Exam 3

Question 1

What is the decision rule for single project evaluation

Answer 1

accept if net surplus is positive

Question 2

what is principle in net present worth measure

Answer 2

equivalent net surplus at n = 0 for given interest rate

Question 3

what is decision rule for comparing multiple alternatives

Answer 3

select alternative with largest new present worth

Question 4

what factors should company consider in selecting MARR in project evaluation

Answer 4

cost of capital and risk premium

Question 5

what is cost of capital

Answer 5

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

Question 6

what is risk premium

Answer 6

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

Question 7

what is net future value

Answer 7

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

Question 8

what is net present value

Answer 8

investment opportunity - bank equivalent expressed in today’s dollars

Question 9

can you find NPV by discounting NFV to today

Answer 9

yes

Question 10

what is discount rate (or MARR)

Answer 10

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

Question 11

if the NPV of project is greater than zero …

Answer 11

return of project exceeds discount rate

Question 12

if NPV > 0 …

Answer 12

project to be pursued and all FV > 0

Question 13

what is the decision rule of future worth

Answer 13

accept project if equivalent worth is positive

Question 14

capitalized equivalent worth principle

Answer 14

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

Question 15

equation for capitalized equivalent worth

Answer 15

CE(i) = A/i

Question 16

what is the capitalized equivalent

Answer 16

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

Question 17

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

Answer 17

the loan balance is never reduced

Question 18

payback period principle

Answer 18

how fast can I recover my initial investment

Question 19

method of payback period

Answer 19

based on cumulative cash flow

Question 20

screening guideline of payback period

Answer 20

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

Question 21

weakness of payback period

Answer 21

does not consider time value of money

Question 22

principle of discounted payback period

Answer 22

how fast can I recover my initial investment plus interest

Question 23

method of discounted payback period

Answer 23

based on cumulative discounted cash flow

Question 24

screening guideline of discounted payback period

Answer 24

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

Question 25

weakness of discounted payback period

Answer 25

cash flows occurring after DPP are ignored

Question 26

the shorter the payback period ...

Answer 26

the better the investment

Question 27

who determines minimum payback period

Answer 27

the company does

Question 28

what payback method(s) are presented

Answer 28

conventional and discounted

Question 29

annual worth analysis principle

Answer 29

measure an investment worth on annual basis

Question 30

annual worth analysis benefits

Answer 30

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

Question 31

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

Answer 31

accept investment

Question 32

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

Answer 32

remain indifferent to investment

Question 33

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

Answer 33

reject investment

Question 34

comparing mutually exclusive alternatives of service projects

Answer 34

select alternative with minimum annual equivalent cost (AEC)

Question 35

comparing mutually exclusive alternatives of revenue projects

Answer 35

select alternative with maximum AE(i)

Question 36

capital cost + operating cost =

Answer 36

annual equivalent cost

Question 37

when only costs are involved, the AE method is called

Answer 37

annual equivalent cost

Question 38

revenues must cover two kinds of costs

Answer 38

operating and capital

Question 39

definition of capital costs

Answer 39

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

Question 40

what is capital recovery cost

Answer 40

annual equivalent of capital cost ... function of MARR

Question 41

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

Answer 41

becomes smaller

Question 42

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

Answer 42

decreasing function of N

Question 43

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

Answer 43

it lowers

Question 44

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

Answer 44

constant

Question 45

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

Answer 45

revenues ≥ capital recovery costs