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Company Finance - Coggle Diagram
Company Finance
Capital Budgeting
Payback period: time taken to recover initial investment in a project
Actual (Exact time point where we pass from negative to positive) vs Average Payback period (Initial investment / Average cash flows)
Does not factor in Time Value of Money
Net Present Value (NPV): The value a project will bring to the company in today's money.
CF = Cash Flow
r = rate of interest
II = Initial Investment
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Internal Rate of Return (IRR)
IRR = discount rate that results in a NPV of $0 
Accept/reject a project based on whether the IRR is greater or less than the WACC.
If greater, we accept. If lesser, we reject.
IRR = effectively estimating rate of return of investment after accounting for all its projected cashflows tgt with the time value of money. Main drawback of IRR is that it is heavily reliant on projections of future cashflows, which are notoriously difficult to predict.
Nani why must explain until so long.
Internal Rate of Return: is the discount rate at which the net present value becomes 0.
Set the NPV at $0.
Annualised NPVNot all projects run for the same length of time, so we use Equivaent annual NPV method to convert each NPV to an annuity payment.
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Value
Equity: value of shares issued by company
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Time value of money
($ today more valuable than $ tomorrow)
FV = PV(1+r)^t
Multiple cashflows PV = total FV(1+r)^t
r = rate of interest
FV = Future Value, PV = Present Value