Formulas Flashcards
What is present value? What is the formula?
The value today of future cash.
PV = FV / (1+r)^n
fv = future value
r = interest
n = number of time periods
What is net present value? And which answer should you choose on the test?
Present value of the total benefits (income or revenue) minus the costs over many time periods.
Choose the answer that is the highest financially, the number of years is not relevant.
What is the internal rate of return? And which answer should you choose on the test?
IRR is the interest rate at which the project inflows (revenue) and project outflows (costs) are equal.
The higher the IRR the better.
What is the payback period and what answer should you choose on the test?
Refers to the length of time it take for the organization to recover its investment in a project before it starts accumulating profit.
The shorter time period is best, but keep in mind other financial information that you are presented with.
What is a cost-benefit analysis? What does the result mean?
Compares the expected costs of project to the potential benefits it could bring to the organization or its stakeholders.
greater than 1 means benefits are great than cost
less than 1 means the costs are greater than than the benefits
equal to 1 means the costs and benefits are equal
ex. 1.7 cost-benefit ratio means revenue is 1.7 times higher than cost
What is economic value added (EVA)?
Whether the project returns more value than it costs.
What is opportunity cost?
Opportunity being given up by selecting one project over another. does not require a calculation.
It is the amount of the opportunity that was NOT selected.
What are sunk costs?
Expended costs, what you already spent. Should not be considered when deciding whether to continue with a troubled project.
What is the law of diminishing returns?
After a certain point, adding more input will not produce a proportional increase in productivity.
What is working capital?
An organizations current assets minus its current liabilities. The amount of money the company has available to invest, including investing in projects.
What is depreciation? What kind of depreciation are there?
Large assets lose value over time
Straight-line depreciation: same amount of depreciation is taken each year
Accelerated depreciation: there are 2 forms double declining balance and sum of the years’ digits
