week 9 - finance

  • Created by: jmf00632
  • Created on: 27-12-19 21:53
net present value (NPV)
the diff between an invesmtnets maret value and its cost
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the process of valuing an invemsntet by discoynting its future cash flows
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pay back period
the amount of time required for an investment to generate cash flows sufficient to recover its initial cost
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disconted pay back period
– the length of time required for an invesmets discounted cash flows to equal its initial cost
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average accounting return (AAR)
An invesmtnets average net income divided by its average book value
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The discount rate that makes the NPV of an investment 0.
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multiple rates of return
– the possibility that more than one discount rate will make the NPV of an investment 0.
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mutually exclusive invesmtnet decision
– a situation in which taking one investment prevents the taking of another
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profitability index (PI)
The presents value of an invemstns future cash flows divided by its initial cost. also called the benefit cost ratio.
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importance of capital budgeting
• Long-term effect—capital, or long-term funds, raised by the firm are used to invest in assets that enable the firm to generate revenues several years into the future • Timing is important—decisions impact the firm for several years
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good decision criteria
• Provide information on whether we are creating value for the firm • Adjust for the time value of money • Take risk into account (e.g. how quickly the investment is repaid)
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the practice of capital budgeting -
• Strategic asset allocation • How to tell whether a particular investment will create shareholder value - or not! • Variety of techniques
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net present value
The difference between an investment’s market value and its cost
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formula of NPV
NPV = PV(future cash flows at investor required rate of return) minus the initial investment
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Mutually exclusive investements
situation where taking one investment prevents taking the other
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npv calc - when you have to decide wheather to go ahead with an investment
draw a timeline - poster and use the pv annuity formula then thesingle cash flow formula for the salvage cost and add all 3 of them up
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week 9 - payback (got a poster)
make a table of all the cash flows and them make a column called cum cash flow and in this you add the cash flow with the previous one and so on
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If AAR is greater than the target return then we accept it
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the process of valuing an invemsntet by discoynting its future cash flows

Card 3


pay back period


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Card 4


disconted pay back period


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Card 5


average accounting return (AAR)


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