Financial Modelling 2555A/B Study Guide - Midterm Guide: Sunk Costs, Standard Deviation, Accounts Payable

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Npv rule recognizes 3 things: $ today is worth more than $ tomorrow, only takes into account cash flows and the opportunity cost of capital, can add npv because all measured in todays $ Book rate of return = book income/book assets. Depends on which items accountants treat as capital investments + how fast they depreciate. Payback period: number of years it takes before cumulative cash flow = initial investment. Payback rule: accept investments if payback period < cutoff. Payback and misleading answers: ignores cash flows after cutoff, gives equal weight to cash flows before cutoff. Why use payback rule: simplest way to communicate profitability, if managers want quick profit, could look to pbr, if small businesses want rapid payback projects. Discounted payback measure: how many years a project has to last to make sense in terms of. Rate of return = payoff/investment 1 = r (c1 = payoff, c0 = investment)

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