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