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Winter 2017 > Economics > Flashcards

Economics Flashcards

1
Q

Nominal interest rate:

A

rate of interest for a given period (usually a year)

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2
Q

Effective Interest Rate:

A

actual rate of interest, which accounts for the interest amount accumulated over a given period

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3
Q

What is APR?

A

Annual Percentage Rate ~ the rate of interest that banks state for interest arrangements.

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4
Q

Effective Annual Interest Rate:

A

the rate that truly represents the interest earned or paid in one year — that is, compounding is considered.

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5
Q

Which part of the period is an annuity paid?

A

Payments are made at the start of each period rather than the end for an annuity due

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6
Q

Steps when the payment period is equal to the compounding period.

A

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)

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7
Q

Steps for when compounding occurs at a different rate than payment.

A

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

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8
Q

What does mutually exclusive mean?

A

A project is excluded if another project is chosen.

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9
Q

What is an independent investment project?

A

Costs and benefits of one project do not depend on whether another is chosen

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10
Q

You have an investment with complex interest rates (more than one sign change). Which method do you use for recommending the project?

A

ERR

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11
Q

You have a simple investment with only one sign change. Which method do you use for recommending the project?

A

IRR

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12
Q

What is the only concern when evaluating a capital investment?

A

Cash flows (or incremental cash flows - inflows and outflows)

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13
Q

List 6 Cash Outflows:

A
  1. Purchase of new equipment
  2. Investments in working capital
  3. Manufacturing, operating, and maintenance costs
  4. Leasing expenses
  5. Interest and repayment of borrowed amounts
  6. Income taxes and tax credits
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14
Q

List 5 cash inflows:

A
  1. Borrowed funds
  2. Operating revenues
  3. Cost savings (cost reduction)
  4. Salvage value (net selling price)
  5. Working Capital Release
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15
Q

What are the 3 Classifications of Cash Flow Elements?

A
  1. Operating activities
  2. Investing activities
  3. Financing activities.
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16
Q

5 major categories on income statement:

A
  1. Revenues
  2. Expenses
  3. Taxable Income
  4. Income Taxes
  5. Net Income
17
Q

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?

A

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)

18
Q

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?

A

$125,000; the initial investment

19
Q

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?

A

$50,000

20
Q

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?

A

$41,250 (revenues - expenses)

21
Q

Define Cost Basis:

A

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.

22
Q

What is meant when we say CCA class 16?

A

CCA rate = 40%

23
Q

What is CCA?

A

Capital Cost Allowance; the means by which a company can claim depreciation expenses for calculating taxable income.

24
Q

What is UCC?

A

Undepreciated Capital Cost; the balance of the capital Cost left for depreciation.

Previous UCC + Cost of acquisitions +- net adjustment - proceeds of dispositions.

25
Q

List all 13 columns of the Schedule 8 CCA form:

A
  1. Class Number
  2. UCC (beginning of year)
  3. Acquisitions
  4. Net adjustments
  5. Proceeds of dispositions
  6. UCC
  7. 50% rule
  8. Reduced UCC
  9. CCA rate
  10. Recapture of CCA
  11. Terminal loss
  12. CCA
  13. UCC at end of year
26
Q

What is the 50% rule?

A

The half-year rule. It limits the maximum CCA of new property acquired during the first year to 50%.

27
Q

In terms of inflation, Capital cost allowances and interest expenses are always calculated in….?

A

Actual dollars

28
Q

You have a loan in repayment with a total amount owing of $100,000. If the payment size is estimated at $1,234 with 11.5% interest compounded annually, what will be the effect on payment size once inflation is considered (4.6%)? Increase, decrease, stay the same?

A

The payment size does not change with inflation on borrowed funds. Thus, the payment does not change.

29
Q

What can be said about purchasing power when considering economic inflation?

A

Purchasing power decreases as the general level of prices of goods and services increase(inflate).

30
Q

What are we looking for when determining capitalized cost.

A

Present Worth (for a project)

31
Q

M = CK; what is M?

A

The number of compounding periods per year.

32
Q

M = CK; what is C?

A

The number of compounding periods per payment period.

33
Q

M = CK; what is K?

A

The number of payments per year.

34
Q

When calculating the effective interest rate; what period is i based on?

A

The interest rate period is same period as K (the number of payments per year).

35
Q

Actual dollars refers to what?

A

Actual (current) dollars are estimates of future cash flows that take inflation into account. A_n

36
Q

Constant dollars refers to what?

A

Constant (real) dollars are estimates of future cash flows that are independent from the passing of time. Inflation is not accounted for. A’_n

37
Q

How does one find the disposal tax effect given the income statement and cash flow statement?

A

Use the final UCC value in the gains(losses) formula:

G=t(Udisp-S)

Winter 2017 (8 decks)

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