Another perspective on value creation comes from converting the initial investment into a capital charge against the annual operating cash flows that the project generates. Recall that the project generates an annual operating cash flow of ¥294,800,000.Can anyone explain the above for me please ? am an engineer, i don't have a financial background so bare with me :)

Means that if you bring all operating cash flows to the present (NPV) and then subtract the initial investment, you can determine whether the project is profitable. Technically, if this number is =>0 it adds value.

Technically capital charge= Intial investment x Cost of capital(WACC). So in a way we are saying the minimum required rate of return or hurdle rate to cross over into actually making some money.i.e value creation. This is a little more off beat topic in capital budgeting

A CFA Level 1 Discussion About Value Creation

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This topic has 4 replies, 4 voices, and was last updated Oct-243:40 am by mkazma.

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- hellomarconi
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  - CFA Level 2
  10 Jun 2018 at 8:18 am
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  Means that if you bring all operating cash flows to the present (NPV) and then subtract the initial investment, you can determine whether the project is profitable. Technically, if this number is =>0 it adds value.
- arvindanallen
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  08 Oct 2024 at 10:25 am
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  Technically capital charge= Intial investment x Cost of capital(WACC). So in a way we are saying the minimum required rate of return or hurdle rate to cross over into actually making some money.i.e value creation. This is a little more off beat topic in capital budgeting
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