Chapter 8 Flashcards
Chapter 8 focuses on making what decisions?
Investment
A specific decision making process that involves whether or not to proceed with a project
Capital Budgeting
Capital Budgeting involves what and what measurements?
Quantitative and Qualitative
Capital budgeting works by knowing the initial cost and estimating the future what?
Costs and Benefits
1 Define the decision and related issues
2 determine criteria to evaluate alternatives
3 generate alternatives
4 analyze and assess alternatives
5 decide and implement
The Decision Making Framework
1 payback method
2 net present value
3 internal rate of supportive return (IRR)
The 3 Capital Budgeting Techniques
1 for projects with up front investment and smooth or annual cash flows
2 a more general estimation of payback when net cash flows are uneven
The 2 Versions of the Payback Method
Initial Investment / Annual Net Cash Inflow
The Payback Period Formula
The payback method ignores the what of money? Although this is okay for SMALL investments
Time Value
Year Net Cash Flow Cumulative Cash Flow
0 (100) (100)
1. (10). (110)
2. 5 (105)
3. 12. (93)
4. 18. (75)
5. 22. (53)
6. 27. (26)
7. 33. 7
8. 35. 42
Payback Method with Uneven Cash Flow Table
1 easy calculation
2 quick measure of risk
Strengths of the Payback Method
1 no time value consideration
2 no consideration of cash flows expected to occur beyond payback period
Weaknesses of the Payback Method
The goal of the net present value method is to determine what?
The net value added to a firm by the project
The cost of capital in the net present value method formula includes what?
Discount Rates
The risk associated with uncommon territory for the organization is called what?
The Hurdle Rate