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healthcare finance > Finance Part 2 - Chapter 02 > Flashcards

Finance Part 2 - Chapter 02 Flashcards

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1
Q

opportunity cost

A

the cost associated with alt uses of the same funds

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2
Q

example of opportunity cost

A

if money is used for one investment, it is no longer available for other uses, creating an opportunity cost

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3
Q

why does an investment have an o.c. rate even when the funds employed have no explicit cost?

A

money could be used for another investment

O.C. applies to all investments no matter what

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4
Q

How are o.c. rates established?

A

the rate applied to an investment case flows is the rate that could be earned on all alt investments of similar risks, primary determinant is the riskiness of the cashflows being discounted

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5
Q

Does the O.C. rate depend on the source of the investment funds?

A

No, it depends only on the riskiness of those cash flows and returns available on alt investments of similar risk

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6
Q

Normal (Stated) Int Rate

A

the int rate stated in a debt contract, it does not reflect the effect of any compounding that occurs more frequently than annually

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7
Q

Effective Annual Rate

A

the int rate that under annual compounding, produces the same FV as was produced by more frequent compound

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8
Q

Periodic Interest Rate

A

in the time value of money analysis, the interest rate per period, example, 2% quarterly int, which equals an 8% annual rate

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9
Q

What changes must be made in the calculations to determine the FV of an amt being compounded at 8% semi and one being compounded annually at 8%?

A

I would need to be divided by 2

N would need to be multiplied by 2

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10
Q

Why is semi annual compounding better than annual from an investor standpoint?

A

earned more money

interest on interest is being earned more frequently

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11
Q

How does EAR differ from the stated rate?

A

It produces the same FV as stated rate, but is always annual compounding

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12
Q

How does the periodic rate differ from stated rate?

A

It reflects compounding and a different # of periods added up to find the rate per period

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13
Q

amortized

A

(installment loan) loan that is repaid in equal periodic amts that include both principal and interest payments

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14
Q

When constructing an amortization schedule, how is the periodic payment amount calculated?

A

must be equal periods, equal installments

take the rate and loan amount

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15
Q

Does the periodic payment remain constant over time?

A

yes, but only until it has been paid off

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16
Q

Do the principle and interest components remain constant overtime?

A

No because you are paying off a loan, int goes down, repayment of prin goes up

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17
Q

Capital budget Decisions

A

the process of selecting a business capital ( long term asset) investment

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18
Q

What is the primary advantage of classifying capital projects?

A

classify by size and importance

ensures both the lowest possible financing costs and availability of funds, analyze compared to similar projects

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19
Q

What are some typical classifications

A

mandatory replacement, expansion of existing services, safety or environmental projects

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20
Q

What role does size ( cost ) play in classification?

A

With each class, they are sorted by size, larger projects require more analyses and approval at higher levels

21
Q

What is the role of the financial analyses in capital budgeting decision making with for-profit firms?

A

its clear, max owner wealth, only take on projects that are going to benefit the owner

22
Q

Why is project financial analysis important in not-for-profit businesses?

A

providing high quality, cost effective services

provide goods for everyone, but make sure they are earning a profit

23
Q

What are the four steps of capital budgeting financial analysis?

A
  1. estimate project cash flows
  2. assess riskiness of the est cast flows
  3. estimate the projects cost of capital
  4. assess the financial impact of the project
24
Q

Incremental Cash Flow

A

a cash flow that arises solely from a project that is being evaluated and hence should be included in the project analysis

25
Q

Terminal Value

A

the estimate of the value of the cash flows beyond the truncation point when a project’s cash flows are arbitrarily truncated

26
Q

Salvage Value

A

the expected market value of an asset ( project ) at the end of its useful life

27
Q

Sunk Cost

A

a cost that already occurred or is irrevocably committed, should not be included in project analysis

28
Q

Non Incremental Cash Flow

A

A cash flow that does not stem solely from a project that is being evaluated

29
Q

Strategic Value

A

the value of future investment opportunities that can be undertaken only if the project currently under consideration is accepted

30
Q

Cash Flow Vs Accounting Income

A

a business true profitability depends on its cash flows and not on income as reported in accordance with GAAP

31
Q

Cash Flow Timing

A

must account for the timing of cash flows, should be analyzed exactly as they occur

32
Q

Project Life

A

one of the first decisions that must be made, a c.f. forecast should extend for the full life of the project, most organizations set an arbitrary limit on the project life

33
Q

Effects on existing business lines

A

must consider the effects of the project under consideration on the firm’s existing business lines

34
Q

Shipping, installation, and related costs

A

must take in cost beyond how much new equipment costs

35
Q

change in current accounts

A

increase in current assets must be financed, same with fixed assets, impacted on changes must be recognized in capital budgeting analysis

36
Q

Inflation Effects

A

inflation can effect profitability, so it must be considered, embedded in corp cost of capital

37
Q

“Ignoring inflation effects and strategic value can result in overstating a projects financial attractiveness”

A

must take everything into consideration
current project must be accepted
ignoring inflation effects will lead to a not correct profitability

38
Q

Payback Period

A

The number of years it takes for a business to recover its investment in a project without considering the time value of money

39
Q

Return on ivestment

A

the est fin return on an investment. in capital budgeting analysis, ROI can be measured either in dollars or percentage (rate of ) return

40
Q

Post audit

A

the feedback process in which the performance of projects previously accepted is reviewed and actions are taken if performance is below expectations

41
Q

Why are post audits important to the efficiency of a business?

A

improves forecasts, develop historical risk data, improve operations, and reduces losses

42
Q

Can capital budgeting tools be used in diff settings?

A

they can use the tools to make all sorts of decisions including whether or not to divest assets and reduce staff

43
Q

how to calculate NPV

A

find the PV of each net cash flow and sum the present values, if negative, project is unprofitable

44
Q

How to calculate IRR

A

the discount rate that forces the NPV to equal 0

45
Q

What are the benefits of payback?

A

you figure out how long its going to take to make money or pay something off. can compare it to others

46
Q

What are payback deficiencies when used as the primary evaluation tool?

A

payback ignores all cash flows that occur after the payback period
ignores the o.c. costs associated with the capital employed

47
Q

How is a project cash flow analysis constructed?

A

you figure out the expense of what you are buying and then the cash inflows and outflows received over time. you calculate that into a chart and find the net cash flow at the end of each year until the project period is over

48
Q

what are the key differences in cash flow analyses performed by investor owned and not for profit businesses?

A

investor owned has to pay a certain tax that not for profit has to pay

healthcare finance (7 decks)

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