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2. NPV Formula:
n
Xt
NPV I 0
t
(
1
k
)
t 1
where I0 = initial cash outlay, n =
investment horizon, xt = net cash
flow at t, k = cost of capital,
3. Most important property of NPV technique:
- focus on incremental cash flows with
respect to shareholder wealth
4. NPV obeys value additive principle:
- the NPV of a set of projects is the sum of
the individual project NPV
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3.
4. Intangible Benefits
k * rf * (rm rf )
where k* is the all-equity rate and * is the all-equity
beta.
Recall that
* 1(1t ) D / E
Xt
t 1
Tt
t 1
St
d
)t
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4. Tax Factors:
determine the amount and timing of taxes
paid on foreign-source income.
B. Issue #2 How to adjust for increased
economic and political risk of project?
1. Three Methods of Economic
and Political Risk Adjustments:
a. Shortening minimum payback period
b. Raising required rate of return
c. Adjusting cash flows
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