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Up0
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 🙂
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Up5
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.
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Up0
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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