# S2- Investment decisions Flashcards

What is the primary objective of investing in real assets?

Profitability

Valuation of assets has a projection:

On the future

Whats the discounted cash flow formula?

∑Ct/(1+rt)^t

Ct = cash flow at t

rt = rate of return

What’s the opportunity cost of capital

The return foregone from a certain activity instead of investing in an alternative with the same risk level

NPV =

PV - cost of investment

What are other measures of return on investment?

- Book rate of return
- Payback period
- Payback rule
- IRR

What is the formula for Book rate of return (BRR)

Prospective book income/Prospective book assets

What is IRR?

Internal rate of return

What is the payback period method?

Measures number of years it takes for cumulative cash flow from the project to equal the initial investment

What is the payback rule

A project should be accepted if its payback period is less than some specific cut off period

What is the rate of return

The ratio of the projects profitability

What is the rate of return rule?

Accept investments that offer rates of return in excess of their opportunity costs of capital

What is the formula for rate of return?

C-Q/Q

In the RR formula, what is C and Q?

C = cash flow Q = Cost of investment