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17 Cards in this Set
- Front
- Back
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A dollar today is worth more than a year from now. Therefore, projects today that promise earlier returns are preferable to those that promise later returns |
true |
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the capital budgeting techniques that best recognize the time value of money are those that involve |
discounted cashflows NPV and IRR |
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Payback |
length of time it takes for a project to recoup its initial cost |
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Payback formula |
investment required/annual net cash inflow
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What sucks about payback? 3 ways |
Ignores time value of money shorter payback doesn't always mean more desirable investment Ignores cash flow after payback period |
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Net Present Value |
Compares present value of a projects cash inflows with the present value of cash outflows. The difference between these two streams of cash flows is called the NPV |
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NPV positive or zero |
acceptable because it promises a return greater than/equal to the required rate of return |
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NPV negative |
not acceptable because it promises a return less than the required rate of return |
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Internal Rate of Return |
rate of return promised by an investment over its useful life |
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How is IRR computed? |
by finding the discount rate that will cause the NPV of a project to be zero |
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if the IRR is equal to or greater than the minimum required rate of return |
then the project is acceptable |
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Capital budgeting decisions |
screening decisions and preference decisions |
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Screening decisions |
Pertain to whether or not an investment is acceptable, this decision comes first |
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Preference Decisions |
Rank projects |
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the higher the internal rate of return |
the more desirable the project |
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NPV of one project cannot be directly compares to the NPV of another unless investments are equal. If not, what must be calculated? |
Profitability Index |
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Profitability Index |
NPV/Investment Required |
