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What's cost of capital?
An entity's cost of capital is equal to the weighted avg of the cost of debt, preferred & CS, & RE, with their markt values as weights.
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Probability formula
1)find Change in Market Value2) Probability factor X Change in value = Cost of investment
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Pay Back period (present value factor) =
= Net incremental investment/ Net annual cash flowsNo concideration of time
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NPV vs IRR methods
NPV - highlights amounts, more conservative, assumes reinvestment @ hurdle rateIRR - focuses decision makers on %, more agressive, assumes reinvestment @ IRR, less reliable.
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Short-term interest rates are generally ______ than long-term rates
LOWER
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When do you accept NPV?
Investment should be made if NPV >0.If company has unlimited funds- NPV > or =0.
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Net Present Value =
= the PV of an investment's future net cash flows minus the initial investment.If positive, the investment should be made (unless an even better investment exists), otherwise it should not.- the method that recognizes the time value of money by discounting the after- tax cash flows over the live of a project, given the company's minimum desired rate of return.
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Popular methods of capital budgeting include
net present value (NPV), internal rate of return (IRR), discounted cash flow (DCF) and payback period.
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Profitability index =
NPV =
PROJECT Profitability index =
- PV of CF / Investment
- PV of CF - Investment
- NPV/ Investment
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The payback period serves as a fair approximation of ?
of the annity factor value used in estimaiting the IRR
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The profitability index is also known as
the excess present value index. it is a variation of NPV
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What Does Present Value Interest Factor Of Annuity - PVIFA Mean?
A factor which can be used to calculate the present value of a series of annuities. The initial deposit, earning interest at the periodic rate (r), perfectly finances a series of (N) consecutive dollar withdrawals. PVIFA is also a variable used when calculating the present value of an ordinary annuity (is an annuity whose payments are made at the end of each period). PVIFA = [- (1 + r)^-N]/r
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