term1 Definition1term2 Definition2term3 Definition3
Please sign in to your Google account to access your documents:
What is the Net Present Value of a project?
Present Value sum of all future cash flows.
Also, PV (benefits) - PV (costs)
(p 59)
What is a real option?
Real options are delayed decisions that are incorporated into investment decisions. (Alan)
Real options are actual options (in the sense of "choices") that a business may gain by undertaking certain endeavors. For example, by investing in a particular project, a company may have the real option of expanding, downsizing or abandoning other projects in the future. Other examples of real options may be opportunities for R&D, M&A and licensing. (Investopedia)
What are other valuation approaches (i.e., other than NPV)?
Payback period
Internal rate of return (IRR)
Payback Period
The time it takes for cumulative earnings of a project to become positive. (Eg, number of years it takes to receive the initial cost of capital)
What is a critique of payback period as a valuation approach? What is it good for?
Critiques:
- ignores time value of money (unless discounted)
- doesn't consider cash flows beyond the payback period, which means it is a poor measure of profitability
It is good as a measure of project liquidity
Internal rate of return
It is the discount rate that makes PV (inflows) = PV (outflows) -- that is, NPV = 0
IRR > CoC, accept
IRR < CoC, reject
What is a critique of IRR as a valuation approach? What is it good for?
Not accurate:
- there can be multiple IRRs
- A higher IRR doesn't mean better (probably just paid faster)
Calculate NPV
Adjust differences btw incremental earnings and cash flow:
Sales - COGS = Gross Profit
Gross Profit - SGA - R&D - Depreciation = EBIT
EBIT * tax = Unlevered Net Income
Adjust:
Plus: Depreciation
Less: CapEx
Less: Increase in NWC (i.e., Current Assets - CL)
Need help typing ? See our FAQ (opens in new window)
Please sign in to create this set. We'll bring you back here when you are done.
Discard Changes Sign in
Please sign in to add to folders.
Sign in
Don't have an account? Sign Up »
You have created 2 folders. Please upgrade to Cram Premium to create hundreds of folders!