Please enable JavaScript.

Coggle requires JavaScript to display documents.

Capital Budgeting (NPV (Net Present Value (The dollar value, when we…

- - - - Don't invest
  - - - Investt
- - - - NPV>0 or IRR> Discount rate (WACC)
  - - - You have money, does not affect other choices
    - - You pick one, but not the other
- - - - As equity investors are paid last, their risk is always higher
      - A rational investor would always require a higher rate of return for investing in the company's equiity
    - - There would not be an automatic bias
- - - - Upside
        
        Uncertainty that provides bemefits
        
        Asset: receiving greater future earnings than expected, or sooner.
        
        Liability: Paying lesser future cost than expected, or later.
      - Downside
        
        Asset: receiving less future earnings or later than expected
        
        Liability: Paying greater future cost, or sooner.
    - - Downside risk ^, a greater return is needed to compensate for the risk burden
      - Holding all else equal, a greater yield/return is the result
        
        Higher risk
        
        Higher uncertainty of FCF
        
        Lower value
        
        FCF of greater risk are worth less
        
        Lower price
        
        Buyers are willing to pay less for lower value
        
        HIgher return
        
        Same CF/Lower price=^ Return
        
        Compensates for ^ risk
        
        ^
        
        ^Risk=^ Return
      - Risk ^= discount risk ^ for PV