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Finance > Capital Budgeting II > Flashcards

Capital Budgeting II Flashcards

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1
Q

what are the three parts that make up total cash flows

A

capital investment
operating cash flow
changes in working capital

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2
Q

is capital investment usually a positive or negative cash flow

A

negative

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3
Q

is operating cash flow usually positive or negative

A

positive

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4
Q

are changes in working capital usually positive or negative

A

can be both

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5
Q

examples of capital investment for a coffee shop

A

coffee machine

table and chairs

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6
Q

examples of operating cash flows in a coffee shop

A

revenue - costs

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7
Q

example of working capital in a coffee shpo

A

inventory

time in between selling to the customer and being turned into cash

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8
Q

what is working capital

A

cash tied up for a short time between buying and selling

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9
Q

what are the two fundamental elements for project evaluation

A

identify the relevant cash flows that are to be disounted

discount at the correct opportunity cost of capital

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10
Q

why should we focus on cash flows rather than profits

A

profits can be manipulated by accountants

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11
Q

how to identify a cash flow

A

would the cash flow still exist if the project does not exist?

if yes DONT include
if no DO include

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12
Q

what are incremental cash flows

A

cash flows that are subject to change if the project is implemented

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13
Q

what are the 8 rules for finding the relevant incremental cash flows

A 
include indirect effects
ignore sunk costs
include all opportunity costs
overheads
terminal cash flows
investment in working cpaital
ignore financing costs
include value of all of positive and negative externalities created by the project
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14
Q

indirect effects can also be called

A

incidental effects

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15
Q

what is an indirect effect

A

a new product may either increase or decrease sales of other products in the companu

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16
Q

example of an incidental effect

A

opening a second shop in the same town could draw sales away from the original shop

selling more printers means more printer ink will be sold

17
Q

what are sunk costs

A

costs that have already occured
eg costs spent on market research

whether the project goes ahead or not, the money has already been spent

18
Q

what is an opportunity cost

A

the cost of the best alternative forgone

19
Q

example of an opportunity cost

A

the project under consideration may be taking resources away from another project
the loss of cash flows from these other projects are termed opportunity costs

20
Q

what are overheads

A

costs that are not directly associated with any one part of the firm or one project

21
Q

examples of overheads

A

rent
heat
electriicty

22
Q

what overheads should be included

A

any that increase directly as a result of the new investment

23
Q

what is an example of a terminal cash flow

A

selling of equipment

clean up costs

24
Q

why can we ignore financing costs

A

accounted for in discount rate

25
Q

example of positive and negative externalities created by investment that need to be accounted for

A

climate - carbon tax, lower costs due to more efficient energy

26
Q

what does ESG stand for

A

environmental social governance

27
Q

what are the quantitative factors of project analysis

A

NPV, IRR etc

28
Q

what are the qualitative factors for project analysis

A

strategy, social context, potential problems, intangible benefits

29
Q

what are some potential capital budgeting probelms

A

ensuring forecasts are consistent
eliminating conflicts of interest
reducing forecast bias
proper selection criteria

29
Q

what are some potential capital budgeting probelms

A

ensuring forecasts are consistent
eliminating conflicts of interest
reducing forecast bias
proper selection criteria

30
Q

for what industries would payback period not really be a suitable capital budgeting method

A

research and development as it may take longer to reep rewards

31
Q

when is profitability index useful

A

when funds are limited as it tells us which project is most profitable

Finance (12 decks)

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