L5-8 Capital budgeting

Question 1

Name some types of investment apraisal methods

Answer 1

NPV, IRR, MIRR, PI and Payback are the most important to know but therere area also others

Question 2

What does ex-ante vs ex-post mean

Answer 2

Before vs after

Question 3

Can IRR be used when you have multiple switches in cashflow polarity

Answer 3

No

Question 4

When should you use MIRR

Answer 4

When the reinvestment rate is different from the IRR

Question 5

When evaluating investments should you use cashflows or accounting values

Answer 5

Cashflows

Question 6

Sunk costs shall never be ignored

Answer 6

False

Question 7

When analysing investments opertunity costs should be ignored

Answer 7

Yes, they have nothing to do with the actual value of the investment and to calculate opertunity cost you must first calculate the value of the next best alternative which means you have to already have calculated the npv of all investments and select the second best to know the opertunity cost.

Question 8

Should the value of sideeffects be included when evaluating an investment

Answer 8

Yes, include erosions and synergies

Question 9

When should allocated costs be counted to an investment projects npv

Answer 9

When it is an incrimental cost of the project

Question 10

How should an asset be depreciated in sweden according to the general rule

Answer 10

According to the expected decline in value of the asset

Question 11

Explain the standard depreciation rule in sweden

Answer 11

Certain production assets may be depreciated in
accordance with either of two standard rules:
- Main Rule: 30% of the opening book-value (the 30-rule)
- Supplementary Rule: 20% of the acquisition value
(closing book value: 80% Y1; 60% Y2 etc) (the 20-rule)

Question 12

Assets with short expected life (so-called three-year inventories) may
be treated as an expense when acquired.

Answer 12

True

Question 13

How many ways are there to calculate operating cashflow

Answer 13

3

Question 14

How do you calculate operating cahsflow with the bottom up aproach

Answer 14

Net-income - depreciation

Question 15

How do you calculate operating cashflow with the top down aproach

Answer 15

sales - costs - taxes

Question 16

How do you calculate operating cashflow using the tax shield aproach

Answer 16

(sales - costs) * (1 - tc) + depreciation * tc where tc is tax rate

Question 17

How should you compare investments with different lifetimes which are a going concern and will continue with the business for a foreseeable future

Answer 17

through the Equivalent Annual Cost Method, I did not really understand the presentation but it is probably in the book somewhare around chapter 8

Question 18

The economic life of an asset can never be longer than its technical life

Answer 18

True, when it becomes irrecoverable it becomes worthless

Question 19

When is the optimal time of replacing an asset which is a gowing concern like f.ex a machine

Answer 19

When the cost of keeping the asset is equal to the equal annual cost of a new machine, or if we assume the machine earns a profit when the economic profit of keeping the old asset becomes less than equal to the profits of getting a new machine.

Question 20

What type of analysis is when you find the value of an input variable that lets the project break even

Answer 20

Break even analysis

Question 21

What is the difference between financial and accounting break even analysis

Answer 21

Depreciation distorts the true cost of aquiering an asset.

Question 22

Accounting break even analysis looks at what is required for projects not to make a loss

Answer 22

True

Question 23

Financial break even analysis looks at what is required for projects to have a positive NPV

Answer 23

True

Question 24

An option to abandone a project increases its value

Answer 24

True as it limits potential losses