, 1. Net Present Value (NPV) the sum of the present values of
expected
future cash flows from an investment,
minus the cost of that investment
2. Discount Rate rate that accounts for the Time Value
of Money (TVM) and the idea that
when you're creating expectations on
future cash flows you need to factor
in the fact that the real- ized money
in the future will be worth less
because of the TVM and other factors
such as inflation and opportunity cost
3. If the NPV is greater than 0 it How do you determine if a project is
is technically worth doing, al- worth doing after calculating the
though the higher NPV the NPV?
bet- ter
4. Weighted Average Cost
of Capital (WACC) the weighted average of the cost of
equity and the aftertax cost of debt
and helps serve as a benchmark for
projects, projects rev- enue must
bring in an amount higher than this
5. WACC = Equity / Debt +
Equity x Re + Debt / Debt + The formula for WACC is ?
Equity x Rd x (1 - t)
6. Re = Expected return
required by equity investors What does Re stand for in the WACC
formu- la?
7. Rd = Interest rate of debt What does Rd stand for in the WACC
formu-
la?
8. The tax rate used in the 9. WACC is used as a discount rate in
prob- lem other formulas, primar- ily in the
2/
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