Fishers And Capital Budgeting

Question 1

What is fishers separation theorem

Answer 1

The optimal investment decision of the firm is unrelated to the consumption preferences of the shareholders

Question 2

What is the implication of fishers separation theorem

Answer 2

Firms should accept all investment projects with positive NPV (assuming projects are independent)

Question 3

Factors for cash flows?

Answer 3

Sunk costs 
Financing costs 
Opportunity cost 
Side effects 
Taxes inflation

Question 4

Chas flows: side effects,synergy & erosion

Answer 4

Side effect: effects of the proposed project on other parts of the firm

Synergy: new project increases cash flows of existing projects

Erosion: new project decreases the cash flows of existing project

Question 5

Calculate net working capital

Answer 5

Cash + inventory + receivables - payables

Increase in NWC is a negative cash flow

Question 6

Nominal

Answer 6

Actual dollars and actual interest rates

Question 7

Real

Answer 7

Adjusted for inflation

Question 8

Calculate real

Answer 8

Real = nominal / 1+ inflation rate