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27 Cards in this Set
- Front
- Back
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Appreciation of Equity Rate of Return (AOEROR)
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Reinvested operating incomes grow at an assumed compounding frequency until either
○ A common point in time is reached ○ The end of a project life is reached |
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Bail-Out Time
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Cumulative NCF + Salvage Value = Original Investment
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Characteristic of an ideal Yardstick
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■ Consistent with corporate goals
■ Easy to understand and apply ■ Permits cost-effective decision making ■ Provides a quantitative measure for acceptance or rejection ■ Permits alternatives to be compared and ranked ■ Incorporates the time value of money |
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Cumulative Net Cash Flow Curve
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plot of cumulative net cash flow versus time is also called a cash position curve, communicates cash requirements and time to payout for a project.
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Discounted Cumulative Cash Flow
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○ Plot of discounted NCF vs Time
○ Often Combined with undiscounted cumulative NCF curve to show the effect of discounting |
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Discounted Payout
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Time where the cumulative discounted net cash flow reaches 0
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Discounted Return on Investment
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● Return = Cumulative Operating Income discounted to the present time
● Investment = Cumulative Investments discounted to present time |
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Limited Capital in Portfolio of Projects
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some of the projects must be rejected or eliminated
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Maximum Exposure
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The most negative point on the cumulative (undiscounted) net cash flow
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meaning of ROI of 1
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the project just pays back the cost of investment
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meaning of ROI of 2
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you can double your money
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measure of the time period required to return the original investment.
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Time to Payout
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Modified Internal Rate of Return
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calculated by discounting at various discount rate until the sum of the discounted net cash flow equals average company investment opportunity rate
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Mutually Exclusive Projects
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Mutually exclusive project are two or more projects where the acceptance of one means the rejections of all the others. Only one of the projects may be undertaken
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Net Present Value (NPV)
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Calculated by discounting each of the future cash flows (NCF) to Time 0 at an specified constant discount rate (i) and summing them up over the life of the project
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Portfolio of projects
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The selection of a portfolio of projects from numerous possible projects is the decision process during capital budget deliberations.
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Present Value Profile (PVP)
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Generated by calculating the NPV at several discount rates and plotting the results
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Represents the maximum amount of money that will be placed at risk
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Maximum Exposure
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Single Project
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The first test of any project is to see if it is able to stand alone. This implies to the cash flow analysis of chapter 1
(Cash flow of company w/ project = cash flow of company with project - w/t project) |
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Time at which the project will achieve given internal rate of return (IRR)
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Discounted Payout
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Time to payout
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The time at which the cumulative NCF curve crosses the x-axis
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Tools (Yardsticks) that ignore the time value of Money
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Cumulative Cash Flow Curve
Maximum Exposure Total NCF Time to Payout Bail-Out Time Return on Investment (ROI) Profit to Investment Ratio (P:I) Total Operating Income to Maximum Exposure Ratio |
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Total Net Cash Flow
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Maximum value reached by the cumulative NCF
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Undiscounted Profit to Investment Ratio (P:I)
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○ P:I is a variation of ROI
○ P:I = (Total Net Cash Flow) / (Total Investment) = ROI-1 |
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Undiscounted Return on Investment (ROI)
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○ Ratio of the amount of return to the amount of invested
○ ROI = (Total Operating Income) / (Total Invested) |
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Unlimited Capital in Portfolio of projects
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If capital is unlimited then all the projects meeting minimum requirements for a single project would be selected
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Yardstick
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a measure of investment worth that are used to help compare and rank competing projects
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