows and reinvested net cash flows have the same formula.
True
reinvested/net cash flows * (1+rir/K%)^n-t
The RNPV evaluates the real total cash flows in moment 12.
FALSE
The RNPV evaluates the real net cash flow in moment 0
For the RNPV, we discount at the rate of …
the cost of capital, K
If the RNPV is positive, we accept the investment project.
True
RNPV = total net cash flow in moment 0/(1+K%)^n
True
The IRR is the value that makes the NPV equal to 0.
True
NPV includes the initial amount invested.
True
Profitability index is the profit index for every euro spent
True
Payback period is the time it takes to recover your investment
True