Chapter 4

Question 1

what is an investment

Answer 1

exchanging something valuable now for something of greater value later

Question 2

name the 3 comparison methods

Answer 2

• present worth
• annual worth
• payback period

Question 3

name the 5 basic assumptions for comparison methods

Answer 3

1. costs/benefits measurable
   in terms of money
2. future cash flows are known with certainty
3. cash flows are unaffected by inflation/deflation
4. taxes are applicable
5. investment = first cost = upfront cost in period zero (now)

Question 4

name the 3 project classifications

Answer 4

• independent
• mutually exclusive
• related but not mutually exclusive

Question 5

what is an independent relationship

Answer 5

the expected costs/benefits of each project do not depend on whether the other one is chosen.

Question 6

what is a mutually exclusive relationship

Answer 6

when choosing one alternative all other alternatives are excluded

Question 7

what is a related but not mutually exclusive relationship

Answer 7

the expected costs/benefits of one project depend on whether the other one is chosen

Question 8

what is minimum acceptable rate of return

Answer 8

• opportunity cost
• aka hurdle rate
• interest rate required for any project to be accepted

Question 9

what is the annual worth method

Answer 9

converts all cash flows to a uniform series (annuity)

Question 10

what is the annual worth method

Answer 10

converts all cash flows to a uniform series (annuity), usually used for projects with unequal lives

Question 11

what is the pay back period method

Answer 11

number of years it takes for an investment to be recouped under zero interest rate

PP = first cost / net annual savings

Question 12

name the two modifications to PW if lives of projects are unequal

Answer 12

• repeated lives approach

- study period approach