PRESENT VALUE OF Perpetuity commencing at end of next year
Annual income/ discount rate
2 of 14
NPV discount factor
Amount will receive x 1/ (100 + cost of capital)^ years
3 of 14
Internal Rate of Return Interpolation (point at which project ceases to be worthwhile)
cost of capital for + NPV + (positive NPV/difference between NPVs) x (difference between costs of capital))
4 of 14
Average rate of return on initial investment
Average profit of project/ initial capital required
5 of 14
ARR on average investment
average profit of project/ average investment (investment- residual value/2)
6 of 14
Advantages of payback period
Time based answer useful if cash flow a problem, useful if risk of project not running full course, based on relevant cash flows not profits so better than ROCE
7 of 14
Disad
Ignores what happens after payback, ignores time value of money
8 of 14
Advantages of NPV
Recognises money loses value over time, gives correct answer if company can borrow as much as it likes at given interest rate (can borrow enough to fund project and have this amount left over in present terms, increasing wealth of shareholders)
9 of 14
Disads
Hard to obtain cost of capital
10 of 14
Advantages of ARR
Looks at entire lifetime of project
11 of 14
Disadvantages
'Average profit' can be misleading
12 of 14
Advantages of IRR
Gives a hurdle rate for comparison with ROCE
13 of 14
Disads
Complicated, can't be used to choose between mutually exclusive projects, but indicates how sensitive decision is to changes in the interest rate, considers time value of money
14 of 14
Other cards in this set
Card 2
Front
PRESENT VALUE OF Perpetuity commencing at end of next year
Back
Annual income/ discount rate
Card 3
Front
NPV discount factor
Back
Card 4
Front
Internal Rate of Return Interpolation (point at which project ceases to be worthwhile)
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