Project Valuation Methods

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Questions and Answers

What are the three key factors considered in project valuation?

  • Profitability, Sustainability, Market Demand
  • Cost Analysis, Risk Assessment, Return on Investment
  • Payback, Net Present Value (NPV), Internal Rate of Return (IRR) (correct)
  • Time Value of Money, Cash Flow, Discount Rate

What is the payback period?

The payback period is the number of years it takes before the cumulative forecasted cash flow equals the initial outlay.

What is the rule for selecting projects based on the payback period?

Projects with payback periods within the desired time frame or those with the shortest payback periods should be selected.

What are the steps involved in calculating the Net Present Value (NPV)?

<p>Estimate all net cash flows, both positive and negative, estimate the project's cost of capital, and find the present value of the cash flows.</p> Signup and view all the answers

What are the rules for deciding whether or not to accept a project based on its NPV?

<p>Accept projects with a positive NPV, reject projects with a negative NPV. Projects with NPV = 0 are indifferent.</p> Signup and view all the answers

Flashcards

Payback Period

The number of years it takes for the cumulative forecasted cash flow to equal the initial investment.

Payback Method

A method of project valuation that focuses on the time it takes to recover the initial investment.

Net Present Value (NPV)

The present value of all future cash flows from a project, minus the initial investment.

Internal Rate of Return (IRR)

A discount rate that makes the NPV of a project equal to zero.

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NPV Decision Rule

Projects with a positive NPV should be accepted, while projects with a negative NPV should be rejected.

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Present Value (PV)

The sum of all the present values of the project's expected future cash flows.

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Cost of Capital

The rate of return that investors require for investing in a project.

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Discounted Payback Period

A method of project valuation that focuses on the time it takes to recover the initial investment, as well as the profitability of the project.

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IRR as a Percentage

The rate of return that makes the NPV of a project equal to zero, expressed as a percentage.

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IRR Spread

The difference between the IRR and the cost of capital, representing the project's excess return.

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Study Notes

Project Valuation Methods

  • Payback Period: The time it takes for cumulative project cash flows to recover the initial investment.

  • Payback Rule: Choose projects with a payback period within a desired timeframe or the shortest payback period.

  • Net Present Value (NPV): A method that considers all cash flows (positive and negative). It accounts for the time value of money using the project's cost of capital to estimate the present value of future cash flows.

  • NPV Decision Rule: If NPV is positive, accept the project. If NPV is zero or negative, reject the project.

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