Home
Subjects
Explanations
Create
Search
Log in
Sign up
Upgrade to remove ads
Only $2.99/month
Social Science
Economics
Finance
7 DCF
STUDY
Flashcards
Learn
Write
Spell
Test
PLAY
Match
Gravity
Terms in this set (19)
1. Capital Budgeting
2. Capital Structure
3. Working Capital Management
3 Chief areas of financial decision-making in most business:
Capital Budgeting
this is the allocation of funds to relatively long range projects or investments
Capital Structure
is the choice of long-term financings for the investments the company wants to make.
Working Capital Management
is the management of the company's short-term assets and liabilities.
NPV
is the present value of cash inflows minus the present value of cash outflows
1. Incremental cash flows
2. After Tax cash flows
2 observed principles in developing cash flow estimates:
incremental cash flows
any and all changes in the firm's future cash flows that are a direct consequence of taking the project (excluding sunk costs)
1. Identify all cashflows associated with the investment - all inflows and outflows
2. Determine appropriate discount rate, opportunity cost, or "r" for the investment project.
3. Using the decided rate, find the PV of CF (Inflows + & Outlfows -)
4. Sum all the present values.
5. Apply NPV Rule
NPV steps:
Estimate of opportunity cost
This is used as the discount rate in NPV analysis:
0-NPV
this type of project makes the company larger; however, it does not increase shareholder wealth.
IRR
the discount rate that makes net present value equal to zero.
Compound rate of return
We will only realize this type of return that is equal to IRR over the life of the investment only if we can reinvest all interim CF at exactly the IRR.
opportunity cost
accept projects or investments for which the IRR is greater than the ________________ ____________ of capital.
NPV > 0
If the opportunity cost is less than IRR of a project; then NPV is.....
Reject
if the opportunity cost is greater than the IRR management should....
Independent
under this circumstance, the IRR and NPV rules give the same accept or reject decision
1. Size and Scale
2. Timing of CF
The IRR and NPV rules rank differently when:
IRR
this is determined by the projects cash flows alone; further, it assumes reinvestment at this rate preventing the interpretation of it as an achievable rate of return.
NPV
this uses an external market-determined discount rate, and reinvestment is assumed to take place at that discount rate.
Sets with similar terms
TCA 420 Exam 3
23 terms
FINC 341 Chapter 11
45 terms
Finance Chpt 9-12
85 terms
Finance Chpt 9-12
85 terms
Other sets by this creator
TVM 6
18 terms
Fixed Income Valuation 52
2 terms
Short-term Funding Alternatives to Banks 50:8
31 terms
Structured Financial Instruments 50:7
13 terms
Other Quizlet sets
Physical Science Chapter 6
131 terms
History 2016 Chapter 17 Vocab
28 terms
Structure & Properties of Nucleic Acids
52 terms
Neuro Intro
25 terms