Key Investment Concepts: Cash Flow, Time Horizon, and Valuation
Key Investment Concepts
The financial dimension of an investment refers to the cash flows required to fund the fixed assets, working capital, and initial losses until the project starts to generate positive cash flows.
The time horizon of an investment refers to the time from the first cash flow of the project until the final cash flow occurs.
An investment project is a stream of cash flows over the time horizon of the investment.
Valuation Models and Concepts
Capital Asset Pricing Model (CAPM): The
Read MoreCapital Budgeting: IRR, NPV, and Project Selection
Capital Budgeting Problems and Solutions
CH8 HW A project has an initial cost of $12,100 and cash flows of -$2,100, $5,800, $16,600, and -$800 for Years 1 to 4, respectively. How many IRRs will this project have? # of IRR’s = number of sign changes (negative to positive=1)
A project has an initial cost of $12,670 and cash inflows of $2,400 a year for Years 1 and 2 and a final cash inflow in Year 6 of $15,400. The required return is 14.5 percent. What is the net present value of this project? Should
Read MoreAccounting for Investments in Associates: A Case Study
Accounting for Investments in Associates
At 1 July 2014:
| Net fair value of identifiable assets and liabilities of Chime Ltd | = | $20,000 + $10,000 (equity) |
| + $15,000 (1 – 30%) (assets) | ||
| = | $40,500 | |
| Net fair value acquired | = | 30% x $40,500 |
| = | $12,150 | |
| Cost of investment | = | $13,650 |
| Goodwill | = | $1,500 |
Depreciation:
Non-current assets: – 20% x $15,000 (1 -30%) = $2,100
A. Bell Ltd Does Not Prepare Consolidated Financial Statements
Profit for 2015-2016 period: $180,000
Adjustments for Inter-Entity Transactions:
Unrealised after tax
Read MoreInvestment Selection Methods: Static and Dynamic
Static Methods to Select Investments
The easiest way to compare investments is to use static methods (that don’t depend on the time of the cash flows). These are approximations but they are very easy to calculate, so we will use them to make a first evaluation.
Methods:
- Payback
Used to find out when our investment will be recovered. The sooner, the better. To calculate the period, we will check the cash flows. When our investment is covered by those cash flows, we will consider the investment has been
Read MoreCorporate Finance: Key Concepts and Valuation Methods
Lecture 1
Fisher Separation Theorem
The optimal investment decisions of a firm are unrelated to the consumption desires of its shareholders. The capital market serves to separate the two decisions. Thus, a firm can best act in its shareholders’ interest by investing in projects with the highest Net Present Value (NPV).
Annuity
Capital Budgeting Rule
Take all projects with a positive NPV. Between mutually exclusive projects, pick the project with the highest NPV.
Principles of Valuation
- Value additivity
- No
Corporate Finance: Budgeting, Debt, Equity, and Leverage
T.2: Capital Budgeting
- Value of the project: €150,000
- To calculate the years horizontally, input the revenues (45) and then calculate 45 + (45 * 0.1)
- Depreciated value of investment = Cost of investment – Book Value
- (-) Depreciation = DVI / Salvage Value or Value of the project * % Depreciation
- EBIT = +Sales (Price per unit * number of units) – Cost of goods sold (variable cost * number of units) – Operating expenses – Depreciation
- (-) Taxes = EBIT * (% tax)
- (+) Depreciation
- (-) Change in receivables