《MPAcc财会专业英语》Chapter26.pdfVIP

Chapter 26 (P539-566) Investment appraisal using DCF methods Topic list (P539) • 1 Discounted cash flow and the cost of capital • 2 The net present value method • 3 The internal rate of return method • 4 NPV and IRR compared • 5 Assessment of DCF methods of project appraisal • 6 Asset replacement decisions Introduction (P539) Discounted cash flow (DFC) methods Net present Value (NPV) Internal Rate of Return (IRR) Study guide (P540) Section 13- Interest and discounting Section 14 – Investment appraisal using DFC methods • Exam guide (P540) 1 Discounted cash flow and the cost of capital (P540) • There are two methods of DCF to evaluate capital investments, the NPV method and the IRR/DCF yield method. • (a) cash flows • (b) timing; discounting them • 1.1 Compounding (P541) • 1.1.1 Simple and compound interest • 1.2 Discounting • Present value of = (1+r) -n or 1/ (1+r)n • 1.3 The cost of capital (P542) • (a) cost of funds • (b) minimum return • 1.4 The cost of ordinary share capital (P542) • 1.5 The cost of debt capital and fixed dividend capital (P542) • 1.6 Computing a discount rate (P543) • Marginal cost of the funds raised (or earnings retained) • Weighted average cost of capital (WACC) • 1.7 Example: Weighted average cost of capital (P543) • 1.7.1 Weighting 1.8 Arguments for and against using the WACC (P544) • Recommended for use in investment appraisal: • (a) financed by new sources of funds • (b) marginal cost • (c) long-term future capital • Arguments against using the WACC: • (a) business risk; return required by investors • (b) change the capital structure; financial risk • (c) floating rate debt capital 1.9 Required returns in the public sector (P545) • The social opportunity cost return approach • The social rate of time preference approach 1.10 Effective and nominal rates of interest (P545) • 1.1