Long Term Decision

Question 1

Net Present Value

Answer 1

The time value of money.
Future cash flow x present value factor (discount factor).
Y1 - 100 x .909
Y2 - 150 x .826

Question 2

Net Present Value calculation

Answer 2

NPV (outflow) - NPV (Income)
+ Accept
- Reject

Question 3

Advantages of NPV

Answer 3

Considers value of money
Used cash flow rather than profits
Considers whole life of project
Provides monetary value for return from an investment

Question 4

Disadvantages of NPV

Answer 4

Future predictions inaccurate
Discounted cash flow difficult for a non financial manager
Difficult to decide on discount rate

Question 5

Net Present Cost

Answer 5

Decide which investment is cheaper to run.

Question 6

Internal rate of return (IRR)

Answer 6

The rate required for the project to break-even.

Question 7

Calculation of the (IRR)

Answer 7

Low rate interest +
NPV (LRI) /
NPV (LRI)-NPV (HRI) x
HRI - LRI

Question 8

Advantages of IRR

Answer 8

Considers time value of money
Uses cash flows rather than profits
Considers life of project
Provides a % return easier for non-financial managers
Decided without desired cost of capital

Question 9

Disadvantages of IRR

Answer 9

Future predictions inaccurate

Does not provide a monetary value on return from investment

Question 10

What is the payback period?

Answer 10

Time taken to recover initial money invested.