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27 Cards in this Set
- Front
- Back
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What are identifiers of Relevant Costs?
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Does the cost affect your decision?
Does the cost change your decision? |
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When should you accept the cost of a new project?
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IF PVFCF > today's cost
(initial cash outflow = today's cost) |
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Calculate the Net Initial Cash Outflow?
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Invoice Price + Shipping + Install
+ increase in Working Capital <Cash proceeds on sale of old (net of tax) inflow> = Net initial outflow |
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How do you calculate the Gain or Loss on sale of asset?
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Selling Price
<NBV for TAX> =G/L on asset |
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Calculate NPV
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Step 1: Calculate after tax CF
Step 2: Add depreciation Benefit Step 3: Multiply by PV of Annuity Step 4: Subtract initial cash outflow =NPV |
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Calculate cash inflow of tax savings on depreciation...
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Depreciation * Tax Rate
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When you are looking at accepting a project, a riskier project would require you to adjust what?
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Higher Interest Rate
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What is the major advantage of NPV over IRR?
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You can adjust the rates for each cash flow period with NPV.
IRR requires a constant rate. |
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Limitation of NPV?
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Does not give you the actual rate of return, rather its a dollar amount made on the investment.
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Limitation of IRR?
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You only get a % rate of return.
This fucking sucks because you dont really know how much money the investment is making, ie dollar amount. |
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IRR - What is the discount rate?
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The discount rate that discounts future cash inflows to equal the PV $ outflow today.
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When should you accept the project using the IRR?
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When...
IRR > Hurdle Rate Accept that shit! |
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Explain the reinvestment assumption when using the IRR
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All cash flows are assumed to be invested at the internal rate of return, often this is very unreasonable.
Thus if IRR is too high or too low you will have wildly inappropriate conclusions on the project/investment. |
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How do you calculate the Payback period?
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Initial outflow / annual annuity
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When you have high operating leverage, you have _______ fixed costs.
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High Fixed Costs
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When you have low operating leverage, you have _______ fixed costs.
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Low fixed costs
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When you have high operating leverage, you have _______ variable costs.
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low variable costs
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When you have low operating leverage, you have _______ variable costs.
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high variable costs
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Degree of operating leverage (DOL)?
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% Change EBIT
------------------------ % Change Sales |
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Financial Leverage calculation?
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% Change in EPS
--------------------------- % Change in EBIT |
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Financial leverage calculation?
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% change in EPS
--------------------------- % change in EBIT |
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Higher financial leverage = ______ potential profit, but ____ Risk.
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Higher financial leverage = higher potential profit, but higher risk.
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Calculate degree of Leverage?
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DOL * DFL
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Operating leverage is usually determined by _________?
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Industry.
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Financial leverage is usually determined by __________?
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Management decisions.
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WACC
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(Ke *%) + (Kd *%)
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If the tax rate goes up you have more of an incentive to use what kind of financing?
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Debt financing, due to the tax deduction you can take.
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