Business Administratio3

Business Administratio3 - purposes of control. Count the...

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Business Administration Making Better Investment Decisions with Net Present Value Basics: Present value of a perpetuity: C/r Present value of a growing (or shrinking) perpetuity: C/(r-g) Present value of C dollars t years from now: C/[(1+r) t ] Present value of a C-dollar t-year annuity: C[(1/r)-(1/[r(1+r) t ]) What To Discount: Only cash flow is relevant Always estimate incremental cash flows Be consistent in your treatment of inflation Now we are going to expand each of these principles Only Cash Flow Is Relevant: Largely ignore what accountants tell you. Accountants "accrue" things and "depreciate" things; they use a set of rules that were developed from the 15th to the early 20th centuries largely for
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Unformatted text preview: purposes of control. Count the money instead. If taxes are relevant, be sure to count after tax cash flows. And be sure to take account of taxes only when they are paid, not when they hit the balance sheet. Estimate incremental cash flows: Include all incidental effects Do not confuse average with incremental payoffs Do not forget working capital requirements Ignore sunk costs Include opportunity costs (Storrow Drive in Boston; FDR Drive in NY; places where opportunity costs not considered). Beware of allocated overhead costs (relevance lost, again); talk about Relevance Lost. Save on materials; but it shows up in quality control (or in returns and maintenance)....
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