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NPV
According to my Brigham...
Definitely Definitions
Enron Accounting (and unrelated facts)
Payback's a...useful thing to know
100
What does an NPV other than zero represent a change in?
What is "shareholder wealth."
100
According to my Brigham, when IRR and NPV conflict in capital budgeting analyses, which metric should be given priority in the decision-making process?
What is NPV.
100
A cash flow that changes signs more than once throughout its lifetime is considered "this."
What is non-normal.
100
This assumption is usually incorrect, and generally leads IRR to overstate a project's return.
What is the assumption that a project's cash flows can be reinvested at the IRR.
100
This is the information that payback yields.
What is "the period of time necessary for an investment to recoup its costs."
200
Speed round. You invest $400 in a project that is expected to yield $100, $200, and $300 during years 1, 2, and 3 of its operation. WACC is zero because the First Bank of Mom has given you a very generous loan. Opportunity cost, however, is 5%. This means our NPV is...
What is $135.78.
200
According to my Brigham, this is the primary difference between MIRR and IRR
What is "the reinvestment rate."
200
This graph shows the relationship between a project's NPV and the firm's cost of capital.
What is the "Net Present Value Profile."
200
Free time! Within 100 miles, approximately what distance has Mr. Bilsborrow spent in free fall from perfectly functional airplanes?
What is 600.
200
Project A costs $120 and will yield cash flows of $60, $60, and $80 in years 1, 2, and 3, respectively. Project B costs $120 and will yield cash flows of $40, $70, and $90 in years 1, 2, and 3, respectively. If our maximum allowable payback period is 2 years, which project should be chosen?
What is Project A.
300
Tough Triple: You invest in a project for $200, and it returns $200 and the end of year 1. Your WACC is 18%. What value would we need to invest to earn $200 (PV) on our initial investment.
What is $236. (we need an additional 18% to cover the WACC).
300
*NO FLIPPING TO THE COVER* What other author contributed to your textbook? (Hint: if you can't remember, we have a problem.)
Who is Houston.
300
This particular payback method adjusts cash flows for their respective WACCs.
What is "discounted payback."
300
Project A costs $120 and will yield cash flows of $60, $60, and $80 in years 1, 2, and 3, respectively. Project B costs $120 and will yield cash flows of $40, $70, and $90 in years 1, 2, and 3, respectively. If our maximum allowable payback period is 3 years, which project should be chosen?
What is Project B.
400
You invest in a project with an initial cost of $1400, and it returns $100, $600, and $1000 in years 1, 2, and 3, respectively. If your WACC is 12%, what is the NPV of this investment to the nearest dollar?
What is -$121.
400
According to my Brigham, when independent projects with normal cash flows are being evaluated, these two metrics always lead to the same decision to reject or accept.
What are NPV and IRR.
400
This can be used to compare projects of unequal lives, and assumes that each project can be repeated as many times as necessary to reach a common life.
What is the "Replacement Chain (Common Life) Approach."
400
Project A costs $1 million and will yield cash flows of $970,000, $20,000, and -$10,000, and $20,000 in years 1, 2, and 3, and 4, respectively. Project B costs $1 million and will yield cash flows of $800,000, $150,000, and $50,000, and -$40,000 in years 1, 2, and 3, and 4, respectively. Which project should we choose if the maximum payback period is 3 years? What if it is 4 years?
What is Project B for 3 years, Project A for 4 years.
500
Principia College wants to invest in a new observatory. Once constructed, the observatory will bring in revenues from regional astronomers who don't have access to large telescopes yet. The project will cost $3 million, and will bring in revenues of $600k and $900k for its first 2 years. The telescope will receive an additional $1 million in upgrades in its 3rd year, and will then return $800k for each of its remaining 5 years of life. At a WACC of 12%, what is the NPV?
What is -$406,020.
500
Name one of the two principles observed when calculating cash flows for a capital project.
1) Cash flows are incremental & do not include such items as sunk costs. 2) Cash flows are calculated on an after-tax basis.
500
Gonn A. Fibb, our favorite corporate accountant, told us that we need a $400 plant upgrade in order to keep our money trees healthy and bearing fruit. Projected harvests for years 1, 2, and 3 were $50, $200, and $230, respectively. Our WACC consists solely of the loan, and Mr. Fibb told us it holds a rate of 12%. Later, we found that our WACC was actually 15%. By how much did Mr. Fibb understimate our costs?
What is $21.87. WACC @ 12%: 367.799 WACC @ 15%: 345.925
500
This particular payback method adjusts cash flows for their respective WACCs.
What is "discounted payback."