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Flashcards in Net Present Value & investment criteria Deck (10):
1

What is the Net present value?

the difference between an investment's market value and its cost

2

What is Discounted Cash Flow Valuation?

The process of valuing an investment by discounting its future cash flows

3

What are the strengths of using the NPV?

it uses cash flows
uses all cash flows
discounts cash flows
*gives the value created for shareholder by a project*

4

Payback is...? and when should you accept a project?

The amount of time required for an investment to generate cash flows sufficient to recover its initial cost.
accept project with shortest payback

5

What are the advantages and disadvantages of the payback period rule?

:) easy to understand
:) adjusts for uncertainty
:) biased towards liquidity

> ignores time value of money
> requires arbitrary cut-off point
> ignores cash flows beyond cut-off date
> biased against long-term projects such as R&D

6

What is discounted payback?

The length of time required for an investment' discounted cash flows to equal its initial cost

7

What are the advantages and disadvantages of discounted payback?

:) INCLUDES time value of money
:) easy to understand
:) does not accept negative estimated NPV investments
:) biased towards liquidity

> may reject positive NPV investments
> requires an arbitrary cut-off point
> ignores cash flows beyond cut off date
>biased against long term projects

8

what is AAR (average accounting return)?

An investment's average net income divided by its average book value

9

What is the Internal Rate of Return?

The discount rate that makes the NPV of an investment zero.

10

What is the Profitability Index?

the present value of an investment's future cash flows divided by its initial cost.