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Ency VO > chapter 16, 18 > Flashcards

chapter 16, 18 Flashcards

1
Q

What does an “investment” generally refer to within a company?

A

Use of financial resources, typically for the acquisition of fixed assets.

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2
Q

What are the various forms of investment projects in a company?

A
  • Financial investments
  • investments in assets for production
  • sales
  • R&D
  • investments divided into physical and intangible assets
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3
Q

Aspects of the investment term

A

Aspect of asset-oriented term for investment.
* Conversion of capital into assets, called “capital use”.
* Disinvestment is the reverse process.

payment-oriented investment term
* Determined by cash outflows and inflows,
* involves expenditure for acquiring the investment object,
* subsequent generation of revenue surpluses

process-oriented investment term.
* Views investment as a planning and decision-making process
* determining the use of company’s funds

disposition-oriented investment term:
* Long-term determination of financial resources in fixed assets
* limits future dispositions for companies

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4
Q

What is the difference between individual planning and overall planning in investment planning?
sketch investment planning as part of the company’s overall planning

A

Individual planning is single-object planning with stages from investment stimulus to decision.

  • Investment stimulus
  • problem description
  • search for alternatives
  • profitability analysis and assessment
  • decision.

Overall planning coordinates all investment projects within the entire company.
* coordination of all investment projects within the scope of the entire company planning.

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5
Q

What are the impacts of investment decisions on companies?

A
  • Long-term influence on product creation, sale process, technology, competitiveness, future profitability
  • Freezing of cost structure, reflected in fixed costs
  • Financial resource limitations due to long-term commitment of funds
  • Need for forward-looking decision making
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6
Q

Summarize the consequences of investment decisions in three basic effects.

A
  1. Success Components (positive contributions to overall target system)
  2. Liquidity Components (ability to fulfill payment obligations)
  3. Risk Components (possibility that expectations don’t occur)
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7
Q

What are the impact criteria on investment projects?

A
  • Technical: Measurements, performance, quality, susceptibility to malfunction, etc.
  • Legal: Regulatory requirements, patents, licenses, concessions, etc.
  • Social: Operational safety, flexibility, influences on staff, working atmosphere, etc.
  • Economic: Investment costs, subsidies, useful life time, operating costs, taxes, etc.
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8
Q

What is the nature and scope of data for investment decisions?

A
  • Presence or accessibility of information to prove profitability
  • Data along a time axis showing cash inflows and outflows
  • Time horizon spanning useful life of project
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9
Q

What is the division of cash flows in investment decisions?

A
  • Cash flows related to entire period of project’s useful life
  • Cash flows related to one year of project use
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10
Q

What does an investment appraisal inform about an investment project?

A
  • Optimum economic life
  • Replacement decision
  • Optimum economic replacement time
  • Optimum investment point in time
  • Optimum investment program
  • Optimum investment and financial program
  • Optimum investment and production program
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11
Q

What are the key decisions to be made using investment appraisal methods?
objectives

A
  • Absolute profitability of an investment project
  • Relative profitability of an investment project

objective: compare investment alternatives and provide statement about contribution to company’s objectives

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12
Q

What are the specific assumptions made to assess profitability of investment projects?

A
  • The model’s data and linkages are known with certainty.
  • All relevant effects can be isolated and forecasted.
  • No relationship exists between the alternative investment projects.
  • Other decisions are made before the investment decision.
  • The economic life of the investment projects is specified.
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13
Q

Name the static methods of investment appraisal.

A
  • Cost comparison method
  • Profit comparison method
  • Average rate of return method
  • Static payback method
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14
Q

What is the main method, decision-making levels, imputed interest cost calculated, factors does operating cost, in Cost Comparison Method (CCM)?

A

main method:
Differentiated cost type calculation

decision-making levels:
Total cost comparison
Performance cost comparison/unit cost comparison
Comparison of the cost functions

imputed interest cost
By multiplying the average capital tie-up by the rate of interest.

factors operating cost depends on
Technical effectiveness
Performance ratio

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15
Q

What are the key terms related to dynamic investment calculation?

A
  • Current/present value: Nominal value at payment time.
  • Net present value: Value of payment adjusted for a specific reference date.
  • Reference date: Time when cash inflows and outflows are adjusted.
  • End value: Final value of converted cash inflows and outflows.
  • Compounding factor: Multiplier for present value to determine future value.
  • Discounting factor: Multiplier for present value to determine past value.
  • Interest or “discount rate”: Chosen rate for adjusting cash flows.
  • Capital expenditure (CapEx): Funds for acquiring/upgrading physical assets.
  • Cash flow surpluses: Excess cash inflows over outflows for specific periods.
  • Liquidation value: Estimated selling price of an asset.
  • Capital recovery factor: Ratio of constant annuity to present value.
    * Internal rate of return: Interest rate making net present values zero.
  • Annuity: Series of equal payments at regular intervals.
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16
Q

What are the influencing factors on the discount rate?

A
  • Minimum interest rate expected by investor
  • Rate of return of not considered investment alternatives
  • Industry customary interest rate
  • Average corporate rate of return
  • Expected inflation rate
  • Surcharges for special risks
  • Secondary market rate of return
  • Eurobor rate of return
  • DAX rate of return
  • ATX rate of return
17
Q

What model is often used to determine the costs of equity?

A

Capital Asset Pricing Model (CAPM)
base: Yield of risk-free bonds (eg. government bonds, here 7%)

18
Q

How is the market’s risk premium calculated?

A

Difference between market rate of return (long-term DAX yield; here 12%) and yield of risk-free bonds.

19
Q

How is the company-specific risk premium determined?

A

company-specific ~-value weighted with market’s risk premium.

20
Q

How are the costs of debt determined?

A

Taking into account all financing forms the company uses, often using a calculative interest on borrowed capital applied to all business segments.

21
Q

What are 4 value levels of accounting?

A
  • Cash inflow/outflow -> change in liquid funds -> Financial Management/Cash-Flow management
  • Receipts/Expenditures -> Financial assets -> Balance Sheet
  • Revenues/Expenses -> Net Equity -> Balance Sheet/P&L
  • Operating result/Cost -> Operating Profit -> Cost and Result Accounting
22
Q

Explain transfer of expenses to costs

A
  • Cash Inflow – any process where the stock of cash increases
  • Cash Outflow – stock of cash decreases
  • Receipt – any business case that increases financial assets
  • Expenditure – decreases financial assets
  • Revenue – any business case that increases equity
  • Expense – decreases equity
  • Operating result – increase in value by internal actions
23
Q

What is cost accounting and what does it provide.

A

Cost accounting is internally oriented – right information to the right person at right quantity at right time at minimum cost

24
Q

Sketch cost cube.

A

Y axis – 1. Dimension Structure of Cost (Fixed Cost/Variable Cost)
X axis – 2. Dimension Possibility to influence cost (short/long-term)
Z axis – 3. Dimension Cost allocation (direct/indirect)

25
Q

What are cost behavior patterns/structure of costs.

A
  • Total Costs – Variable/Product Cost (activity level dependent); Fixed/Structure Costs (time dependent)
  • Non consumable resources -> fixed costs
  • Consumable resources -> variable costs
26
Q

What is cost object and few examples.

A

Cost object is any activity for which a separate measurement of cost is desired (product, service, project, customer, department, brand category)

27
Q

Which 3 special cost terms do you know?

A

Direct (prime) costs:
* Related to cost object and traceable
* Includes material and labor costs

Indirect (overhead) costs:
* Cannot be directly traced to cost object
* Examples: electricity, lubricants, auxiliary wages/materials

Special costs:
* Costs for unique services, not provided uniformly across products
* Includes special production costs (special processing/equipment/assemblies/tools)
* Includes special sale costs (special cargo, packaging, insurances, sales, promotions)

28
Q

Classify most important cost types.

A
  • Sunk costs (cost incurred in past, not relevant to present decisions)
  • Idle time costs (unproductive time, unnecessary costs)
  • Opportunity costs (values of benefits forgone when one decision alternative was chosen over other)
29
Q

What are imputed costs?

A

Imputed costs are cost elements which do not directly correspond to any type of expense found in financial accounting. Often, they are opportunity costs.

30
Q

What is imputed deprecation and what are causes for deprecation?

A

Imputed Depreciation:
* Refers to decrease in value/utility of fixed assets over time
* Process of distributing cost of fixed assets over its useful lifespan

Causes of Imputed Depreciation:
* Technical
* Economical
* Legal
* Political

Straight Line Method:
Assumes constant value consumption over the asset’s useful lifespan

31
Q

What is imputed interest and how is it calculated.

A

Interest:
* Charge for the privilege of borrowing money, typically expressed as an annual percentage rate
* Represents cost of capital made available to a company

Imputed Interest:
* Concept extends not only to borrowed capital, but also to equity
* Reflects potential income from alternative investments foregone due to current investment

Imputed Interest Rate Calculation:
* (Borrowed capital / total capital) * interest on borrowed capital
* (Equity / total capital) * interest on equity

Imputed Interest for Fixed Assets:
* Assumes a steady decrease between initial investment and liquidation value
* Calculation:
* Sum initial investment and liquidation value, divide by 2 to get average capital tie-up
* Multiply average capital tie-up (ACT) by imputed interest rate to get imputed interest cost

32
Q

Which 2 types of risk are there?

A
  • Imputed risk costs – general entrepreneurial risk (company as a whole)
  • special risk (risk linked to company’s activities)
33
Q

What is corporate governance?

A
  • System of rules, practices, and processes
  • Ensures accountability, fairness, and transparency
  • Directs and controls a company
  • Balances the interests of stakeholders (shareholders, management, customers, and suppliers)

Ency VO (10 decks)

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