IEECONO (Quiz 2) Flashcards
EOY
End of Year (Financial Year)
P
Original Installed Cost of the depreciable property
N (in depreciation)
Depreciable Life of the Asset
F
Salvage Value of the asset after its useful life of N years
dn
Depreciation charge for year n and is dependent on the method used
Dn
Accumulated Depreciation charges from the acquisition time to the end of year n
BV
Book Value of the asset at the end of year n
When getting P, what should be included as part of the cost?
Costs of the assets (shipping, insurance, etc). Operating expenses are not part.
Straight Line Method
dn = (P-F)/N
Dn = n(dn)
BVn = P-Dn
Declining Balance Method (DB)
k = 1-sqrt(F/P) ; index = n
BVn = P(1-k)^n
dn = kBV(sub n-1) = kP(1-k)^n-1
Dn = P - BVn
Sum of the Years Digit Method (SYD)
dn = (P-F)(2(N-n+1)/N(N+1))
Dn = (P-F) ((2N-n+1)n / N(N+1))
BVn = P - Dn
(Note: It is easier in excel)
Sinking Fund Method
dn = (P-F)(i / (1+i)^N - 1)
Dn = dn ((1+i)^n - 1 / i)
BVn = I - Dn
Service Output Method
d = (P-F) / N
BVn = I - Dn
Double Declining Balance Method
Same formulas as Declining Balance
k = 2/N
Investment Decision Criteria for Payback Method
Accept projects with a a payback period below the policy payback period
Investment Decision Criteria for Discounted Payback Method
Accept projects with a a payback period below the policy payback period
In Application of Money Time Relationships, outflows are _________ .
Negative
In Application of Money Time Relationships, inflows are _________ .
Positive
Investment Decision Criteria for NPV Method (PW, FW, AW)
Accept projects with an NPV >= 0
Formula for NPV (Net Present Value)
Inflows vs Outflows
PV of Inflows+ PV of Salvage Value - Investment
(Same concept applies for NFV, NAV)
If NPV = 0, the IRR is ________ to the MARR
Equal
What is the downside when using the IRR method?
It favors smaller projects (Always chooses a higher rate of return despite the investment being smaller compared to the other)
Formula for ERRR (Explicit Reinvestment Rate of Return)
ERRR = (R-D)-(I-S)(i/(1+i)^N - 1) / I
i = effective interest rate or MARR
R = Annual receipts
D = annual disbursements
I = Investment
S = Salvage Value
Suppose that we conduct an incremental analysis of Alpha vs Beta, what is your basis for subtracting? (is it B-A or A-B)
It depends on which would result in the investment being negative
What is the procedure for ERR
- Get the PV of all net outflows (-)
- Get the FV of all net inflows (+)
- Apply formula 4 which is
(FV/PV)^(1/N) - 1
