Initial cash outlay + Additional cash outlay related

to asset + Additional working capital - Cash inflow

NET INITIAL INVESTMENT OR PROJECT COST
arising from sale of old asset being replaced -
Avoidable costs = Net investment

Annual incremental revenue from project - Cash

operating costs = Annual net cash inflow before
taxes - Taxes = Annual net cash inflow after taxes
NET CASH RETURNS - BASIC
Taxes = Tax rate (Annual net cash inflow before
taxes - Incremental depreciation)
Annual cash operating costs if old asset or
method is used - Annual cash operating costs if
new asset or method is used = Annual cash
NET CASH RETURNS - COST REDUCTION savings before taxes - Taxes = Annual cash
PROJECT savings after taxes

Taxes = Tax rate (Annual net cash inflow before

taxes - Incremental depreciation)

COST OF CAPITAL - DEBT Cost of debt = Interest rate (1 - Corporate tax rate)

Cost of preference shares = Dividends per share /

COST OF CAPITAL - PREFERENCE SHARES
Market value per share of preference shares

Stock price based cost of ordinary shares =

COST OF CAPITAL - ORDINARY SHARES (Expected cash dividends per share / Current price
(STOCK PRICE BASED) per share of ordinary shares) + Dividend growth
rate

Book value based cost of ordinary shares = Net

COST OF CAPITAL - ORDINARY SHARES
year’s projected earnings per share / Current price
(BOOK VALUE BASED)
per share of ordinary shares
 COST OF CAPITAL - RETAINED EARNINGS Same as cost of ordinary shares

Weighted average cost of capital

= Summation of (Cost of each type of capital *
Respective weight)
WEIGHTED AVERAGE COST OF CAPITAL
Respective weight = Amount of each type of
capital / Total capital structure

Uniform periodic cash flows: Payback period =

Net investment / Annual cash returns
Non-uniform periodic cash flows: Determining the
PAYBACK PERIOD
point in time at which the cumulative estimated
annual cash inflows equal the investment outlay
Decision rule: Minimize

Bail-out payback period = Point in time at which

the cumulative cash earnings plus the salvage
BAIL-OUT PAYBACK PERIOD
value at the end of a particular year equals the
original investment

Accounting rate of return = Average annual net

ACCOUNTING RATE OF RETURN OR SIMPLE RATE income / Initial investment or average investment
OF RETURN - BASIC
Decision rule: Maximize

Accounting rate of return = (Cost savings -

Depreciation on new equipment) / Initial
ACCOUNTING RATE OF RETURN OR SIMPLE RATE
investment or Average investment
OF RETURN - COST REDUCTION PROJECT
Decision rule: Maximize

Average investment = (Initial investment +

AVERAGE INVESTMENT Salvage value of the asset at the end of economic
life) / 2
 Present value of cash inflows computed based on
minimum desired discount rate or cost of capital
NET PRESENT VALUE - Present value of investment = Net present value

Decision rule: Accept if zero or positive

Net investment / Annual cash returns = Present

DISCOUNTED RATE OF RETURN OR INTERNAL
value factor
RATE OF RETURN OR TIME-ADJUSTED RATE OF
“Use interpolation to get the exact IRR” “Decision
RETURN - UNIFORM CASH INFLOWS
rule: Maximize”

Net investment / Average annual cash returns =

Present value factor “Use interpolation to get the
DISCOUNTED RATE OF RETURN OR INTERNAL
exact IRR” “Decision rule: Maximize //
RATE OF RETURN OR TIME-ADJUSTED RATE OF
Summation of returns to be received during the
RETURN - UNIFORM CASH INFLOWS
life of the project / Economic life of project =
Average annual cash returns

Payback reciprocal = Annual cash inflows / Net

investment “Or”
Payback reciprocal = 1 / Payback period
PAYBACK RECIPROCAL
“Used to estimate the discounted rate of return
when the project is at least twice the payback
period”

Present value index = Present value of cash

PROFITABILITY INDEX OR PRESENT VALUE
inflows / Present value of net investment
INDEX OR BENEFIC-COST RATE OR DESIRABILITY
“Used as a measure of ranking projects in a
INDEX
descending order of desirability”

“Payback period is computed using discounted

DISCOUNTED PAYBACK PERIOD cash flows using an appropriate cost of capital
rate.”

“Compares projects of unequal lives which

REPLACEMENT CHAIN (COMMON LIFE) assumes that each project can be repeated as
APPROACH many times as necessary to reach a common life
span.”