Chapter 8: Specific investment decisions

Question 1

Capital rationing

Answer 1

: Arises when there is insufficient capital to invest in all available projects which have positive NPVs, ie capital is a limiting factor.

Question 2

Divisible projects:

Answer 2

A project that can be scaled down and done in part.

Question 2

Equivalent annual benefit

Answer 2

: Expresses the NPV from a project as an annuity, ie a constant cash flow per year.

Question 3

Equivalent annual cost:

Answer 3

Expresses the present value of the costs of an asset replacement cycle as a cost per year.

Question 4

Leasing

Answer 4

: A contract between a lessor and a lessee for hire of a specific asset by the lessee from a manufacturer or vendor of such assets

Question 5

Lessee

Answer 5

A lessee makes lease payments.

Question 6

Lessor

Answer 6

: A lessor receives lease payments.

Question 7

Non-divisible project

Answer 7

: A project that must be undertaken completely or not at all; ie it is not possible to scale down the project and do it in part.

Question 8

Sale and leaseback

Answer 8

: When a business that owns an asset agrees to sell the asset to a financial institution and lease it back on terms specified in the sale and leaseback agreement.