Page 15 - FINAL CFA II SLIDES JUNE 2019 DAY 6
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Economic income = cash flow + (ending market value − beginning market value)
Or = cash flow − economic depreciation READING 20: CAPITAL BUDGETING
where: economic depreciation = (beginning market value − ending market value)
MODULE 20.3: REAL OPTIONS AND PITFALLS IN CAPITAL BUDGETING
Calculate economic income:
Beginning MV = initial investment + NPV = $400,000 + $168,467 = $568,467. Calculate accounting income:
= Assumption, note interest is based on MV/fair value, not BV!
= WACC! Why?
It is the same discount rate used to
determine the value of the company.
