Making capital investments H7

Question 1

What is erosion and synergy in regards to projects

Answer 1

Side effects of projects, the can either increase or decrease other projects cashflows. Increase in the case of synergy and decrease in the case of erosion

Question 2

If a cost benefits many projects how should it be accounted and included in the NPV

Answer 2

Accountants allocate it evenly across multiple projects but when making capital budgeting theese costs should only be included of they are direct incrimental costs of the project itself.

Question 3

Why must a budget income statement be prepared when comparing NPV.

Answer 3

Because the taxes are a percentage based on expected earnings

Question 4

What is net working capital

Answer 4

Difference between current liabilities and assets

Question 5

Firms usually assume projects are funded through equity

Answer 5

Yes, they usually take a lack of debt financing as a given.

Question 6

how is the real interest rate calculated

Answer 6

(1+nominal rate)/(1+inflation rate) -1

Question 7

What is an aproximate formula to calculate real interest rate

Answer 7

real = nominal - inflation …rate

Question 8

Should you discount with nominal or real cashflow and interest rates

Answer 8

it does not matter as long as you are consistent

Question 9

Give some alternative ways to calculate a projects operating cashflow

Answer 9

By the bottom up aproach EBIT + Depreciation - Taxes or by the top down approach Sales - costs - taxes

Question 10

What is the tax shield approach to calculate OCF

Answer 10

(Sales - Costs) * (1- tax-rate) + Depreciation * tax-rate

Question 11

When should the equivalent annual cost be applied to investment decisions

Answer 11

When comparing assets of different lifetimes. If the assets gnerate the same income but one is cheaper the cheaper one may have a higher net present value but may also require an earlyer replacement which distrots the conclusions of NPV