Long-term Decision Making

Question 1

Features of Payback…

Answer 1

It is a simple measure of risk.

Is it NOT an absolute measure.

Question 2

Compounding…

Answer 2

Calculated the future sum invested today for a number of years.
V = P(1 + r)^n.

Question 3

Discounting…

Answer 3

Calculates the present value of a sum received in the future.
P = (V) / [(1 + r)^n].

Question 4

To calculate a Non-Annual interest rate…

Answer 4

Non annual rate = (1 + r)^[n/12] - 1.

Question 5

Features of NPV…

Answer 5

It considers the time value of money.
It is an absolute measure.
It aims to maximise shareholder wealth.

Question 6

An Annuity…

Answer 6

Is a constant annual cash flow for a number of years.

P = Annual cash flow x [1 - (1 + r)^-n] / (r).

Question 7

A Perpetuity…

Answer 7

Is a constant annual cash flow continuing indefinitely.

P = (cash flow) / (r).

Question 8

The perpetuity method for calculating IRR =

Answer 8

(Cash Flow ) / (Initial Investment) x 100.

Question 9

Features of IRR…

Answer 9

It considers the time value of money.
It is a relative measure.
It aims to maximise shareholder wealth.