Capital Budgeting Flashcards
1
Q
Capital budgeting
A
Long term investments in real assets
2
Q
Best weights to use for WACC
A
Target
Market
Book Value
3
Q
Risk
A
Corp- overall firm
Market- overall market
Stand alone- st. dev
4
Q
Inflation
A
NPV too low w/o inflation
5
Q
Sensitivity analysis
A
One variable, impact on NPV
- ignores relationships, no diversification
- breakeven analysis
6
Q
Scenario
A
Worst, likely, best case
Range of outcomes
*Assumes perfect correlation, only delivers a few potential outcomes
7
Q
Simulation analysis
A
Lots of outcomes
Hard to predict probabilities, bad inputs lead to bad outputs
8
Q
Cross over rate
A
Difference, IRR
9
Q
EAA
A
NPV = Annuity ((1 - 1/(1+r)^t)/r)
10
Q
Externality
A
Decrease in profit at other locations when new location is established
