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Time Value of Money and Capital Budgeting
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Time Value of Money and Capital Budgeting
Time Value of Money and Capital Budgeting
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1
Question
How is net present value calculated from project free cash flows?
Page 3
Answer
\(NPV = \sum [FCF_t / (1 + r)^t]\).
2
Question
When does the net present value decision rule accept a project?
Page 3
Answer
Accept if \(NPV > 0\). Reject if \(NPV < 0\).
3
Question
How is free cash flow calculated from unlevered net income?
Page 3
Answer
\(FCF = \text{Unlevered Net Income} + \text{Depr} - \text{CapEx} - \Delta NWC\).
4
Question
Which equation calculates earnings after marginal taxes?
Page 3
Answer
\(\text{Earnings} = (\text{Rev} - \text{Cost} - \text{Depr}) \times (1 - T)\).
5
Question
Which condition makes a growing perpetuity formula valid?
Page 2
Answer
The discount rate must exceed the growth rate: \(r > g\).
6
Question
How does the ordinary perpetuity value relate to payment and rate?
Page 2
Answer
\(PV_{Ordinary} = C / r\).
7
Question
How is the present value of one future cash flow calculated?
Page 1
Answer
\(PV = C / (1 + r)^n\).
8
Question
How is the future value of a single present cash flow calculated?
Page 1
Answer
\(FV = C \times (1 + r)^n\).
9
Question
Which formula solves for the number of compounding periods?
Page 1
Answer
\(n = \ln(FV / PV) / \ln(1 + r)\).
10
Question
Which formula solves for the periodic return from present and future values?
Page 1
Answer
\(r = (FV / PV)^{(1/n)} - 1\).
11
Question
How does the Rule of 72 estimate doubling time?
Page 1
Answer
Years to double \(\approx 72 /\) annual rate in percent.
12
Question
How is the periodic interest rate derived from APR?
Page 1
Answer
\(\text{Periodic Rate} = APR / m\).
13
Question
How is effective annual rate calculated from APR and compounding frequency?
Page 1
Answer
\(EAR = (1 + APR / m)^m - 1\).
14
Question
Why should unadjusted APR not be used in discounting formulas?
Page 1
Answer
Convert APR to the periodic rate before cash flow calculations.
15
Question
When is EAR useful for comparing financial products?
Page 1
Answer
Use EAR to compare products with different compounding frequencies.
16
Question
How does the present value of a perpetuity due differ from an ordinary perpetuity?
Page 2
Answer
\(PV_{Due} = (C / r) \times (1 + r)\).
17
Question
When does an ordinary perpetuity make its first payment?
Page 2
Answer
It begins at \(t=1\).
18
Question
When does a perpetuity due make its first payment?
Page 2
Answer
It begins immediately at \(t=0\).
19
Question
Which equation values a perpetuity whose payments grow at a constant rate?
Page 2
Answer
\(PV = C / (r - g)\), where \(r > g\).
20
Question
Which formula gives the present value of an ordinary annuity?
Page 2
Answer
\(PV = (C / r) \times [1 - 1 / (1 + r)^N]\).
21
Question
When does an ordinary annuity make its first payment?
Page 2
Answer
It starts one period from today.
22
Question
Which equation calculates the future value of an ordinary annuity?
Page 2
Answer
\(FV = (C / r) \times [(1 + r)^N - 1]\).
23
Question
Which equation calculates the present value of a growing annuity?
Page 2
Answer
\(PV_{Growing} = [C / (r - g)] \times [1 - ((1 + g)/(1 + r))^N]\).
24
Question
How is an ordinary annuity adjusted to value an annuity due?
Page 2
Answer
\(PV_{Due} = PV_{Ordinary} \times (1 + r)\).
25
Question
Which equation defines internal rate of return using project cash flows?
Page 3
Answer
\(NPV = \sum [FCF_t / (1 + IRR)^t] = 0\).
26
Question
When does the IRR decision rule accept a project?
Page 3
Answer
Accept if \(IRR >\) cost of capital \((r)\).
27
Question
How is the profitability index calculated?
Page 3
Answer
\(PI = PV(\text{Future Cash Flows}) / \text{Initial Investment}\).
28
Question
When is the profitability index used to rank projects?
Page 3
Answer
Use PI when capital is constrained, ranking projects by yield per dollar.
29
Question
Which formula calculates straight-line depreciation per period?
Page 3
Answer
\(\text{Depreciation} = (\text{Asset Cost} + \text{Shipping} - \text{Salvage}) / \text{Life}\).
30
Question
How is a project’s payback period defined?
Page 3
Answer
It is the time required for cumulative cash inflows to equal the initial investment.