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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.
1)find Change in Market Value2) Probability factor X Change in value = Cost of investment
Pay Back period (present value factor) =
= Net incremental investment/ Net annual cash flowsNo concideration of time
NPV vs IRR methods
NPV - highlights amounts, more conservative, assumes reinvestment @ hurdle rateIRR - focuses decision makers on %, more agressive, assumes reinvestment @ IRR, less reliable.
Short-term interest rates are generally ______ than long-term rates
When do you accept NPV?
Investment should be made if NPV >0.If company has unlimited funds- NPV > or =0.
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.
Popular methods of capital budgeting include
net present value (NPV), internal rate of return (IRR), discounted cash flow (DCF) and payback period.
Profitability index =
PROJECT Profitability index =
- PV of CF / Investment
- PV of CF - Investment
- NPV/ Investment
The payback period serves as a fair approximation of ?
of the annity factor value used in estimaiting the IRR
The profitability index is also known as
the excess present value index. it is a variation of NPV
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