Handbook in Corporate Finance: Empirical Corporate Finance ...
CFA Corporate Finance
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Transcript of CFA Corporate Finance
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© Pristine This Presentation has been prepared to provide general information about the Company to whom it is addressed. This Presentation does not purport to contain all the information. The information provided in this presentation is meant only for the recipient and is not to be shared with anyone else.
Corporate Finance Topic Weight: 8%
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Net Present Value (NPV)
1 2 3 0
PV = CF1/(1+k)1
CF1
PV = CF2/(1+k)2
CF2
PV = CF3/(1+k)3
CF3 - CF0
PV = - CF0
Sum of all this is
NPV IF…… DECISION
NPV > 0 The project may be accepted.
NPV < 0 The project should be rejected.
NPV = 0 The Company is indifferent in accepting or rejecting the
project. The project does not add any value to shareholder.
NPV decision rule:
where
CF0 = the initial investment
outlay
CFt = after tax cash flow at
time t
k =required rate of return for
project
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Concept Checker
Project A Project B
Year CFAT Year CFAT
1 12,000 1 22,000
2 14,000 2 20,000
3 16,000 3 16,000
4 20,000 4 14,000
5 22,000 5 12,000
Cash Flows 84,000 84,000
Initial Investment – 60,000
After tax Cost of Capital is 10%
NPV ? ?
A. 1320.10 & 5429
B. 1240.20 & 5563.20
C. 1820.91 & 5563.20
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Answer
C
Calculating NPV with the BA II PLUS professional calculator from Texas Instruments.
Project A
Key Strokes Explanation Display
[CF] [2nd] [CLR Work] Clear memory registers CFO = 0.0000
60,000 [+/-] [Enter] Initial Investment (Cash outflow) CFO = - 60,000.0000
[ ] 12,000 [Enter] Period 1 cash flow CO1 = 12,000.0000
[ ] Frequency of cash flow 1 F01 = 1.0000
[ ] 14000 [Enter] Period 2 cash flow CO2 = 14,000.0000
[ ] Frequency of cash flow 2 F02 = 1.0000
[ ] 16,000 [Enter] Period 3 cash flow CO3 = 16,000.0000
[ ] Frequency of cash flow 3 F03 = 1.0000
[ ] 20,000 [Enter] Period 4 cash flow CO4 = 20,000.0000
[ ] Frequency of cash flow 4 F04 = 1.0000
[ ] 22,000 [Enter] Period 5 cash flow CO5 = 22,000.0000
[ ] Frequency of cash flow 5 F05 = 1.0000
[NPV] 10 [Enter] 10% discount rate I = 10.0000
[ ] [CPT]
Calculate NPV NPV = 1820.91
Cont…
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Cont……
Project B – NPV for project B can be calculated in the same fashion as calculated for
Project A. NPV
Project A 1820.91
Project B 5563.20