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on 08-Jul-2017 (Sat)

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IRR and NPV
#tvm
Another perspective on value creation comes from converting the initial investment into a capital charge against the annual operating cash flows that the project generates. Recall that the project generates an annual operating cash flow of ¥294,800,000. If we subtract a capital charge of ¥270,570,310 (the amount of a five-year annuity having a present value of ¥1,000 million at 11 percent), we find ¥294,800,000 − ¥270,570,310 = ¥24,229,690. The amount of ¥24,229,690 represents the profit in each of the next five years after taking into account opportunity costs. The present value of a five-year annuity of ¥24,229,690 at an 11 percent cost of capital is exactly what we calculated as the project’s NPV: ¥89.55 million. Therefore, we can also calculate NPV by converting the initial investment to an annual capital charge against cash flow.

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Flashcard 1623550987532

Tags
#discounted-cashflow-applications
Question
The IRR and NPV rules give the same accept or reject decision when projects are [...]
Answer
independent


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Flashcard 1623552822540

Tags
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Question

The IRR and NPV rules rank projects differently when

  • the [...] differs

Answer
size or scale of the projects

(measuring size by the investment needed to undertake the project),


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Flashcard 1623554919692

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Question

The IRR and NPV rules rank projects differently when

  • the [...] ​​​​​​​ cash flows differs.

Answer
timing of the projects’


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Flashcard 1623556754700

Tags
#discounted-cashflow-applications
Question

When the IRR and NPV rules conflict in ranking projects, we should take directions from [...]

Answer
the NPV rule.


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Flashcard 1623560424716

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Question

Why should we choose the NPV rule over the IRR rule when analyzing mutually exclusive projects?

Answer
The NPV of an investment represents the expected addition to shareholder wealth from an investment.


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Flashcard 1623562259724

Tags
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Question

The NPV of an investment represents the [...] from an investment.

Answer
expected addition to shareholder wealth


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Flashcard 1623564094732

Tags
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Question

We take the [...] to be a basic financial objective of a company.

Answer
maximization of shareholder wealth


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Flashcard 1623578250508

Question
Contrast interleaved and blocked practice.
Answer
In the sequence ABCABCABC, two intervening items (i.e., B and C) come before each recurrence of a given item (i.e., A). Such an arrangement, in which different kinds of items inter-mix during practice, is termed interleaved practice. In contrast, blocked practice groups the same kinds of items together during practice (e.g., AAABBBCCC).


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Flashcard 1623792160012

Tags
#discounted-cashflow-applications
Question
The Money-Weighted rate of return is an [...] calculation.
Answer
internal rate of return


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Flashcard 1623805005068

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Question
In investment management applications, the internal rate of return is called the [...]
Answer
money-weighted rate of return


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Flashcard 1623807888652

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Question
In the United States, the money-weighted return is frequently called the [...]
Answer
dollar-weighted return.


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Flashcard 1623815228684

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Question
If you are an investor and you want to assess the success of your investments, which two tasks do you face?


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Flashcard 1623818636556

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Question
The calculation of returns in a logical and consistent manner is called [...]


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Flashcard 1623820995852

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Question
performance measurement involves [...] manner.
Answer

calculating returns in a logical and consistent


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Flashcard 1623824403724

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Question
Accurate performance measurement provides the basis for your second task, [...] .


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Flashcard 1623827025164

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Question
[...] is of great importance for all investors because it is the foundation for all further analysis.
Answer
Performance measurement


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Flashcard 1623830695180

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Question
The return that an investor earns during a specified holding period; a synonym for total return.
Answer
Holding period return


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Flashcard 1623834103052

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Question
HPR = [...]
Answer
(P1P0 + D1)/P0


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Flashcard 1623837248780

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Question
When we measure [...] , or when the portfolio is subject to additions and withdrawals, portfolio performance measurement is a challenging task.
Answer
performance over many periods


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Flashcard 1623849307404

Tags
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Question
Two of the measurement tools available for portfolio perfomance measure are the [...] measure and the [...] measure.
Answer
money-weighted rate of return

time-weighted rate of return


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#discounted-cashflow-applications
The money-weighted rate of return has a serious drawback. Generally, clients determine when money is given to the investment manager and those decisions may significantly influence the money-weighted rate of return. A general principle of evaluation, however, is that a person or entity should be judged only on the basis of their own actions, or actions under their control. An evaluation tool should isolate the effects of the investment manager’s actions.

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#tvm
The Rule of 72 is loosely based on the observation that it takes 12 years to double an amount at a 6 percent interest rate, giving 6 × 12 = 72. At a 3 percent rate, one would guess it would take twice as many years, 3 × 24 = 72.

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Rule of 72
rs sometimes use an ad hoc rule called the Rule of 72 : Divide 72 by the stated interest rate to get the approximate number of years it would take to double an investment at the interest rate. Here, the approximation gives 72/7 = 10.3 years. <span>The Rule of 72 is loosely based on the observation that it takes 12 years to double an amount at a 6 percent interest rate, giving 6 × 12 = 72. At a 3 percent rate, one would guess it would take twice as many years, 3 × 24 = 72.<span><body><html>