CMA Part CD Flashcards
Linear programming
problem-solving approach used in situations where managers need to make decisions about how to maximize profits or minimize costs, based upon certain constraints
Initial investment
the purchase price, installation cost, and increase in working capital
payback method
capital budgeting method that provides a rough measure of project risk, does not distinguish between types of cash inflows and represents the break-even point for an investment
profitability index
(PI, or benefit-cost ratio) compares the present value of future cash flows with the initial investment on a relative basis. It is a ratio of the present value of future net cash flows to the initial cash outflow
project?s payback
(PB) is the length of time it takes for the cash flows generated by the initial investment (I) to equal the initial investment. Assuming the cash flows occur uniformly throughout the year
payback method
merely looks at the length of time it takes to recover the initial investment. It does not consider the life of the project, the time value of money, or the project profitability
Capital investment projects
include many possibilities; including proposals for the acquisition of equipment, the expansion of existing product offerings, and additional research and development facilities. Refinancing is not a capital budgeting decision. It is a financing decision
Certainty Equivalent (CE)
amount of cash an investor requires at a given point in time to make that investor indifferent between that certain amount and the amount expected (assuming risk) at the same point in time
Internal Rate of Return (IRR)
is the discount rate used in the calculation of net present value (NPV) that causes the NPV to equal zero. NPV Present value (PV) of the project?s annual cash flows (calculated at the appropriate discount rate less the project?s net incremental investment)
CVP
Cost/Volume/Profit Analysis
Cost
resource expended to achieve a specific objective
Cost Driver
factor that affects cost
Cost Object
anything for which cost data is accumulated
Fixed cost
cost that remains fixed within a relevant range-fixed costs vary per unit
Variable cost
cost that varies in direct proportion to changes in activities; variable cost are flat at a unit cost
Contribution Margin
Rev - All variable expenses
CM Ratio
CM/Revenue
Tot Cost
fixed + variable costs
Operating Income
Operating Rev-Tot Op costs
Net Operating Income
Operating Income - Operating income taxes or (1-relevant tax rate)*(operating income)
Sales Mix
sometimes referred to as rev mix, relative proportions of products sold and applies to both products and services. Doesn?t reflect what a product sells for
CVP Assumptions
a. Linearity-rev and cost functions are linear over the relevant range,b. Certainty-parameters are known or can be reasonably estimated,c. Single product or defined product mix-allows analysts to utilize a weighted average produce,d. Production=sales,e. For multiple products?sales mix must remain constant
