Frequently Asked Questions

Q. Can FPI( ) accommodate investment opportunity time-frame period lengths shorter than annual?

A. Yes.  FPI( ) can accommodate time-frame period lengths other than annual.  Simply adjust all the relative percentages in the FPI( ) input string to the desired time-frame. The FPI relative percentages are assumption input Line Items [1] Equity Return, [6] Secondary Flow Return Rate, [8] Debt Rate and [9] Asset O&M and Property Tax Rate.  Monthly relative percentages are one-twelfth an annual rate. 

Q. Are the FPI( ) Basic, Standard and Advance Version functions forward compatible?

A. Yes.  Transitioning forward from FPI( ) Basic to the higher Standard Version or from FPI( ) Standard to the higher Advance Version is 100% compatible.  Transitioning forward to a higher FPI( ) version allows previous default FPI assumptions to become user-input assumptions in the higher version. 

Q. Are the FPI( ) Basic, Standard and Advance Version functions backward compatible?

A. Yes.  However, transitioning backward from FPI( ) Standard to the lower Basic Version or from FPI( ) Advance to the lower Standard Version requires shortening existing FPI( ) function input strings.  The input strings are shortened to a maximum of [11] going to the lower Basic and a maximum of [17] going to the lower Standard Version.  Shortening FPI( ) input strings is necessary in the higher version, prior to the transition to the lower version.  Shortening FPI( ) function strings replaces any user-input assumptions with FPI default values. FPI default values [12] through [23] can be found at FPI Function Blueprint.  

Q. What is a non-trivial investment opportunity?

A. A non-trivial investment opportunity is one where there is both 1) a difference between the pretax weighted average cost of capital and the after-tax equity return and 2) the investment’s pre-asset operating performance varies period to period.

Q. What are the seven A’s of an investment opportunity?

A. Ask, Assumptions, Analyze, Answer, Actual, Analyze, Abort.

Definitions

Book Depreciation Method [13] (BookDep) Advance – book depreciation method determining how quickly the asset valuation depreciates on the books over the asset valuation’s life, [12] BookLife.  An input of 0 (zero) prescribes straight line depreciation and an input of 2 (two) prescribes accelerated double declining balance. The book depreciation method switches to straight-line depreciation when depreciation is greater than a declining balance calculation.  Positive inputs other than 0 (zero) and 2 (two) are permissible.  Default value – 0 (zero) straight-line.

Change in Other Assets (Liabilities) [20] Advance – a positive amount for a Change in Other Assets (Liabilities) assumption represents either items paid during the period but appropriately not yet expensed through the income statement or earned revenue not yet received (placing an asset on the balance sheet). Conversely, a negative amount change in other assets (liabilities) represents materials or services expensed but not yet paid or revenue received but not yet earned (placing a liability on the balance sheet).

Debt Capital Structure Weight [6] – capital financing percent supported by debt.  

Debt Rate [7] – cost rate assigned to outstanding debt.

Depreciable Asset True/False [10] – a switch to indicate whether the investment asset valuation in question is depreciable.

Discounted Cash Flow (DCF) – an economic concept valuing a future dollar at a discount to a dollar today.

Income Tax Rate [14] – the income tax rate applicable to operating performances

Income Tax Rate (Deferred Tax) FPI period 0 [22] – the income tax rate applicable to the investment opportunity period 0.  This rate is used in the instance when deferred taxes need recalculated at the beginning of an investment opportunity due to a change income tax rates. 

Initial Cost [2] – the initial cost of an investment opportunity’s asset.  Initial cost is one of the three basic elements in an investment opportunity.

Internal Equity Return (IER) [1] – an investment opportunity’s return measure. Internal equity return is one of three basis elements in an investment opportunity.

Interest Tax Deductibility percent [15] – recent national discussion concerning interest expense tax deductibility has created a need to place interest tax deductibility as a variable assumption.  All other income statement items (except equity return) within the investment opportunity are assumed to be tax deductible.

Investment Category – the four predominant core business focuses are A) what is an investment opportunity’s return measure; B) what is an investment opportunity’s point-in-time initial cost; C) what is an investment opportunity’s operating performance over time and D) what is an investment opportunity’s future sale price or salvage, if any.

Life, Asset periods, [12] – the number of periods describing an assets useful life.

Life, Asset periods Previous to FPI Beginning period [18] – accounts for when an investment opportunity’s asset life exceeds the investment opportunity life. The assumption is used to position the beginning investment opportunity life relative to the beginning of the asset life.

O&M Property Tax Rate, Asset [9] – this assumption percentage captures initial cost related income statement items.

Other Assets (Liabilities), Beginning Balance [19] – the beginning balance of other assets (liabilities) for an investment asset.

Operating Performance – pre-asset operating performance less asset O&M property tax, if any, over the time frame associated with the investment opportunity.

Operating Performance, Net Income – pre-asset operating performance less asset O&M property tax, if any, and less pre-tax capital cost components over the time frame associated with the investment opportunity.

Operating Performance, Pre-Asset [3] – periodic operating performance void of any asset influences over the time frame associated with the investment opportunity.  Pre-asset operating performance is one of the three investment opportunity basis elements.

Pre Asset Operating Performance next period percent [11] – periodic operating performance percentages over the time frame associated with the investment opportunity. The first period is always 100%. Pre Asset Oper Perf next period percent is used exclusively for category C investment opportunities.

Return Initial Iterative Parameter (RIIP) [23] –an initial estimate for pretax capital cost. The return rate initial parameter assumption and is used only in category A investment opportunities. The assumption gives the option to start the iterative category A method at a rate other than a spreadsheet’s 10% default value. The 10% default spreadsheet rate is used when FPI’s return rate initial parameter assumption is left blank (recommended).

Sale Price [4] – is either a solved core business focus amount or a given inputted percent of ending book value. Ending book value at the end of an investment opportunity creates a mutually exclusive situation between sale price gain (loss) and salvage (disposal).  Sale price only occurs when investment opportunity ending book value is not zero

Salvage (Disposal) Initial Cost, Asset percent [5] – is a percent of initial cost.  Ending book value at the end of an investment opportunity creates a mutually exclusive situation between salvage (disposal) and sale price gain (loss).  Salvage (disposal) only occurs when investment opportunity ending book value is zero 

Secondary Flow, Beginning Balance [21] – the beginning balance secondary flow assumption is for investment opportunities where the investment opportunity’s initial FPI period starts after the asset’s life starts.

Secondary Flow Return Rate after tax [8] – the percentage return rate applied to outstanding secondary flow balances

Solve/Assumption Synchronicity – is a Discounted Cash Flow benchmark. Solve/Assumption Synchronicity starts with the four predominant investment categories. Demonstrating solve/assumption synchronicity utilizes a single investment assumption set. Solve/ assumption synchronicity takes any three investment category combination as assumptions and solves for the remaining fourth category. The rotating investment category answers match the four original assumption amounts.

Tax Depreciation Method [17] – tax depreciation method where an input of 0 prescribes straight line depreciation and an input of 2 prescribes double declining balance.

Tax Life periods [16] – the number of periods representing an asset’s tax life.