🙋 Student Q&A (Lecture 5)

Click here to learn about timestamps and my process for answering questions. Section agendas can be found here. Email office hour questions to robmgmte2700@gmail.com. PS1Q2=“Question 2 of Problem Set 1”

📅 Questions covered Saturday, Feb 28

At the start, we covered question interpretation for questions 1 through 7 on the problem set to get an idea of what we were facing this week. We only talked about interpretation; we didn’t talk about how to solve the questions, just what they were asking and what you should assume.

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❔ Once you have the r for NPV, could you just choose a lower r and increase the NPV?

✔ r is something you can’t control. It’s related to how much it costs to borrow money or sell stock.

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❔ Examples from the slides, particularly the last.

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📅 Questions covered Monday, Mar 2

🕣 7:40pm → 8:17pm
❔ When you are calculating FCF, do you add back in the initial cost of the depreciating asset as CapEx in year 0 even though you are also including the depreciation expense, per the formula?

FCF= (Revenues - Costs - Depreciation) × (1 - Tax Rate) + Depreciation - CapEx - Change in NWC

✔ Covered this during video This is clearly a nuanced topic. To really understand this, we need to understand the concept of unlevered net income. Unlevered Net income = (Revenues - Costs - Depreciation) × (1 - Tax Rate)

Unlevered net income expresses what happens on income statement (incrementally, when we separate financing from capital budgeting)

The following terms from your formula capture what happens in the statement of cash flows: + Depreciation - CapEx - Change in NWC

🕣 8:22pm
❔ What does positive NPV mean?

✔ When a question asks for “positive NPV,” you want the lowest number such that NPV ≥ 0. You could enter the value that makes NPV = 0. We do this because if we don’t allow NPV exactly equal to 0, then people will get frustrated and confused about what the lowest number is that is actually larger than 0. This is a pain, we we allow NPV=0 when the question says “positive NPV”. It’s super pragmatic.

To get a positive NPV, what is the maximum possible outflow?

✏️ A. 5.40 dollars is inflow. B. 5.40 million dollars is inflow.

✔ A. 5.40 dollars of outflow B. 5.40 million dollars of outflow.

While the above is a perfectly fine answer for 100% credit, you could also enter 5.41 or 5.400001. Given rounding tolerances, you’d probably also be fine with 5.42 or even 5.43