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11 Cards in this Set

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capital investment decision

decision made concerning deployment of capital


acquisition, replacement, or expansion

NPV

net present value is incremental cash inflow minus incremental cash outflow over project life

payback analysis

measure amount of time it takes to pay back initial investment, standard is arbitrary, ignores cash flows beyond payback and TVM

IRR

internal rate of return: comparing NPV to WACC, accept project if NPV>0, sometimes meaningful NPV cannot be calculated

NPV calculator steps

NPV(R%,CF0,{CF list},{CF frequency})

IRR calculator steps

IRR(CF0,{CF list},{CF frequency})

importance of capital budgeting

long term effects


timing


substantial expenditures

notable problems in cash flow

sunk costs


opportunity costs


externalities (effects on rest of firm)


shipping and installation costs


inflation

types of cash flows

initial investment: occur at beginning


supplemental operating cash flows: from purchase to disposal


terminal cash flows: occur at end of life

payback period calculations undiscounted

(# of years before year of full recovery)+ (amount unrecovered at start of recovery year/ total cash flow generated during recovery year)

payback period discounted

same as undiscounted but with NPV of net cash flow