Flashcards in Financial Decision models Deck (22):
Cash flow Effects
Stages of cash flows
Inception of the project
Disposal of the project
Methods that consider the time value of money are
DCF (discounted cash flow)
NPV (net present value)
Internal rate of return
A discount or hurdle rate is determined in advance for which capital budgeting technique?
Net present value
What is an acceptable procedure to evaluate cash flows with risk?
Discount rates may be used that reflects the degree of risk
NPV focuses on what?
Advantage of using NPV over internal rate of return model in discounted cash flow analysis
NPV can be used when there is no constant rate of return required
Profitability index is used when?
The capital rationing needs to be considered when comparing projects
Profitability index equation?
ONE limitation is?
present value of net future cash inflow / present value of net initial investment
It requires detailed long term forecasts of the projects cash flows.
NPV uses what rate to discount cash flow
hurdle rate (discount percentage rate)
NPV of a project is a function of
current and future cash flows, including proceeds from sale of old asset
capital budgeting is based on
managements predictions of an uncertain future
Capital financing relates to
longer periods of time that are subject to greater levels of uncertainty
ONE limitation of payback period, discounted cash flow, internal rate of return, and NPV
They rely on the forecasting of future data
Capital budgeting decisions do not include
Financing short-term working capital needs (more operational in nature)
in capital budgeting decisions, MARCS and straight line depreciation will
equal in total
Relevant cost are those cost that will
differ among many alternatives
NPV method recognizes the
time value of money and discounts cash flow over the life of the project using the hurdle rate
List the rates used in NPV
Cost of capital
Required rate of return
NPV method of capital budgeting assumes that
cash flows are reinvested at the discount rate
One disadvantage of NPV is
It does not provide that true rate of return on investment