28: Uses of Capital Flashcards
Capital allocation is the process planning _____ on assets where the _____ to the firm are expected to be greater than 1 years
planning expenditures based on cash flows
Making good capital allocation decisions must be consistent with the manager’s primary goal of:
maximizing shareholder value
Are interest costs included in the estimate of the incremental cash flows from an investment?
No. Costs to finance the investment are taken into account when the cash flows are discounted at the appropriate cost of capital;
including interest costs in the cash flows would result in double-counting the cost of debt
Sunk costs _____ be included in the analysis
Should not, these costs are not affected by the accept/reject decision because they cannot be avoided
the effects of acceptance of a project may have on other firm cash flows
externatilites
A common example of a ____ externality is cannibalization, which occurs when:
negative externality because the new project takes sales from an existing one
Cash flows are based on:
opportunity costs
Cash flows are analyzed on an ______ basis
after tax
the impacts of taxes must be considered when analyzing all capital allocation projects
Financing costs, like interest payments, are reflected in the project’s:
required rate of return (discount rate) & therefore should not be included in the cash flows
The net present value (NPV) of an investment is equal to the sum of the expected cash flows discounted at the:
opportunity cost of capital
IRR is the discount rate that makes the net present value equal to zero
IRR is the discount rate to make PV inflows = PV outflows
When comparing ROIC and cost of capital, if all projects have a positive NPV, ROIC is ____ cost of capital, and these projects are providing return that is greater than ______
Since all projects have a positive NPV, they are all providing a return that is greater than the opportunity cost of capital.
Therefore, the ROIC > cost of capital
____ is a direct measure of the expected change in firm value from undertaking a project
NPV
____ is related to share value; and should cause a proportionate increase in a company’s stock price, of _____/shares outstanding, but other factors are related
NPV
NPV per shares outstanding
IRR shows the return on _____
each dollar invested as a percentage
When dealing with mutually exclusive projects, the most reliable decision rule is:
NPV
The value of a company is the value of its _____ plus the ______ of all of its future investments
existing investments + net present values
The internal rate of return method assumes that the cash flows from a project are reinvested at the project’s ____; the net present value (NPV) method assumes that cash flows are reinvested at _____.
IRR
the cost of capital
used to identify systematic errors in the forecasting process and improve operations is which step of the capital allocation process?
conducting post audit (last step)
For independent projects the NPV decision rule is to:
For mutually exclusive projects the NPV decision rule is to:
accept all projects with a positive NPV
accept the project with the highest NPV
When the NPV = 0, this means the discount rate used is _____ IRR
cost of capital = IRR
changing the inputs into a production process:
option to sell:
option to increase capacity:
flexibility option
abandonment
expansion
IRR analysis will yield ____ accept/reject decision for a single project compared to NPV
the same
NPV is the preferred method, but should be used especially when there are ____ IRR
multiple project IRRs
Unconventional cash flows where the sign of the cash flows change more than once cause:
multiple IRR
Conventional cash flows= 1 IRR
NPV will = IRR for projects:
for independent projects with conventional cash flows
Conflict between the NPV and IRR decision rules can arise when evaluating mutually exclusive projects with conventional cash flows because:
1) the scale of investments may differ and/or 2) the timing of the cash flows may differ
