Fin 314 Study Guide
Terms in this set (32)
When cashflow is conventional NPV is:
Positive for Discount Rates below the IRR
Negative for Discount Rates above the IRR
Equal to 0 when the Discount Rate equals the IRR
What is the "Crossover Rate?"
The rate at which the NPV's of two projects are equal
The Internal Rate of Return is a function of
A project's cash flows
If a project has multiple internal rates of return which of the following methods should be used:?
MIRR and NPV
The IRR is the discount rate that makes the NPV of a project equal to
Opportunity costs are referred to as
"Erosion" will _____ the cash flows of existing products
Investment in NWC arises when
credit sales are made
Inventory is purchased
cash is kept for unexpected expenditures
Interest expenses incurred on debt financing are _____ when computing cash flows from a project
Cash flows should always be considered on a _____ basis
Which of the following are fixed costs?
Cost of equipment
Rent on a production facility
Operating cash flow is a function of
Earnings before tax and interest
Operating cash flow (OCF) =
Operating Cash Flow = EBIT + Depreciation - Taxes
Cash Flow from Assets has three components
Operating cash flow, capital spending, changes in NWC
Modified ACRS Depreciation
Every Asset is assigned to a particular class
Ways to calculate Operating Cash Flow (OCF):The Bottom Up Approach
Use this approach when we are ignoring any financing expenses such as interest
Project Net Income = EBIT - Taxes
The Top Down Approach
OCF = Sales - Costs - Taxes
The Tax Shield Approach
OCF = (Sales - Costs) x (1-T) + Depreciation x T
Equivalent Annual Cost (EAC)
An amount, paid each year over the life of the machine has the same PV of costs.
An increase in depreciation expense will _____ cash flows from operations
Opportunity costs are classified as
The difference between a firms current assets and its current liabilities is known as
Net Working Capital
Equation for estimating OCF using the Top-Down Approach
OCF = Sales - Costs - Taxes
Operating Cash Flow =?
EBIT + Depreciation - Taxes
Depreciation Tax Shield =
Depreciation * tax rate
Ex: If depreciation equals 120,400 and the tax rate is 34% your equation looks like 120,400*.34=$42,140
Capital budgeting can be defined as
the process of analyzing, evaluating, and deciding whether resources should be allocated to a project or not.
What is the goal of capital budgeting?
shareholder value maximization
Conventional Cash flow?
One change of signs for example: - + + + + + or + + + + -
Nonconventional Cash Flow?
Two changes of signs for example: - + + + + - or + + + - + + +
What is an "Independent" project?
if cash flows of one project are unaffected by the acceptance of an other project
What is a "Mutually Exclusive" Project?
If the cash flows of one project can be adversely impacted by the acceptance of another.
Crossover Rate Calculation
First Step: Take the cashflows from Project A and subtract Project B, like (A - B). Enter each new cash flow into your calculator starting with CF0. After entering all cash flow values compute IRR
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