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In any project, Cash flows of year two is dependent with cash flows of year one so it is called time dependency of cash flows. For example: if public reacted positively high in the market for a new product that introduced by a company, resulting high initial cash flows, then cash flows in future periods are also likely to be high. Therefore, it is time dependency of cash flows.
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How do you calculate present value of multiple cash flows?
To calculate the present value of multiple cash flows, you need to discount each cash flow back to the present using a specific discount rate. The formula is: ( PV = \sum \frac{CF_t}{(1 + r)^t} ), where ( CF_t ) is the cash flow at time ( t ), ( r ) is the discount rate, and ( t ) is the time period. You sum the present values of all individual cash flows to get the total present value. This approach helps determine the current worth of future cash flows.
How do you calculate payback period with a depreciation value?
To calculate the payback period considering depreciation, first determine the initial investment and the annual cash flows generated by the investment. Subtract the annual depreciation expense from the cash flows to find the net cash inflow. Then, divide the initial investment by the net cash inflow to find the payback period. This gives you the time it takes for the investment to be recouped, factoring in the impact of depreciation on cash flows.
How is the value of any asset whose value is based on expected future cash flows determined?
The value of an asset based on expected future cash flows is determined through the process of discounted cash flow (DCF) analysis. This involves estimating the future cash flows the asset is expected to generate and then discounting them back to their present value using an appropriate discount rate, which reflects the risk and time value of money. The sum of these discounted cash flows provides the asset's intrinsic value. Ultimately, this valuation helps investors assess whether the asset is overvalued or undervalued in the market.
Explain why the NPV of a relatively long-term project defined as one for which a high percentage of its cash flows are expected in distant future is more sensitive to changes in the cost of capital th?
The NPV (Net Present Value) of a long-term project is more sensitive to changes in the cost of capital because a significant portion of its cash flows occurs far into the future. Since NPV calculations discount future cash flows back to their present value, even small changes in the discount rate can have a substantial impact on the present value of those distant cash flows. As a result, if the cost of capital increases, the discounted value of future cash flows decreases more dramatically, leading to greater sensitivity in NPV. Thus, the longer the time horizon of cash flows, the more pronounced the effect of changes in the cost of capital on NPV.
Will The market of any real or financial asset may be estimated by determining future cash flows and discounting them to the present?
Yes, the market value of any real or financial asset can be estimated by projecting its future cash flows and discounting them to their present value. This method, known as discounted cash flow (DCF) analysis, accounts for the time value of money, reflecting how future cash flows are worth less today. By applying an appropriate discount rate, investors can assess the intrinsic value of an asset and make informed decisions based on this valuation.
What is undiscounted cash flows?
Undiscounted cash flows is a term commonly used in real estate sector. This does not take into consideration the value of time and in the future the value of a tangible asset will depreciate.
What is a good time weighted return and how can it be calculated effectively?
A good time-weighted return is a measure of investment performance that eliminates the impact of cash flows. It is calculated by taking the geometric mean of a series of sub-period returns. This method is effective because it accounts for the timing and size of cash flows, providing a more accurate measure of investment performance over time.
Does an increase in accrued expenses increase cash flow?
Yes, Expenses done while payment not made is a reason for increase in cash flows because if cash is paid then there would be a reduction in cash while deferred it to future time has actually increase the cash flow for the time being.
How do you calculate present value of multiple cash flows?
To calculate the present value of multiple cash flows, you need to discount each cash flow back to the present using a specific discount rate. The formula is: ( PV = \sum \frac{CF_t}{(1 + r)^t} ), where ( CF_t ) is the cash flow at time ( t ), ( r ) is the discount rate, and ( t ) is the time period. You sum the present values of all individual cash flows to get the total present value. This approach helps determine the current worth of future cash flows.
When a cash dividend is declared it would affect the balance sheet but not the statement of cash flows?
dividend will affect the cash flow when actual cash is paid and not at the time of declaration of dividend.
What is role of cash Flow Statement?
Cash flow statement means the cash inflow and outflow from business due to operating, financing and investing activities.
Why is it inappropriate to use one yield in discounting all cash flows in a financial asset?
There are different cash flow patterns. Each cash flow should be discounted at a unique rate appropriate for the time period in which the cash flows will be received to get a more accurate bond price.
Where does cash go on an income statement?
Cash does not appear on an income statement. The income statement shows a company's revenues and expenses over a specific period of time, while cash flow is shown on the statement of cash flows.
Why are Discounted cash flows the best basis for capital budgeting decision?
Discounted cash flows are the best basis for capital budgeting decision due to the singular fact that they recognise the time value of money. Capital budgeting decisions are long term investment that considers how much money invested now will yield an expected returns in the future and since money is time sensitive,the best way of capturing this is by using methods that recognises time lags,hence the use of discounted cash flows
Why does bond duration decrease if yield increases?
Bond duration measures the sensitivity of a bond's price to changes in interest rates, reflecting the average time it takes to receive the bond's cash flows. When yields increase, the present value of future cash flows decreases, leading to a lower bond price and a shorter duration. This occurs because higher yields make future cash flows less valuable, effectively reducing the time-weighted average of those cash flows. As a result, the bond becomes less sensitive to further interest rate changes, thus decreasing its duration.
How does run off cash flow affect the repricing model?
Run-off cash flow impacts the repricing model by altering the expected cash flows from assets and liabilities over time. As cash flows from maturing assets are reinvested or used to pay down liabilities, the timing and amount of cash flows can change, affecting interest rate risk assessments. This can lead to adjustments in the model's sensitivity to interest rate fluctuations, ultimately influencing a financial institution's strategy for managing its balance sheet and capital requirements. Consequently, accurately forecasting run-off cash flows is essential for effective repricing and risk management.
What financial statement covers a period of time?
The Income Statement and the Statement of Cash Flows. Both report information presented over a period of time.
