Opportunity Cost Rate, Operating Capital, Net Income and NOPAT
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1) What is an opportunity cost rate? How is this rate used in discounted cash flow analysis, and where is it shown on a time line? Is the opportunity rate a single number that is used in all situations?
2) Why is operating capital important?
3) Explain the difference between NOPAT and net income. Which is a better measure of the performance of a company's operations?
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Solution Summary
This response explains what opportunity cost rate is and how it is used in a cash flow analysis. It also defines the concept operating capital and compares NOPAT and net income.
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1) Opportunity cost rate is also called the hurdle rate. In the world of financial management, there are many unexpected events that may affect expected cash flows. For instance, an international company may have many cash flows from different countries. The cash flows from foreign countries may contain risks that are higher than that from domestic investments. In those cases, ...
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