Investments

Question 1

Replacement investments

Answer 1

Aimed at preserving production capacity

Question 2

Expansion investments

Answer 2

Aimed at increasing production capacity

Question 3

Free cash flows (Investment project)

Answer 3

Cash inflows generated by sales minus cash outflows related to the purchase and use of production resources

Cash inflows and cash outflows related to finance are not part of free cash flow

Question 4

Assessment of investment project

Answer 4

Based on period profit: accounting rate of return
Based on free cash flow: payback period
Considering time value of money: Internal rate of return, net present value

Question 5

Payback period

Answer 5

Period it takes for the invested amount to be returned through the free cash flows

Question 6

Financial arithmetic

Answer 6

Simple interest: interest calculated on the initial sum only
Compound interest: Interest on the initial sum + accrued interest

Question 7

Influence of uncertainty

Answer 7

Involves future values: Amount and time of reception of cash flows are unknown
- Sensitivity analysis
- Risk premium

Question 8

Factors affecting the sensitivity of NPV calculations

Answer 8

• Annual sales volume
• Project life
• Initial outlay
• Operating costs
• Financing cost
• Sales price

Question 9

Interest rate 10-15%

Answer 9

Risk free rate 2,55%
Economic risk 9%
Business risk 3-5%

Question 10

Profitability

Answer 10

Ratio of profit to invested capital
For business: ROA
For equity providers: ROE

Question 11

Liquidity

Answer 11

Dynamic -> Period -> Cash flow forecast
Static -> Moment -> Balance sheet

Question 12

Break-even analysis assumptions

Answer 12

1. Linearity of returns line and costs line
2. One type of product
3. Production (volume) = sales volume