Finc Mgmt A2 - Financial and Risk Analysis

Question 1

Advantages of IRR over ARR:

Answer 1

• emphasis on CFs

- use of TVM

Question 2

Payback Period is the

Answer 2

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

Question 3

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

Answer 3

Include in ARR but exclude in IRR and PB

Question 4

Profitability Index =

Answer 4

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

Question 5

Rates used in NPV include

Answer 5

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

Question 6

Q6

Answer 6

[PLACEHOLDER]

Question 7

Internal Rate of Return =

Answer 7

[PLACEHOLDER]

Question 8

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

Answer 8

lower

Question 9

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

Answer 9

different for each of the methods

Question 10

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

Answer 10

average

Question 11

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

Answer 11

high

Question 12

Annual Compound Interest Formula =

Answer 12

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

Question 13

Chose projects with the _____ profitability index first

Answer 13

highest

Question 14

ARR =

Answer 14

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

*factors depreciation in

Question 15

The use of resource markets outside of the firm involve

Answer 15

opportunity costs

Question 16

Opportunity are _____ costs

Answer 16

implicit

Question 17

Accounting profit =

Answer 17

Revenue - Explicit Costs

Question 18

IRR should be used with which TVM table?

Answer 18

PV of an Annuity of $1

Question 19

NPV should be used with which TVM table?

Answer 19

PV of $1

Question 20

Discounted breakeven period is

Answer 20

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

Question 21

NPV =

Answer 21

PV of future cash inflows - Initial Investments

Question 22

Positive NPV indicates that the IRR _____ the hurdle rate

Answer 22

exceeds

Question 23

Ordinary Annuity aka Annuity in Arrears is

Answer 23

payable at the end of each period

Question 24

Annuity Due aka Annuity in Advance is

Answer 24

payable at the beginning of each period

Question 25

Discounted Payback period should be used with which TVM table?

Answer 25

PV of $1

Question 26

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

Answer 26

PV of an ordinary annuity of $1

Question 27

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

Answer 27

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

Question 28

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

Answer 28

smaller

Question 29

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

Answer 29

increasing the PV of the depreciation tax shield

Question 30

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

Answer 30

less than the project's IRR

Question 31

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

Answer 31

greater than the project's IRR

Question 32

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

Answer 32

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

Question 33

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

Answer 33

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

Question 34

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

Answer 34

NPV method

Question 35

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

Answer 35

IRR method

Question 36

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

Answer 36

Payback Period

Question 37

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

Answer 37

ARR method

Question 38

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

Answer 38

greater

Question 39

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

Answer 39

Profitability index

Question 40

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

Answer 40

proceeds from the sale of the asset to be replaced

Question 41

Capital budgeting methods are often divided into what 2 classes?

Answer 41

project screening and project ranking

Question 42

Example of project ranking method

Answer 42

Profitability Index

Question 43

Examples of project screening methods

Answer 43

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

Question 44

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

Answer 44

discounted CF model

Question 45

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

Answer 45

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.

Question 46

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

Answer 46

NPV

Question 47

Contribution Margin =

Answer 47

(Revenue - VC) / Revenue

Question 48

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

Answer 48

payback

Question 49

PV of $1 =

Answer 49

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

Question 50

Profitability Index =

Answer 50

NPV / Investment Required

Question 51

Payback method:

Answer 51

- 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

Question 52

ARR =

Answer 52

Increase in Income / Required Investment

Question 53

Payback period =

Answer 53

Initial Investment / Annual Cash Flow

Question 54

If you ______ discount rate, NPV would decrease

Answer 54

increase

Question 55

IRR > Required Rate of return, then

Answer 55

NPV > 0

Question 56

In capital budgeting, the Profitability Index is best used to

Answer 56

select projects when capital budgeting funds are limited

Question 57

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

Answer 57

least

Question 58

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 ________.

Answer 58

greater than; increase

Question 59

When evaluating capital budgeting analysis techniques, the payback period emphasizes

Answer 59

liquidity

Question 60

IRR is less reliable than NPV when

Answer 60

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

Question 61

Real $ =

Answer 61

Actual $ / (1+Inflation rate)^n