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SIE 265 > Exam 3 > Flashcards

Exam 3 Flashcards

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SIE Exam flashcards
1
Q

What is the decision rule for single project evaluation

A

accept if net surplus is positive

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2
Q

what is principle in net present worth measure

A

equivalent net surplus at n = 0 for given interest rate

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3
Q

what is decision rule for comparing multiple alternatives

A

select alternative with largest new present worth

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4
Q

what factors should company consider in selecting MARR in project evaluation

A

cost of capital and risk premium

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5
Q

what is cost of capital

A

required return necessary to make an investment project worthwhile … viewed as rate of return firm would receive if it invested its money somewhere else with similar risk

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6
Q

what is risk premium

A

additional risk associated with the project if dealing with a project with higher risk than normal project

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7
Q

what is net future value

A

investment opportunity - bank equivalent at at any common time in future

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8
Q

what is net present value

A

investment opportunity - bank equivalent expressed in today’s dollars

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9
Q

can you find NPV by discounting NFV to today

A

yes

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10
Q

what is discount rate (or MARR)

A

cost of capital imposed on a business or project by owners of capital (could be company or external)

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11
Q

if the NPV of project is greater than zero …

A

return of project exceeds discount rate

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12
Q

if NPV > 0 …

A

project to be pursued and all FV > 0

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13
Q

what is the decision rule of future worth

A

accept project if equivalent worth is positive

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14
Q

capitalized equivalent worth principle

A

PW for a project with an annual receipt of A over infinite service life

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15
Q

equation for capitalized equivalent worth

A

CE(i) = A/i

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16
Q

what is the capitalized equivalent

A

amount of money invested today that will generate constant payments forever (a perpetuity) at a stated interest rate (MARR)

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17
Q

the implication of a loan with an infinite term must be that …

A

the loan balance is never reduced

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18
Q

payback period principle

A

how fast can I recover my initial investment

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19
Q

method of payback period

A

based on cumulative cash flow

20
Q

screening guideline of payback period

A

if payback period ≤ some specified benchmark, the project would be considered

21
Q

weakness of payback period

A

does not consider time value of money

22
Q

principle of discounted payback period

A

how fast can I recover my initial investment plus interest

23
Q

method of discounted payback period

A

based on cumulative discounted cash flow

24
Q

screening guideline of discounted payback period

A

if discounted payback period is ≤ some specified benchmark, the project could be considered

25
Q

weakness of discounted payback period

A

cash flows occurring after DPP are ignored

26
Q

the shorter the payback period …

A

the better the investment

27
Q

who determines minimum payback period

A

the company does

28
Q

what payback method(s) are presented

A

conventional and discounted

29
Q

annual worth analysis principle

A

measure an investment worth on annual basis

30
Q

annual worth analysis benefits

A

by knowing annual equivalent worth, we can seek consistency, determine unit cost, facilitate unequal project life comparison

31
Q

for single project evaluation, if AE(i) > 0

A

accept investment

32
Q

for single project evaluation, if AE(i) = 0

A

remain indifferent to investment

33
Q

for single project evaluation, if AE(i) < 0

A

reject investment

34
Q

comparing mutually exclusive alternatives of service projects

A

select alternative with minimum annual equivalent cost (AEC)

35
Q

comparing mutually exclusive alternatives of revenue projects

A

select alternative with maximum AE(i)

36
Q

capital cost + operating cost =

A

annual equivalent cost

37
Q

when only costs are involved, the AE method is called

A

annual equivalent cost

38
Q

revenues must cover two kinds of costs

A

operating and capital

39
Q

definition of capital costs

A

owning equipment is associated with two transactions… its initial cost and its salvage value

40
Q

what is capital recovery cost

A

annual equivalent of capital cost … function of MARR

41
Q

generally speaking, as an asset becomes older its salvage value …

A

becomes smaller

42
Q

as long as salvage value is less than initial cost, capital recovery cost is

A

decreasing function of N

43
Q

the longer we keep an asset, how does capital recovery cost change

A

it lowers

44
Q

if salvage value is equal to initial cost, the capital recovery cost is

A

constant

45
Q

to be profitable, how does revenue have to compare to capital recovery costs

A

revenues ≥ capital recovery costs

46
Q
A

SIE 265 (1 decks)

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