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15 Cards in this Set
- Front
- Back
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Formula for CF, step 1, initial cost? |
1. Initial cost: Invoice + installation + shipping (outflow) + increase in Work. Cap. (outflow) - Net of Tax proceeds on sale of old (inflow) = Net Outflow |
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Formula for CF, Step 2 Oper. CF & 3, Disposal? |
Oper. CF = PV of FCF Disposal: + decrease in Work. Cap (inflow) - Gain * Tax Rate (outflow) + Loss * Tax Rate (inflow) = Cash Inflow |
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Two methods of discounted cash flow? |
- NPV - IRR |
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Rate of return (also known as Huddle Rate, Discount Rate) |
= compensation for all risk assumed Rate used to discount FCF |
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NPV vs. IRR? |
NPV: uses multiple Discount Rates Evaluates in $ amounts IRR: uses single rate Evaluates in % of return |
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Interpreting NPV Method (when profit/loss) |
1. Sum of PV of FCF > cost, Profit (implies IRR > Huddle Rate) 2. PI (Profitability Index) > 1, Profit |
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IRR rate determination? Formula? |
rate that will set the PV of FCF = Today's Cost i.e NPV of Zero IRR = Investment / Cash Flows |
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Interpreting IRR (when profit/loss) |
1. IRR > Huddle Rate, Profit (implies positive NPV, PI>1) |
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PI Formula? (used to rank investments) |
PI = (PV of FCF) / (PV of Initial Investment, i.e. cost) |
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Risk and PV of FCF correlation? |
increase Risk -> Increase Rate of Return -> Decrease PV of FCF |
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Payback Method focus? (used only for uniform CF) |
Time required for the net After-Tax CF to recover initial investment Nothing else, no profit focus Liquidity Focus |
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Payback Method Formula? (used only for uniform CF) |
Payback Period = (Initial Outflow) / (Increase in Annual Net After-Tax CF) |
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Cumulative Approach Payback Method (used for non-uniform CF) |
calculate cumulative CF, see in what year initial investment will be covered (including fraction of a year) |
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PV of 1$ formula |
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PV of ordinary Annuity formula? |
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