# Finance Boot Camp Notes - Finance Boot Camp Notes NPV = PV...

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Finance Boot Camp NotesNPV = PV of cash flows – initial investment, Initial investment – cash outflow at year 01.IRR – Internal rate of return2.Payback/Discounted3.EAC (Equivalent annual cost)4.Investment Timing5.Profitability IndexStudy these concepts, easy marks, all you need to know is how to use this conceptR – discount rateConcepts are from chapter 81.IRR – Internal rate of return(this can only be used for 2 cash flows)Things used in conjunction with NPV, discount rate when NPV = 0,Whatever is the IRR is it’s the maximum discount rate you can have before NPV equalsnegative, obviously when it’s negative you reject the project, and vice versa.That’s one way^, another way is to compare 2 projectsYou choose the project with the higher IRR obviously the cash flows are worth moreHow we find IRR:1 scenario – Equal cash flows0 = C (PMT) PVAF (I/Y, n) – Initial investment (NOTATION)Example,0 = 1,000 x PVAF(I/Y,10) – 5,000 (USE ANNUITY FORMULA TO SOLVE THIS)N = 10PMT = 1,000I/Y =?PV= -5,000FV = 02ndscenario – unequal cash flows*WE CAN’T USE OUR PV FORMULA HENCE IN CALCULATOR WE HAVE TO SOLVEMATHEMATICALLY0 = (5,000/(1 + IRR) + 7,000/(1 + IRR)^2 )(MONEY YOUR EARNING IN DIRRECNT INCRIMENTS)–3,000(INITIAL INVESMENT)
Let x = ((1 + IRR)0 = 5,000/x + 7,000/X^2 – 3,0000 = 5,000x + 7,000 – 3,000x^20 = 3,000x^2 – 5,000x – 7,000use the quadratic formulax = -b +/- Sqrt b^2 – 4ac/2aa = 3b = -5c = -72.Payback/DiscountedHow long it takes to get my money backPayback formula = Initial investment / Annual cash flowsExample I spend 10k I receive 3k, how long till I receive my money, 10/3.Another exampleInitial investment = 10kY1 = 5,000Y2 = 3,000Y3 = 4,000Step 2:This way you will add the money you know you have earned by year 2 (8,000) divided by what’sleft earned in year 310k – 8k / 4k= 0.5total answer equals 2.5 as you include the first 2 years.Discounted pay back you would discount each year PV of each year and than follow from step 23.EAC (Equivalent annual cost)Purpose of comparing investment decisions with different lives, you pick the lower cost as it ismore economically beneficialYou would use this for equipment ex. You have equipment that will last for the next 2 yearscompared to buying a new one that will last for 10yrs
EAC = PV of all cost / annuity factor*Annuity factor is based on life of project, n = life* This should only apply to new investments*they could mix it up however*they could turn this question into a timeline question4.Investment TimingIf you invest today you would spend x amount of dollars and would earn this Y cash flow eachyear which would increase of decrease, next year the initial investment will go down, when thebest time to invest?

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