Capital Investments Wk 3

Question 1

What does REVENUE have an affect on capital investments

And by what factor?

Answer 1

Revenue has a positive affect

(1-Tc) where Tc = company tax rate

Question 2

What doe Costs have an affect on CI?

Factor of …. And all “real” CF are what?

Answer 2

Negative

By a factor of (1-Tc) and al real CF are multiplied by (1-Tc)

Question 3

What is Depreciation in CI?

Answer 3

Depreciation is not a real CF but has some tax benefits which acts like an increase in CF

Question 4

What is Depreciation Tax Shield

Answer 4

= DtTc

Reduces the amount owed

Question 5

Prime cost (straight line) Method

Answer 5

D = r x BV0.  R = constant rate, BVO = book value at t=0
D = remains constant

Question 6

Reducing balance method

Answer 6

Dt = r x BV t-1

Dt = declines overtime 
BVt-1 = book value at beginning of year

Question 7

What is book value?

Answer 7

Book value is total assets - total liabilities

Question 8

What is Capital Budgeting

Answer 8

Planning process on whether to invest in non-current assets

Question 9

What is Net working Capital?

Increase in WC means?
Decrease in WC means?

Answer 9

Cash employed to run day-to-day operations

More cash is employed (outflow)
Less cash employed (inflow)

Question 10

Is income tax an inflow or outflow?

Answer 10

Outflow

Question 11

What is Capital Gains Tax?

Answer 11

Lowers net profit received from sales of an asset

Question 12

If you sell an asset ? Book value means?

Answer 12

Gain in profit

Question 13

The 5 things to watch out for when dealing with CF

Answer 13

Sunk cost, Opportunity cost, Allocated overheads, Change in NWC, Impact on inflation

Question 14

What are the three equations to use in mutually exclusive projects with unequal lives?

Answer 14

1. Lowest common multiple
2. NPV in perpetuity
3. Equivalent Annual Annuity