Chapter 2 Flashcards
1
Q
What is opportunity cost?
A
The sacrifice of the return available on the best forgone project
2
Q
Process of investment appraisal
A
- Objective or fundamental question
- Decision inputs (cash flows & time value of money)
- Decision analysis (discounted cash flows)
- Answer
3
Q
The time value of money and its affect on rate
A
Compensation is required to induce people to make a consumption sacrifice. Compensation is needed for:
- Impatience to consume
- Inflation
- Risk
4
Q
Required return consist of…
A
Required return = RFR + risk premium
Where RFR = risk-free return and consists of pure time value and inflation
5
Q
Problems with internal rate of return
A
- Multiple solutions - with uneven/positive and negative cashflows IRR does not work (gives us multiple values)
- Ranking
6
Q
MIRR - difference from IRR
A
MIRR is the rate of return which if used to compound the initial investment amount produces the same terminal value as the project cash inflows.
7
Q
A