Economics Flashcards
Nominal interest rate:
rate of interest for a given period (usually a year)
Effective Interest Rate:
actual rate of interest, which accounts for the interest amount accumulated over a given period
What is APR?
Annual Percentage Rate ~ the rate of interest that banks state for interest arrangements.
Effective Annual Interest Rate:
the rate that truly represents the interest earned or paid in one year — that is, compounding is considered.
Which part of the period is an annuity paid?
Payments are made at the start of each period rather than the end for an annuity due
Steps when the payment period is equal to the compounding period.
Step 1: Identify the number of compounding periods (M) per year.
Step 2: Compute the effective interest rate per payment period (i).
i = r/M
Step 3: Determine the total number of payment periods (N).
N = M × (number of years)
Steps for when compounding occurs at a different rate than payment.
Step 1: Identify the following parameters:
M = number of compounding periods
K = number of payment periods
C = number of interest periods per payment period
Step 2: Compute the effective interest rate per payment period.
Step 3: Find the total number of payment periods
Step 4: use i and N in the appropriate compounding formula
What does mutually exclusive mean?
A project is excluded if another project is chosen.
What is an independent investment project?
Costs and benefits of one project do not depend on whether another is chosen
You have an investment with complex interest rates (more than one sign change). Which method do you use for recommending the project?
ERR
You have a simple investment with only one sign change. Which method do you use for recommending the project?
IRR
What is the only concern when evaluating a capital investment?
Cash flows (or incremental cash flows - inflows and outflows)
List 6 Cash Outflows:
- Purchase of new equipment
- Investments in working capital
- Manufacturing, operating, and maintenance costs
- Leasing expenses
- Interest and repayment of borrowed amounts
- Income taxes and tax credits
List 5 cash inflows:
- Borrowed funds
- Operating revenues
- Cost savings (cost reduction)
- Salvage value (net selling price)
- Working Capital Release
What are the 3 Classifications of Cash Flow Elements?
- Operating activities
- Investing activities
- Financing activities.
5 major categories on income statement:
- Revenues
- Expenses
- Taxable Income
- Income Taxes
- Net Income
You are developing a project for analysis and need to find the cash flow statement to determine the acceptability of the project. What are the major steps taken to determine if the project should be accepted?
Step 1: Determine CCA/UCC values
Step 2: Develop Income Statement
Step 3: Generate cash flow statement
Step 4: Evaluate the project (PW,AE,etc)
A potential project is to expand a computerized machining Centre. The project considers purchasing a new machine for $125,000, it will generate $100,000 in annual revenues, requires $20,000 in annual labour, $12,000 in material expenses and $8,000 in overhead. The machine can be sold for $50,000 in 5 years, effective tax is 40%, and the MARR is 15%. What is the cost basis?
$125,000; the initial investment
A potential project is to expand a computerized machining Centre. The project considers purchasing a new machine for $125,000, it will generate $100,000 in annual revenues, requires $20,000 in annual labour, $12,000 in material expenses and $8,000 in overhead. The machine can be sold for $50,000 in 5 years, effective tax is 40%, and the MARR is 15%. What is the salvage value?
$50,000
A potential project is to expand a computerized machining Centre. The project considers purchasing a new machine for $125,000, it will generate $100,000 in annual revenues, requires $20,000 in annual labour, $12,000 in material expenses and $8,000 in overhead. The machine can be sold for $50,000 in 5 years, effective tax is 40%, and the MARR is 15%. If the CCA for the first period is $18,750, what is taxable income for period 1?
$41,250 (revenues - expenses)
Define Cost Basis:
The total cost that is claimed as an expense over the asset’s life; includes the initial cost and all incidental expenses such as freight and installation.
What is meant when we say CCA class 16?
CCA rate = 40%
What is CCA?
Capital Cost Allowance; the means by which a company can claim depreciation expenses for calculating taxable income.
What is UCC?
Undepreciated Capital Cost; the balance of the capital Cost left for depreciation.
Previous UCC + Cost of acquisitions +- net adjustment - proceeds of dispositions.
