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11 Cards in this Set
- Front
- Back
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capital investment decision |
decision made concerning deployment of capital acquisition, replacement, or expansion |
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NPV |
net present value is incremental cash inflow minus incremental cash outflow over project life |
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payback analysis |
measure amount of time it takes to pay back initial investment, standard is arbitrary, ignores cash flows beyond payback and TVM |
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IRR |
internal rate of return: comparing NPV to WACC, accept project if NPV>0, sometimes meaningful NPV cannot be calculated |
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NPV calculator steps |
NPV(R%,CF0,{CF list},{CF frequency}) |
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IRR calculator steps |
IRR(CF0,{CF list},{CF frequency}) |
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importance of capital budgeting |
long term effects timing substantial expenditures |
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notable problems in cash flow |
sunk costs opportunity costs externalities (effects on rest of firm) shipping and installation costs inflation |
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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 |
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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) |
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payback period discounted |
same as undiscounted but with NPV of net cash flow |
