Financial Decisions Model Part 1 Flashcards
The discount or hurdle rate is determined
In advance for computations of net present value - Project cash flows are discounted based upon a predetermined rate and compared to the investment in the project to arrive at a positive or negative net present value.
When the risks of the individual components of a projects cash flows are different
Discount rates may be adjusted to factor differences in risk into cash flow analysis.
an advantage of the NPV method over the internal rate of return model in discounted cash flow analysis is that
when using the NPV method of capital budgeting, different hurdle rates can be used for each year of the project
an advantage of the NPV method over the internal rate of return model in discounted cash flow analysis is that
the NPV method can be used when there is no constant rate of return required for each year of the project
the profitability index is used for
Capital Rationing
the profitability index is the ratio of
the net future cash flow to the present value of the net initial investment
the method of funding the project has not effect on
the net present value
A projects net present value, ignoring income tax considerations is normally affected by
proceeds from the sale of the asset to be replaced
The net present value of an investment
is equal to the discounted after-tax cash flow associated with the investment minus the initial investment
Opportunity cost is the potential benefit lost by selecting a particular course of action
Opportunity costs is the revenue that will not occur
the formula for the profitability index is
PV of Net Future cash inflows / PV of Net initial investment - the profitability index is used to rank qualifying investments
the common disadvantage of all capital budgeting model is their reliance on future data
Capital financing relates to longer periods of time that are subject to greater levels of uncertainty than short term.
The profitability index is the ratio of
the pv of Net future inflows / PV of net initial investment
in equipment replacement decisions, which one of the following does not affect the decision-making process
Original Fair Market value of Old equipment, which is a sunk cost
the profitability index is used for capital rationing,
the profitability index is the ratio of
Net present value of net future cash inflows/to the net present value of the net initial investment
the Net present value of an investment is equal to the
discounted after-tax cash flows associated with the investment minus the initial investment
the profitability index is the ratio of the present value of net future cash inflows to the present value of the net initial investment
The profitability ratio requires detailed long term forecasts of projects cash flows.
the NPV
is equal to inflows -outflows
when employing MACRS method of depreciation in capital budgeting decision, the use of MACRS as copared to the straight line method of depreciation will result
equal total depreciation for both methods
the NPV method
recognizes the time value of money and discounts cash flows over the life of a project, using the minimum desired (hurdle) rate
if the net present value is positive (greater than Zero), a project should be accepted, unless
there is a better project, however, if acompany has unlimited funds all projects with a net present value greater than zero should be accepted in order to maximize shareholder wealth
All of these are rates used in net present value analysis
Cost of Capital
hurdle rate
discount rate
required rate of return
the NPV method of capital budgeting assumes
that cash flows are reinvested at the discount rate used in the analysis
if the NPV of a proposed investment is negative, the discount rate used must be greater than the projects IRR
or the NPV of a proposed investment is negative, therefore, the discount rate used must be , greater than the internal rate of return
A disadvantage of the NPV method of capital expenditure evaluation is that
the NPV method of capital expenditure evaluation does not provide the truth rate of return on investment.
