Definitions
The final, lump-sum cash flow from a project at its termination, including the after-tax proceeds from selling assets and recouping any working capital
Terminal Year Cash Flow
MOST critical assumption when projecting a project's revenue?
What is the forecasted growth in sales?
The primary problem the Annual Annuity Method is designed to solve occurs when projects have these.
What are unequal lives or different lifespans?
This is the most common formula for calculating Terminal Value, which assumes cash flows will grow at a constant rate forever.
What is the Gordon Growth Model (or Perpetual Growth Model)?
Best formula for matching a variable of a table with another variable from another table
What is VLOOKUP?
Method to assess how the project's NPV changes when one key variable, such as sales price, is altered
What is Sensitivity Analysis?
This type of cost, which includes items like rent and administrative salaries, remains constant regardless of the project's production level and must be estimated.
What are fixed costs?
This is the financial metric that the Equivalent Annual Method converts into an annualized amount
What is Net Present Value (NPV)?
In a Discounted Cash Flow analysis, this is the value representing all future cash flows beyond the explicit forecast period.
What is Terminal Value?
Excel ribbon to find "Conditional Formating" for a cell
What is "HOME (INICIO)" ribbon?
The funds a business uses for its day-to-day operations, calculated by subtracting current liabilities from current assets
What is working capital?
This critical assumption determines the rate used to calculate the present value of future cash flows and is often based on the firm's cost of capital.
What is the discount rate?
A project with a 4-year life and an NPV of $100,000 will have a HIGHER Equivalent Annual Annuity than a project with the same NPV but a 6-year life, assuming this is the same for both
What is the discount rate?
In the Gordon Growth Model formula TV = [FCF * (1+g)] / (r - g), this critical rule must hold true for the formula to be valid.
What is the growth rate (g) must be less than the discount rate (r)?
This function is used to find the largest number in a selected range of cells
What is the MAX function?
Is the estimated value of a business or project beyond the explicit forecast period in a discounted cash flow (DCF) analysis.
What is Terminal Value?
This variable requires assumptions about the initial outlay for items like inventory and receivables, as well as its recovery at the project's end, impacting cash flow timing.
What is working capital?
While the EAA method is excellent for unequal lives, it still relies on this potentially critical assumption about what happens when each project's life ends
What is the assumption of replacement with a similar identical project or replication in perpetuity?
This alternative to the Gordon Growth Model calculates Terminal Value by applying a market-based multiple, like EV/EBITDA, to the final year's forecasted financial metric.
What is the Exit Multiple Method?
This mandatory argument in a VLOOKUP formula specifies the column number in the table from which to retrieve the value.
What is the col_index_num?
Capital budgeting technique used to compare mutually exclusive projects with unequal lives. It converts the Net Present Value (NPV) of a project into an equivalent, constant annual cash flow over the project's lifespan.
What is Anual Annuity Method?
Fundamental assumption when using the Lowest Common Multiple of Lives (Replacement Chain) method?
What is that the projects can be repeated indefinitely with the same cost and cash flow profile?
This is the key reason why comparing the raw NPV of projects with different lives can be misleading, which the EAA method corrects for
What is the difference in the time horizon or the implicit reinvestment assumption?
When a manager chooses a project with a higher Equivalent Annual Annuity (EAA) over one with a lower EAA but a higher raw NPV, they are essentially prioritizing
What are the annualized economic efficiency and the higher constant annual benefit to the firm?
This is the most significant limitation of VLOOKUP that the XLOOKUP function was designed to fix, as it prevents looking up values in columns to the left of the lookup column.
What is it can only look to the right?