Chapter 9:

Net Present Value: Year 0 Cash Flow (negative) + Year 1 Cash Flow/(1+required return %) +
Year 2 Cash Flow/(1+required return %)^2+ Year Cash Flow/(1+required return %)^3

If NPV is positive, we accept it.

Discounted Payback Method (year 1+2 still to recover):

Year 1: Year 0 Cash (positive)- Year 1 cash flow
Year 2: Year 1 recover – year 2 cash flow
Year 3: Year 2 recover- year 3 cash flow

Once it’s negative, that means you paid all of it back

(Regular payback method is the same, just do not discount them by the regular rate of return RRR)

Computing Average Accounting Return:

Average Net Income = (Add together net incomes)/# of Net Incomes

Average Accounting Return= Average Net Income/ Average Book Value

Computing Internal Rate of Return: Accept the project if the IRR is greater
than the required rate of return
Calculator:
1. enter cash flows as you did for NPV
2. Orange IRR

Internal Rate of return  rate that results 0 net book value

Probability Index= NPV of future cash flows/ Initial Cost

Modified internal rate of return:

1. Discounting  discount of all negative cash flows to NPV and add to initial cost
2. Reinvestment  compound all cash flows to the end
3. Combination  discount back negative and compound positive

Chapter 10:
Best***OCF = (EBIT)(1 – Tax rate) + (Depreciation / # of years)(Tax rate)

Or: Operating cash flow= EBIT + Depreciation- Taxes=

Or: OCF=Net Income + Depreciation
Sometimes: OCF= (Sales* Profit Margin)+ Depreciation expense

Cash Flow from Assets= OCF- Net Capital Spending- Changes in net working capital From CH 10 power point

Depreciation tax shield= depreciation expense* marginal tax rate

Straight line depreciation= (Initial cost - salvage value)/number of years
Book Value= initial cost - accumulated depreciation
After tax salvage value= salvage value – [tax rate*(salvage value - book value)]

Project cash flow= operating cash flow – change in net working capital- capital spending
Selling PP&E under Macrs= Sale price- (sale price- book value)•Tax Rate
Tax Shield:
OCF= (Sales-costs) •(l-t)+Depreciation •T
Elduathy Equipment options with different lines
PV of costs = EAC (equivalent annual costs)* Annuity Factor
Annuity factor [1-1/(1+R)^7]/R
Chapter 11:
3 main breakeven:
1.)Accounting Breakeven: Q= (Fixed cost +Depreciation)/P-V, Q=(FC+OCF)/(P-VC per unit)
payback equal to its life, negative NPV, 0 IRR

2.)Cost Breakeven: Q= Fixed Cost/(Price of each unit-Variable Cost per unit)

never pays back, negative NPV, IRR= -100%

3.)Financial Breakeven: Q=(Fixed Cost+OCF)/(Price of each unit-Variable Cost per unit)

 OCF that results in 0 is NPV
Discounted payback equal to its life, zero NPV, IRR= Expected Return

Degree of Operating Leverage= 1+ (Fixed Cost/OCF)

DOL= 1+ FC/OCF

Zero Project NPV: Initial investment= OCF*Annuity Factor

(%Change in sales Q) * DOL= (% Change in OCF)

Chapter 14:

Cost of equity capital = risk free rate + Beta (return on market % - risk free rate)
Cost of preferred stock = dividend payment / price per share
Pretax cost of debt = *looking for interest, put all other info into calc.
After tax cost of debt = YTM (1 - tax rate)

WACC = [E/D+E(re)]+[D/D+E(rd)(1-t)]

E= market value of equity

D=market value of debt
re= cost of equity to find Debt and Equity
rd= cost of debt when only given the ratio
t = tax rate

Debt-Equity Ratio for WACC = (re)

Some more 9
Second half of nine

10 power point
Net capital spending = change in net fixed assets + depreciation
• Depreciation tax shield = D × T
 D = depreciation expense
 T = marginal tax rate
• Straight-line depreciation
 D = (Initial cost – salvage) / number of years
 Very few assets are depreciated straight-line for tax purposes
 MACRS
 Need to know which asset class is appropriate for tax purposes
 Multiply percentage given in table by the initial cost
 Depreciate to zero
 Mid-year convention
• Book value = initial cost – accumulated depreciation
• After-tax salvage = salvage – T*(salvage – book value)
• Bottom-Up Approach
 OCF = NI + depreciation
 Works only when there is no interest expense
 Top-Down Approach
 OCF = Sales – Costs – Taxes
 Don’t subtract non-cash deductions
 Tax Shield Approach
 OCF = (Sales – Costs)(1 – T) + Depreciation*T