Week 6 Flashcards
In very basic, how do you know if an investment was or is worth it?
Whether or not the investment has increased value in marketplace than what it cost to acquire
In basic what is capital budgeting?
Capital budgeting is the process of a firm deciding to which long term investments it will acquire or projects
In basic, capital budgeting tools do what?
Capital budgeting tools help users decide whether to accept or reject capital budgeting projects.
What is the difference between profit and value?
Profit is the measure of a companies performance over a period of time which is typically a year
Value is the performance of a project or the performance over the projects life
What are the 5 steps in capital budgeting?
Identification of investment opportunity, evaluation of investment opportunity, selecting more lucrative projects, implementations of selected projects, post audit (comparing revenues and costs with original projections)
What is the basic idea behind picking a project, what happens to decide yes or no?
The financial manger will estimate inflow and outflow the investment might generate, they will look at cash flows and decide wether the project should or should not be accepted
What is NPV?
Net present value is the difference between your investments market value and what the cost was
What does DCFV mean?
Discounted cash flow valuation
When might an NPV be accepted or rejected?
Accepted if 0 or above
rejected if below 0 or negative
What are three strengths and weaknesses of NPV?
It takes into consideration time value of money
NPV take into account value creation that after all expenses and costs are done anything after is profit
NPV accounts for all future cash flows, inflows and outflows of a projects life
NPV assumes a lot especially around the discount rates
NPV it can be challenging to accurately predict future cash flows
NPV does not consider wider non financial factors
What is time value of money?
Its the basic concept that £100 in a year is worth more now than in the future due to inflation of other objects around.
What is absolute value creation
Absolute value creation is after all costs and expenses of an investment have been made, it is the profit then or the money made then which counts
