Decision-making process saying whether to undertake the project or not
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Why is NPV the most powerful capital budgeting rule?
1. Use cash flows not earnings 2. use all cash flows 3. considers time value of money
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If the NPV > 0, the company should...
undertake the project
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What is an annuity?
A stream of N equal cash flows
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What is a perpetuity?
An infinite stream of equal future cash flows
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The PV of a stream of expected future cash flows is given by what?
The Gordon Growth model
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What is a bond?
A loan instrument that pays a fixed percentage of the face value of the loan at regular intervals until the loan expires, art which point the face value is also repaid
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What is the discount rate to calculate the PV of a bond?
Yield-to-maturity
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What is the IRR?
Value of the discount rate that makes NPV = 0
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The discount rate below the IRR gives a positive or negative NPV?
Positive
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What is a hurdle rate?
the minimum rate of return that the providers of the firm's capital require from the invetment
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The hurdle rate is also known as what?
Opportunity cost of capital
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How is the hurdle rate obtained?
Financial markets
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What does a discount factor reflect?
timing and risk of expected future cash flow
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Compound growth formula
I x (1xR)^T
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Discount factor formula
£1 x 1/(1+R)^T
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General NPV formula
-I + C1/(1+R) + C2/(1+R)^2 + ..... CN/(1+R)^N
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PV of a perpetuity formula
C/R
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PV of a growing perpetuity
C/R-G
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PV of an annuity
C/R [1- 1/(1+R)^N]
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PV of growing annuity
C/R-G [1- (1+G / 1+R)^N]
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Other cards in this set
Card 2
Front
Why is NPV the most powerful capital budgeting rule?
Back
1. Use cash flows not earnings 2. use all cash flows 3. considers time value of money
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