exam 4

Question 1

Accounting Rate of Return (ARR)

Answer 1

A measure of profitability computed by dividing the average annual operating income from an asset by the initial investment in the asset.

Question 2

Annuity

Answer 2

A stream of equal installments made at equal time intervals

Question 3

Capital Budgeting

Answer 3

The process of making capital investment decisions. Companies make capital investments when they acquire capital assets—assets used for a long period of time.

Question 4

Capital Rationing

Answer 4

Choosing among alternative capital investments due to limited funds.

Question 5

Compound Interest

Answer 5

Interest computed on the principal and all interest earned to date.

Question 6

Hurdle Rate

Answer 6

Management’s minimum desired rate of return on an investment; also called the discount rate and required rate of return.

Question 6

Net Present Value (NPV)

Answer 6

The difference between the present value of the investment’s net cash inflows and the investment’s cost.

Question 7

Discount Rate

Answer 7

Management’s minimum desired rate of return on an investment; also called the hurdle rate and required rate of return

Question 8

Internal Rate of Return (IRR)

Answer 8

The rate of return (based on discounted cash flows) that a company can expect to earn by investing in a capital asset. The interest rate that makes the NPV of the investment equal to zero.

Question 9

Payback Period

Answer 9

The length of time it takes to recover, in net cash inflows, the cost of a capital outlay.

Question 10

Post-Audits

Answer 10

Comparing a capital investment’s actual net cash inflows to its projected net cash inflows.

Question 11

Present Value Index

Answer 11

An index that computes the number of dollars returned for every dollar invested, with all calculations performed in present value dollars. It is computed as present value of net cash inflows divided by investment; also called profitability index

Question 12

Profitability Index

Answer 12

An index that computes the number of dollars returned for every dollar invested, with all
calculations performed in present value dollars. Computed as present value of net cash inflows divided by investment; also called present value index

Question 13

Required Rate of Return

Answer 13

Management’s minimum desired rate of return on an investment; also called the discount rate and hurdle rate.

Question 14

Simple Interest

Answer 14

Interest computed only on the principal amount

Question 15

Time Value of Money

Answer 15

The fact that money can be invested to earn income over time.

Question 16

Future Value (FV)

Answer 16

The value at the end of any time span of concern.

Question 17

Present Value (PV)

Answer 17

The value at the beginning of any time span of concern.

Question 18

Payments (PMT):

Answer 18

A series of equal amounts spaced equally in time.

Question 18

Interest Rate (i):

Answer 18

The rate that corresponds to the compounding period.

Question 19

Time Period (n):

Answer 19

The number of compounding periods.

Question 20

Compounding Period:

Answer 20

The frequency that interest is computed.

Question 21

Single Sum Problems:

Answer 21

involve a single amount of money that either exists now or will in the future

Question 22

Annuity Problems:

Answer 22

involve a series of equal periodic payments (spaced equally in time)

Question 23

Ordinary Annuity (OA):

Answer 23

payments occur at the end of each period

Question 24

Annuity Due (AD):

Answer 24

payments occur at the beginning of each period, STARTING TODAY!

Question 25

Deferred Annuity:

Answer 25

payments occur in the future

Question 26

Capital Assets

Answer 26

assets used for long periods of time, greater than one year.
- Examples: new equipment, factory, vehicles, information technology, intangibles (patents)

Question 27

Capital Investments

Answer 27

when firms acquire capital assets
- The costs of acquiring long-lived assets said to be “capitalized.”

Question 28

Capitalized:

Answer 28

means firms recorded the expenditure as an asset not an expense.

Question 29

Cash Inflows:

Answer 29

when firm receives cash
* Proceeds from sale of old equipment
* Increased cash from customers
* Reduction in current operating expenses
* Cash proceeds from salvage value of equipment when project is complete

Question 30

Cash Outflows:

Answer 30

when firm pays cash
* Initial investment
* Repairs and maintenance
* Increased operating costs
* Overhaul of equipment