FIN 401 Study Guide - Midterm Guide: Risk Premium, Net Present Value, Discount Window

• School: Ryerson University
• Department: Finance
• Course: FIN 401
• Professor: Melissa Toffanin

Document Summary

Discounted payback use discounted cfs (pv of cf ex. N = 1, i% = 15, fv = 50000, solve for pv = 43478) Irr (return that makes npv = 0) accept project if irr is greater than required return. Non-conventional cf and mutually exclusive is unreliable in the following situations: Mirr used for non-conventional cfs (irr can"t handle) Example: non-conventional cfs y0: -450k y1: 660k y2: 500k y3: -750k i: 12% compute irr = 10. 11%, check npv to decide. Crossover rate = discount rate at which you are indifferent between projects > use difference of cfs compute irr. Profitability index: pi = pv(cash inflows)/pv(cash outflows) pi > 1 = accept. Purchase problem: npv: pv (ocf) + pv (ncs) + pv (nwc) + pvccats. Cost=5million savings=900k n=5years cca=25% salvage=250k nwc=no impact tax=40% r=8% Ocf: ebit + depreciation - taxes (savings 900k, aftertax = 540k @ 40%) pv of 540k (pmt) 5yrs 8% = 2156063.