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CFA Corporate Finance

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CFA Corporate Finance session covers the principles that corporations use to make their investing and financing decisions. Capital budgeting is the process of making decisions about which long-term projects the corporation should accept for investment and which it should reject. Both the expected return of a project and the financing cost should be taken into account.

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CFA Corporate Finance

  1. 1. www.edupristine.com Corporate Finance Topic Weight: 8%© PristineThis Presentation has been prepared to provide general information about theCompany to whom it is addressed. This Presentation does not purport to contain allthe information. The information provided in this presentation is meant only forthe recipient and is not to be shared with anyone else.
  2. 2. Net Present Value (NPV) - CF0 CF1 CF2 CF3 0 1 2 3 where CF0 = the initial investment PV = - CF0 outlay CFt = after tax cash flow at PV = CF1/(1+k)1 time t k =required rate of return for PV = CF2/(1+k)2 project PV = CF3/(1+k)3 Sum of all this is NPV IF…… DECISION NPV > 0 The project may be accepted. NPV decision rule: 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.Pristine www.edupristine.com
  3. 3. 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 & 5563.20Pristine www.edupristine.com
  4. 4. 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 ContPristine www.edupristine.com …
  5. 5. 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 5563.20Pristine www.edupristine.com

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