Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

JA BEC Flashcards > Finc Mgmt A2 - Financial and Risk Analysis > Flashcards

Finc Mgmt A2 - Financial and Risk Analysis Flashcards

1
Q

Advantages of IRR over ARR:

A
  • emphasis on CFs

- use of TVM

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Payback Period is the

A

of Years it takes in Cash Inflows to recover the entire Cash outflow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

If income tax is ignored, how would depreciation be handled under the ARR, IRR, and PB methods?

A

Include in ARR but exclude in IRR and PB

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Profitability Index =

A

(PV of Future CF aka Initial investment + NPV) / Initial Investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Rates used in NPV include

A

cost of capital, hurdle rate, and req. rate of return

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Q6

A

[PLACEHOLDER]

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Internal Rate of Return =

A

[PLACEHOLDER]

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

If mgmt believes too many proposals are being rejected, the hurdle rate would be

A

lower

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

If mgmt believes bank loans are riskier than capital investments, then the hurdle rate would be

A

different for each of the methods

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

If mgmt believes capital investment proposals involve average risk, then the hurdle rate would be

A

average

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

If mgmt wants to factor risk into the consideration of projects, then the hurdle rate would be

A

high

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Annual Compound Interest Formula =

A

A = P (1 + (r/n))^nt

Where:

A = Accrued Amount (principal + interest)
P = Principal Amount
I = Interest Amount
r = Annual Nominal Interest Rate %
t = Time Involved in years
n = number of compounding periods per unit t; at the END of each period
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Chose projects with the _____ profitability index first

A

highest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

ARR =

A

Incremental Accounting Income / Initial Investment OR Net Cost Savings / Initial Investment

*factors depreciation in

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

The use of resource markets outside of the firm involve

A

opportunity costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Opportunity are _____ costs

A

implicit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Accounting profit =

A

Revenue - Explicit Costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

IRR should be used with which TVM table?

A

PV of an Annuity of $1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

NPV should be used with which TVM table?

A

PV of $1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Discounted breakeven period is

A

the point where discounted cumulative cash inflows = discounted total cash outflows

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

NPV =

A

PV of future cash inflows - Initial Investments

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Positive NPV indicates that the IRR _____ the hurdle rate

A

exceeds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Ordinary Annuity aka Annuity in Arrears is

A

payable at the end of each period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Annuity Due aka Annuity in Advance is

A

payable at the beginning of each period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Discounted Payback period should be used with which TVM table?

A

PV of $1

26
Q

When you expect a series of equal payments for a fixed amount of time, the NPV should be used with the

A

PV of an ordinary annuity of $1

27
Q

The discounted, net-of-tax amount related to disposal of an asset =

A

Proceeds from sale - (Sales price less tax basis x tax rate x PV of $1)

28
Q

As interest rates get higher, the PV factors for the same # of periods becomes

A

smaller

29
Q

For NPV, the use of an accelerated depreciation method instead of the straight-line method has the effect of

A

increasing the PV of the depreciation tax shield

30
Q

A multiperiod project has a positive NPV, thus the required rate of return is

A

less than the project’s IRR

31
Q

The NPV of a proposed investment is negative, therefore the discount rate must be

A

greater than the project’s IRR

32
Q

When the risks of the individual components of a project’s cash flows are different, an acceptable procedure to evaluate these cash flows is to

A

discount each cash flow using a discount rate that reflects the degree of risk

33
Q

If a project has differing required rates of return over it’s life, i.e., 8% the first 3 years and 12% the second 3 years, the analyst should

A

compute NPV using both rates for the applicable years and accept the project if NPV is at least zero

34
Q

The method that recognizes TVM by discounting the after tax CF over the life of a project, using the company’s minimum desired rate of return is

A

NPV method

35
Q

The method that determines the discount rate at which the PV of the projected future CF exactly equals the initial cost of the investment is

A

IRR method

36
Q

The method that determines the length of time required to recover the inital cash outlay of a capital project computed as the initial investment divided by annual cash flow is

A

Payback Period

37
Q

The method that uses non-discounted measures and is computed as (Net CF - Depreciation) / Investment is

A

ARR method

38
Q

If NPV is positive, it would indicate that the rate of return is _______ than the discount percentage rate used in the NPV computation

A

greater

39
Q

The recommended technique for evaluating projects when capital is rationed and there are no mutually exclusive projects from which to choose is to rank the projects by

A

Profitability index

40
Q

A projects NPV, ignoring income tax considerations, is normally affected by the

A

proceeds from the sale of the asset to be replaced

41
Q

Capital budgeting methods are often divided into what 2 classes?

A

project screening and project ranking

42
Q

Example of project ranking method

A

Profitability Index

43
Q

Examples of project screening methods

A

Payback method, Time adjusted rate of return, and the ARR method

44
Q

The capital budgeting model that is generally considered the best model for long-range decision making is the

A

discounted CF model

45
Q

The payback reciprocal can be used to approximate a project’s

A

IRR if CF pattern is relatively stable

  • If the cash flow pattern is relatively stable, the payback reciprocal number serves as a good approximation of a present value of an annuity table factor. Using the payback number and a PV of an Annuity table, it becomes a relatively simple matter to look up an interest rate corresponding to the appropriate number of years’ life of a project. This interest rate will be a close approximation of the internal rate of return.
46
Q

The Profitability Index is a variation on the which capital budgeting model?

A

NPV

47
Q

Contribution Margin =

A

(Revenue - VC) / Revenue

48
Q

A measure of project risk is provided by the capital budgeting technique of

A

payback

49
Q

PV of $1 =

A

Future CF / (1+Req. rate of return)^n

50
Q

Profitability Index =

A

NPV / Investment Required

51
Q

Payback method:

A
  • does not adjust for TVM
  • formula = Initial Investment / Annual CF
  • Ignores profitability
  • is the length of time required to recover the initial investment
  • Does not consider equip replacement
52
Q

ARR =

A

Increase in Income / Required Investment

53
Q

Payback period =

A

Initial Investment / Annual Cash Flow

54
Q

If you ______ discount rate, NPV would decrease

A

increase

55
Q

IRR > Required Rate of return, then

A

NPV > 0

56
Q

In capital budgeting, the Profitability Index is best used to

A

select projects when capital budgeting funds are limited

57
Q

Capital budgeting techniques would ______ likely be used to evaluate the adoption of a new method of allocating non-traceable costs to product lines

A

least

58
Q

If a firm identifies (or creates) an investment opportunity with a present value ________ its cost, then the value of the firm and the price of its common stock will ________.

A

greater than; increase

59
Q

When evaluating capital budgeting analysis techniques, the payback period emphasizes

A

liquidity

60
Q

IRR is less reliable than NPV when

A

there are net cash inflows of sizable amounts early in the project

61
Q

Real $ =

A

Actual $ / (1+Inflation rate)^n

JA BEC Flashcards (20 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions