2426872
Description
Flashcards by dylan_earl, updated more than 1 year ago
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Created by dylan_earl
over 10 years ago
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| Question | Answer |
| What is the capital budgeting decision concerned with? | Finding out investments that maximize the value of the firm |
| NPV = PV Cash flows - _________ investment | Initial Investment |
| Formula for NPV | NPV = Co + C1/(1+R)^1 ... |
| The discount rate used to discount set of cash flows must match the rate of the cash flow | False: Must match the RISK of the cash flow |
| Two things to determine with NPV | 1. Amount and timing of cash flows 2. Appropriate discount rate |
| Managers increase shareholders' wealth by accepting all projects worth more than they cost T/F | True |
| Anything with positive net present value should be accepted to increase shareholder wealth T/F | TRUE |
| What is Payback | Time period it takes for cash flows generated by project to cover initial investment in project. (ie. if payback is less than specified cut off, you're good!) |
| What is discounted payback period | Time it takes for discounted cash flows generated to cover initial investment |
| Define Internal Rate of Return | Discount rate at which the NPV of the project = zero |
| Define: Investment Timing Decision | When you have the ability to defer investment to a more ideal time |
| What is needed when comparing assets with different lives? | Equivalent Annual Costs (Cost per period with same PV as cost of machine) |
| Define Capital Rationing | Setting a limit on the funds available for investing |
| Soft Rationing vs Hard Rationing | Soft: Imposed by senior management Hard: Unavailability of capital in the market (ie. 2008 Credit Crunch) |
| NPV is the only measure which always gives correct decision when evaluating project T/F | TRUE |
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