Formulas and concepts Flashcards

1
Q

NPV

A

calculating the net present value of an individual cash flow
NPV = sum{F / [ (1 + i)^n ]} - ii

Lump sum/discount rate= end sum

Where,

PV = Present Value
F = Future payment (cash flow)
i = Discount rate (or interest rate)
n = the number of periods in the future the cash flow is
ii = initial investment

A positive net present value indicates that the projected earnings generated by a project or investment (in present dollars) exceeds the anticipated costs (also in present dollars). Generally, an investment with a positive NPV will be profitable, and an investment with a negative NPV will result in a net loss.

Companies often have different ways of identifying the discount rate. Common methods for determining the discount rate include using the expected return of other investment choices with a similar level of risk (rates of return investors will expect), or the costs associated with borrowing money needed to finance the project.

For example, if a retail clothing business wants to purchase an existing store, it would first estimate the future cash flows that store would generate, and then discount those cash flows into one lump-sum present value amount — let’s say $500,000. If the owner of the store were willing to sell his or her business for less than $500,000, the purchasing company would likely accept the offer as it presents a positive NPV investment. If the owner agreed to sell the store for $300,000, then the investment represents a $200,000 net gain ($500,000 - $300,000) during the calculated investment period. This $200,000, or the net gain of an investment, is called the investment’s intrinsic value. Conversely, if the owner would not sell for less than $500,000, the purchaser would not buy the store, as the acquisition would present a negative NPV at that time and would, therefore, reduce the overall value of the larger clothing company.

Read more: Net Present Value (NPV) Definition | Investopedia https://www.investopedia.com/terms/n/npv.asp#ixzz5PTxlP3F5
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2
Q

Sunk costs

A

Sunk costs (past costs) are excluded from future business decisions because the cost will be the same regardless of the outcome of a decision.

If, for example, XYZ Clothing is considering shutting down a production facility, any of the sunk costs that have end dates should be included in the decision.

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3
Q

Things to consider when introducing a new product

A

cannibalization, cross-selling, capacity

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4
Q

Growth references

A

30% growth is amazing for a commodity industry

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5
Q

Considerations when entering a novel market

A

First mover advantage

Could lose benefits of economies of scale (net loss of 3.5M in button volume)

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6
Q

Consideration when creating a website

A

potential to supplant traditional distribution and provide better margins

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7
Q

Working capital

A

Working capital is a measure of both a company’s operational efficiency and its short-term financial health. The working capital ratio (current assets/current liabilities), or current ratio, indicates whether a company has enough short-term assets to cover its short-term debt. A good working capital ratio is considered anything between 1.2 and 2.0. A ratio of less than 1.0 indicates negative working capital, with potential liquidity problems, while a ratio above 2.0 might indicate that a company is not using its excess assets effectively to generate maximum possible revenue.

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8
Q

P and L

A

profit and loss statement=Income statement
is a financial statement that summarizes the revenues, costs and expenses incurred during a specified period, usually a fiscal quarter or year.
records the business performance through a period of time. Directly tells you how the company is doing in terms of making money. like a Profits tree

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9
Q

Consideration when downsizing portfolio

A

Less diversification in products exposes them to increased market risk

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10
Q

up-front investment

A

If smaller, could be better to enter less attractive market based on growth and size

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11
Q

When lacking the technical capabilities to enter this specialized market

A

think about an acquisition strategy,
I would recommend going for one of the larger companies, as that would give the client a stronger position. Smaller companies would probably not offer an important enough position in the market.

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12
Q

Engineering 4.0

A

using the next generation of tools—IoT, AI-aided design, and additive manufacturing—to come up with better design.

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13
Q

risk aversion

A

Risk averse is the description of an investor who, when faced with two investments with a similar expected return, prefers the one with the lower risk.
risk aversion is the behavior of humans (especially consumers and investors), who, when exposed to uncertainty, attempt to lower that uncertainty

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14
Q

Utilities

A

Overhead includes all ongoing business expenses not including or related to direct labor or direct materials used in creating a product or service. A company must pay overhead on an ongoing basis, regardless of how much or how little the company is selling

Overhead expenses can be fixed, meaning they are the same amount every time, or variable, meaning they increase or decrease depending on the business’s activity level. For example, a business’s rent payment may be fixed, while shipping and mailing may be variable.

Categorizing Overhead Expenses
Overhead expenses may apply to a variety of operational categories. Administrative overhead traditionally includes costs related to basic administration and general business operations, such as the need for accountants or receptionists. Selling overhead relates to activities involved in marketing. This can include printed materials and television commercials, as well as the salaries of administrative-support professionals.

Depending on the nature of the business, other categories may be appropriate, such as research overhead, maintenance overhead manufacturing overhead or transportation overhead.

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15
Q

fixed cost

A

A fixed cost is an expense or cost that does not change with an increase or decrease in the number of goods or services produced or sold

Examples of fixed costs include insurance, interest expense, property taxes, utilities expenses and depreciation of assets. Also, if a company pays annual salaries to its employees regardless of the number of hours worked, such salaries are considered fixed costs. A company’s lease on a building is another common example of a fixed cost that can absorb significant funds, especially for retail companies that rent their store premises.

Variable costs per item stay relatively flat, and the total variable costs will change proportionately to the number of product items produced. Fixed costs per item decrease with an increase in production. Thus, a company can achieve economies of scale when it produces enough goods to spread the same amount of fixed costs over a larger number of units produced and sold.

overhead salary(hiring too many/paying too much) rental

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16
Q

variable cost

A

A variable cost is a corporate expense that changes in proportion with production output.

Examples of variable costs are sales commissions, direct labor costs, cost of raw materials used in production, and utility costs. The formula for variable cost is given as:

Total variable cost = Quantity of output x Variable cost per unit of output.

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17
Q

Economies of scale

A

Economies of scale refer to reduced costs per unit that arise from increased total output of a product.

Economies of scale give rise to lower per-unit costs for several reasons. First, specialization of labor and more integrated technology boost production volumes. Second, lower per-unit costs can come from bulk orders from suppliers, larger advertising buys or lower cost of capital. Third, spreading internal function costs across more units produced and sold helps to reduce costs. “Internal functions” include accounting, information technology, and marketing. The first two reasons are also considered operational efficiencies and synergies. The second two reasons are cited as benefits of mergers and acquisitions.

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18
Q

Break-even analysis

A

Break-even analysis entails the calculation and examination of the margin of safety for an entity based on the revenues collected and associated costs. Analyzing different price levels relating to various levels of demand, an entity uses break-even analysis to determine what level of sales are needed to cover total fixed costs.

The calculation of break-even analysis may be performed using two formulas. First, the total fixed costs are divided the unit contribution margin. Alternatively, the break-even point in sales dollars is calculated by dividing total fixed costs by the contribution margin ratio.

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19
Q

Contribution Margin

A

The concept of break-even analysis deals with the contribution margin of a product. The contribution margin is the excess between the selling price of the good and total variable costs. For example, if a product sells for $100, total fixed costs are $25 per product and total variable costs are $60 per product, the product has a contribution margin of the product is $40 ($100 - $60). This $40 reflects the amount of revenue collected to cover fixed costs and be retained as net profit. Fixed costs are not considered in calculating the contribution margin.

The contribution margin allows management to determine how much revenue and profit can be earned from each unit of product sold. The contribution margin is calculated as:

Contribution Margin = Gross Profit / Sales = (Sales – Variable Costs) / Sales

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20
Q

elasticity

A

elasticity refers the degree to which individuals, consumers or producers change their demand or the amount supplied in response to price or income changes. It is predominantly used to assess the change in consumer demand as a result of a change in a good or service’s price.

When the value of elasticity is greater than 1, it suggests that the demand for the good or service is affected by the price. A value that is less than 1 suggests that the demand is insensitive to price.

%change in quantity/%change in price

Companies with high elasticity ultimately compete with other businesses on price and are required to have a high volume of sales transactions to remain solvent. Firms that are inelastic, on the other hand, have products and services that are must-haves and enjoy the luxury of setting higher prices.

Beyond prices, the elasticity of a good or service directly affects the customer retention rates of a company. Businesses often strive to sell goods or services that have inelastic demand; doing so means that customers will remain loyal and continue to purchase the good or service even in the face of a price increase.

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21
Q

Balance sheet

A

A snapshot of the current stage of the company’s property, dept, and ownership at one given point int time. It shows three figures:
assets: what the company owns: buildings equipment cash etc.
-
Liabilities: what the company owes: bills, loans etc.
= equity: networth/book value

The balance sheet is always balanced!

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22
Q

Amortization

A

Amortization is an accounting technique used to lower the cost value of a finite life or intangible asset incrementally through scheduled charges to income. When businesses amortize expenses, it helps tie the asset’s costs to the revenues it generates. For example, if a company buys a ream of paper, it writes off the cost in the year of purchase and generally uses all the paper the same year. Conversely, with a large asset, the business reaps the rewards of the expense for years. Thus, it writes off the expense incrementally over the useful life of that asset, tangible or intangible.

Amortization is the paying off of debt with a fixed repayment schedule in regular installments over time like with a mortgage or a car loan. It also refers to the spreading out of capital expenses for intangible assets over a specific duration — usually over the asset’s useful life — for accounting and tax purposes.

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23
Q

Depreciation

A

Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account for declines in value. Businesses depreciate long-term assets for both tax and accounting purposes.Depreciation is a “non-cash” expense that reduces the value of an asset over time. When depreciation is non-cash, this means that it is taken as an accounting entry and the amount of cash held by the business is not affected. The business can include a specific amount on its income tax return as an expense during each year of the useful life of the asset.

Depreciation is often a difficult concept for accounting students as it does not represent real cash flow. Depreciation is an accounting convention that allows a company to write off an asset’s value over time, but it is considered a non-cash transaction.For accounting purposes, depreciation expense does not represent a cash transaction, but it shows how much of an asset’s value the business has used over a period. For example, if a company buys a piece of equipment for $50,000, it can either write the entire cost of the asset off in year one or write the value of the asset off over the assets 10-year life. This is why business owners like depreciation. Most business owners prefer to expense only a portion of the cost, which artificially boosts net income. In addition, the company can scrap the equipment for $10,000, which means it has a salvage value of $10,000. Using these variables, the analyst calculates depreciation expense as the difference between the cost of the asset and the salvage value, divided by the useful life of the asset. The calculation in this example is ($50,000 - $10,000) / 10, which is $4,000.

A business owner can choose the straight-line depreciation method, which means that an equal amount of depreciation is recognized each year. If, instead, the owner chooses an accelerated method of depreciation, the company recognizes more depreciation in the early years and less in the later years of the asset’s useful life.One popular method is the double-declining balance (DDB) method, which uses a depreciation rate that is twice is straight-line percentage.

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24
Q

Salvage value

A

Salvage value is the estimated value that an owner is paid when the item is sold at the end of its useful life and is used to determine annual depreciation.

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25
Q

EBITDA

A

Earnings Before Interest, Tax, Depreciation, and Amortization

26
Q

EBIT

A

Earnings Before Interest, Tax

27
Q

Gross margin

A

Gross profit/revenue [%]

28
Q

Cash Flow Statement

A

strictly monitors the cash flow in or out, categorized in different sections.

Income statement is an opinion, cash flow statement is the fact.

29
Q

CEO/board organization

A

The board of directors doesn’t directly intervene in the CEO’s day-to-day work, but they reserve the right to fire CEOs The supervisors monitor the CEO and management team and report to the board.

30
Q

Typically company organization

A

CEO then:

  • accounting: record all companies transactions
  • finance: managing the money aspect
  • marketing: how to put the company in the best position to sell
  • sales: actively go out and sell products
  • operation: in charge of running the company (COO)
  • Product development and research: make tangible or intangible products
  • strategy: planning and monitoring business performance to achieve goals and objectives.
31
Q

Tangible Asset

A

asset that has a physical form. Tangible assets include both fixed assets, such as machinery, buildings and land, and current assets, such as inventory.
Tangible assets are physical items of value which are used to generate revenue for a company. Tangible assets are either current or fixed. Current assets include items such as cash, inventory, and marketable securities. These items are typically used within a year and, thus, can be more readily sold to raise cash for emergencies. Fixed assets, on the other hand, are noncurrent assets which a company uses in its business operations for more than a year. They are recorded on the balance sheet as Property, Plant and Equipment (PP&E), and include assets such as trucks, machinery, office furniture, buildings, etc. The money that a company generates using tangible assets is recorded on the income statement as revenue.

Tangible assets are physical items of value which are used to generate revenue for a company. Tangible assets are either current or fixed. Current assets include items such as cash, inventory, and marketable securities. These items are typically used within a year and, thus, can be more readily sold to raise cash for emergencies. Fixed assets, on the other hand, are noncurrent assets which a company uses in its business operations for more than a year. They are recorded on the balance sheet as Property, Plant and Equipment (PP&E), and include assets such as trucks, machinery, office furniture, buildings, etc. The money that a company generates using tangible assets is recorded on the income statement as revenue.

32
Q

intangible asset

A

Nonphysical assets, such as patents, trademarks, copyrights, goodwill and brand recognition, are all examples of intangible assets. Goodwill, brand recognition and intellectual property, such as patents, trademarks and copyrights

An intangible asset can be classified as either indefinite or definite. A company’s brand name is considered an indefinite intangible asset because it stays with the company for as long as it continues operations. An example of a definite intangible asset would be a legal agreement to operate under another company’s patent, with no plans of extending the agreement. Therefore, the agreement has a limited life and is classified as a definite asset.

Businesses can create or acquire intangible assets. For example, a business may create a mailing list of clients or establish a patent. A business could also choose to acquire intangibles. If a business creates an intangible asset, it can write off the expenses from the process, such as filing the patent application, hiring a lawyer and other related costs. In addition, all the expenses along the way of creating the intangible asset are expensed. However, intangible assets created by a company do not show up on the balance sheet and have no recorded book value. Because of this, when a company is purchased, often the purchase price is above the book value of assets on the balance sheet. The purchasing company records the premium paid as an intangible asset, goodwill, on its balance sheet.

33
Q

Incremental Cost

A

Incremental cost, also referred to as marginal cost, is the total change a company experiences within its balance sheet or income statement due to the production and sale of one additional unit of product. It is calculated by analyzing the additional charges incurred based on the change in a certain activity. Incremental costs may also be classified as relevant costs.

34
Q

Company Organization

A

How a company is organized, what different components that make up a company

35
Q

Governance

A

How a company is managed and directed. The leader team includes Board of Directors BOD and Board of Managers BOM

36
Q

Board of Directors (B of D)

A

A board of directors (B of D) is a group of individuals, elected to represent shareholders. A board’s mandate is to establish policies for corporate management and oversight, making decisions on major company issues. Every public company must have a board of directors. Some private and nonprofit organizations also have a board of directors.

37
Q

Economic efficiency

A

Economic efficiency refers to the optimization of resources to best serve each person in that economic state. There is no specific threshold that determines the efficiency of an economy, but indications include goods being produced at the lowest possible cost and labor performed with the greatest possible output.

38
Q

B2B and vs

A

Business to business vs business to customers

39
Q

B2C and vs

A

business to customers vs Business to business

40
Q

Consulting term: lever

A

one or a group of initiatives, actions to perform or to meet certain goals

41
Q

Three parameters the consulting world uses in the categorization of businesses

A

Industry (product) vs location (geography) vs function (HR, finance etc.)

42
Q

Pricing Strategies

A
  • Cost-based pricing: Mark-up pricing is a particular instance 50-60%?
  • Competitive pricing: The seller may then set the same price, knowing this deprives the other seller of the price advantage or, more competitively, may offer to undercut any bona fide offer by a small percentage.
  • Demand-based pricing: This approach may be the consequence of either growing demand or diminishing demand. In the first instance, a seller may increase the selling price of something in limited supply. Auctions.

Each of these three approaches has many variants, one of which is penetration pricing. Some markets offer an interesting mix of all three.

43
Q

Penetration pricing

A

Penetration pricing is the practice of setting a low initial price for a product or service. Having the lowest price among your competitors will immediately draw attention to your business. Buy-one get-one free (BOGO) is a common penetration pricing strategy, as is heavily discounting an item or offering it for free when purchased with a related product.
Prices can eventually be normalized once the advertising objectives have been obtained and customer base increased, or
The customer will also purchase other products at normal or higher than normal prices, or
You are able to bundle the product with additional services that are highly profitable, such as a contract for monitoring services with the sale of a new security system

Predatory pricing is penetration pricing taken to extreme levels to drive competition out of the market and establish a monopoly, with the eventual goal of normalizing prices after the competition has disappeared.

44
Q

Net Cash Flow

A

= Total Cash Inflow - Total Cash Expenditures

Poor management of cash flow is the cause of 82% of business failures

45
Q

Cost of Goods Sold

A

COGS
Cost of goods sold is a calculation of all the costs involved in selling a product.

The basic calculation is:

Beginning Inventory Costs (at the beginning of the year)
Plus Additional Inventory Cost (inventory purchased during the year)
Minus Ending Inventory (at the end of the year)
Equals Cost of Goods Sold

Direct Costs are costs related to production or purchase of the product.
Indirect Costs are costs related to warehousing, facilities, equipment, and labor.

46
Q

net income

A

shows how much revenues are left over after all expenses have been paid. This is the amount of money that the company can save for a rainy day, use to pay off debt, invest in new projects, or distribute to shareholders. Many people refer to this measurement as the bottom line because it generally appears at the bottom of the income statement.

also called net profit

The net income formula is calculated by subtracting total expenses from total revenues. Many different textbooks break the expenses down into subcategories like cost of goods sold, operating expenses, interest, and taxes, but it doesn’t matter.

47
Q

Operating profit

A

Operating profit is an accounting figure that measures the profit earned from a company’s ongoing core business operations, thus excluding deductions of interest and taxes. This value also does not include any profit earned from the firm’s investments, such as earnings from firms in which the company has partial interest.

Operating profit can be calculated using the following formula:

Operating Profit = Operating Revenue - Cost of Goods Sold (COGS) - Operating Expenses - Depreciation - Amortization

Operating profit serves as an indicator of the business’s potential profitability with all extraneous factors removed from the calculation. All expenses that are necessary to keep the business running are included

48
Q

Supply and demand; equilibrium

A

backbone of a market economy. the relationship between price and quantity demanded is known as the demand relationship. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand. The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible.

The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. Law of supply: Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition.

A movement refers to a change along a curve. A shift in a demand or supply curve occurs when a good’s quantity demanded or supplied changes even though price remains the same. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced to supply less beer for the same price.

Read more: Law of Supply and Demand: Basic Economics https://www.investopedia.com/university/economics/economics3.asp#ixzz5P0MZjWIX
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49
Q

Market attractiveness

A

Market attractiveness is composed of the following dimensions:
Market size
Market growth
Market profitability

50
Q

identify the test market

A

two typical dimensions market attractiveness and probability of success

51
Q

For qualitative comparison

A

Use a comparison matrix

52
Q

how-to-win strategy for market entry

A
The 5 classic dimensions of a how-to-win strategy should be addressed:
Product
Production / Supply Chain
Channels of distribution
Brand
Price
53
Q

Collecting market research

A
Primary research (field research) involves gathering new data that has not been collected before. For example, surveys using questionnaires or interviews with groups of people in a focus group.
Secondary research (desk research) involves gathering existing data that has already been produced. For example, researching the internet, newspapers and company reports.

When you conduct primary research, you’re typically gathering two basic kinds of information:
Exploratory. This research is general and open-ended, and typically involves lengthy interviews with an individual or small group.
Specific. This research is more precise, and is used to solve a problem identified in exploratory research. It involves more structured, formal interviews.

54
Q

Business Plan

A

A business plan is a written document that describes in detail how a business, usually a new one, is going to achieve its goals. A business plan lays out a written plan from a marketing, financial and operational viewpoint. Sometimes, a business plan is prepared for an established business that is moving in a new direction.

55
Q

Semi-Variable Cost

A

A semi-variable cost, also known as a semi-fixed cost or a mixed cost, is a cost composed of a mixture of both fixed and variable components. Costs are fixed for a set level of production or consumption, and become variable after this production level is exceeded. If no production occurs, a fixed cost is often still incurred.

Overtime on a production line has semi-variable features. If a certain level of labor is required for production line operations, this is the fixed cost. Any additional production volume that requires overtime results in variable expenses dependent on the activity level. In a typical cellphone billing contract, a monthly flat rate is charged in addition to overage charges based on excessive bandwidth usage. A business likely experiences a similar structure when charged for utilities. Also, a salesperson’s salary typically has a fixed component, such as a salary, and a variable portion, such as a commission.

A business experiences semi-variable costs in relation to the operation of fleet vehicles. Certain costs, such as monthly vehicle loan payments, insurance, depreciation and licensing, are fixed and independent of usage. Other expenses, including gasoline and oil, are related to the use of the vehicle and reflect the variable portion of the cost.

56
Q

Market Cannibalization

A

Market cannibalization is the negative impact a company’s new product has on the sales performance of its related products. In this situation a new product “eats” up the demand for the current product, potentially reducing overall sales. This downward pressure can negatively affect both the sales volume and market share of the existing product.

market cannibalism causes a self-induced decline in sales. This loss of sales equates to the loss of market share and comes from inside, not from competitive pressures.

If it is not intentional, market cannibalization can hurt a company’s bottom line. Market cannibalism forces the premature end of an existing product’s life. Sales shift to the new product rather than tapping into a new market as intended.

57
Q

Discounted Cash Flow (DCF)

A

Discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analyses use future free cash flow projections and discounts them, using a required annual rate, to arrive at present value estimates. A present value estimate is then used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.

Calculated as:

DCF = [CF1 / (1+r)1] + [CF2 / (1+r)2] + … + [CFn / (1+r)n]

CF = Cash Flow

r= discount rate (WACC)

DCF is also known as the Discounted Cash Flows Model.

Our estimate of Company X’s present enterprise value is $1.23 billion. If the company has net debt, this needs to be subtracted, as equity holders’ claims to a company’s assets are subordinate to bondholders’. The result is an estimate of the company’s fair equity value. If we divide that by the number of shares outstanding – say, 10 million – we have a fair equity value per share of $123.18, which we can compare with the market price of the stock. If our estimate is higher than the current stock price, we might consider Company X a good investment.

Read more: Discounted Cash Flow (DCF) https://www.investopedia.com/terms/d/dcf.asp#ixzz5PU0nnWcw
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58
Q

Payback Period

A

The payback period is the length of time required to recover the cost of an investment. The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions. The payback period ignores the time value of money (TVM)

Divide investment by savings/returns

Read more: Payback Period https://www.investopedia.com/terms/p/paybackperiod.asp#ixzz5PU1Q5O8t
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59
Q

Internal Rate of Return - IRR

A

Internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does. You can think of internal rate of return as the rate of growth a project is expected to generate.

To calculate IRR using the formula, one would set NPV equal to zero and solve for the discount rate (r), which is the IRR. Because of the nature of the formula, however, IRR cannot be calculated analytically and must instead be calculated either through trial-and-error or using software programmed to calculate IRR.

Generally speaking, the higher a project’s internal rate of return, the more desirable it is to undertake.

Read more: Internal Rate Of Return (IRR) Definition | Investopedia https://www.investopedia.com/terms/i/irr.asp#ixzz5PU1zJph1
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60
Q

Biological thinking principles

A
Pragmatism rather than intellectualism 
Resilience vs efficiency 
Expérimentation va déduction 
Indirect vs direct approaches
Holism rather than reductionism