REVIEW TEST 2 Flashcards
Agency Problems
a manager who is principally and agent for stakeholders, acts in his own interests instead of maximising market value
- claiming high expenses
- avert risk to secure own position
ways to combat agency problems
- compensation plans
- board of directors
- takeovers
- monitoring
Payback Period
time until cash flows recover the initial investment of the project
- no account of time value of money
payback rule
specifies that a project be accepted if its payback period is less than the specified cut off period
ROI
Return on Investment
- the ratio of cashflows (gained) and initial investment
- no account of time value of money or size of the project
Net Present Value Rule
- accept all projects that are worth more than they cost (positive net present value)
Profitability index
relationship between NPV and initial investment
IRR
Internal Rate of Return
- discount rate at which NPV equals 0
Costing Methods
- process costing
- job-order costing
- activity-based costing
process costing
assigns average costs to each unit of production
job-order costing
differentiates the direct costs per job, to see how profitable each job is
activity-based costing
calculates what percentage of overhead should be assigned to a job
depreciation
the expense part of an expenditure that falls within the period
3 phases of cost estimation
- the ‘decision’ phase
- the ‘validation’ phase
- the ‘execution’ phase
decision phase
work of cost estimator to quickly assist decision maker in estimating cost of various concepts and estimating influence of potential technical uncertainties to the cost
- focus on product
validation phase
make sure we will accomplish the project for the cost which has been decided upon
- focus shifts to activities
execution phase
periodically, from the information which is collected, decide if the project will remain inside the allocated budget
External Factors on Productivity
- market conditions
- environmental conditions
Internal Factors on Productivity
- work conditions
- management conditions
What can we do with risk?
- accept
- minimise/mitigate
- avoid
- insure (pass on to 3rd party)
Fundamental steps of risk management process
- identification
- analysis
- response
Risk Management Method
- identify, characterise threats
- assess vulnerability of critical assets to specific threats
- determine the risk
- identify ways to reduce those risks
- prioritise risk reduction measures based on a strategy
Risk Mitigation Handling Options
1, Avoid
- Control
- Transfer
- Accept
purpose of income statement
shows whether or not a company’s business is profitable
