L5-8 Capital budgeting Flashcards
Name some types of investment apraisal methods
NPV, IRR, MIRR, PI and Payback are the most important to know but therere area also others
What does ex-ante vs ex-post mean
Before vs after
Can IRR be used when you have multiple switches in cashflow polarity
No
When should you use MIRR
When the reinvestment rate is different from the IRR
When evaluating investments should you use cashflows or accounting values
Cashflows
Sunk costs shall never be ignored
False
When analysing investments opertunity costs should be ignored
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.
Should the value of sideeffects be included when evaluating an investment
Yes, include erosions and synergies
When should allocated costs be counted to an investment projects npv
When it is an incrimental cost of the project
How should an asset be depreciated in sweden according to the general rule
According to the expected decline in value of the asset
Explain the standard depreciation rule in sweden
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)
Assets with short expected life (so-called three-year inventories) may
be treated as an expense when acquired.
True
How many ways are there to calculate operating cashflow
3
How do you calculate operating cahsflow with the bottom up aproach
Net-income - depreciation
How do you calculate operating cashflow with the top down aproach
sales - costs - taxes
How do you calculate operating cashflow using the tax shield aproach
(sales - costs) * (1 - tc) + depreciation * tc where tc is tax rate
How should you compare investments with different lifetimes which are a going concern and will continue with the business for a foreseeable future
through the Equivalent Annual Cost Method, I did not really understand the presentation but it is probably in the book somewhare around chapter 8
The economic life of an asset can never be longer than its technical life
True, when it becomes irrecoverable it becomes worthless
When is the optimal time of replacing an asset which is a gowing concern like f.ex a machine
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.
What type of analysis is when you find the value of an input variable that lets the project break even
Break even analysis
What is the difference between financial and accounting break even analysis
Depreciation distorts the true cost of aquiering an asset.
Accounting break even analysis looks at what is required for projects not to make a loss
True
Financial break even analysis looks at what is required for projects to have a positive NPV
True
An option to abandone a project increases its value
True as it limits potential losses
