S2- Investment decisions

Question 1

What is the primary objective of investing in real assets?

Answer 1

Profitability

Question 2

Valuation of assets has a projection:

Answer 2

On the future

Question 3

Whats the discounted cash flow formula?

Answer 3

∑Ct/(1+rt)^t
Ct = cash flow at t
rt = rate of return

Question 4

What’s the opportunity cost of capital

Answer 4

The return foregone from a certain activity instead of investing in an alternative with the same risk level

Question 5

NPV =

Answer 5

PV - cost of investment

Question 6

What are other measures of return on investment?

Answer 6

• Book rate of return
• Payback period
• Payback rule
• IRR

Question 7

What is the formula for Book rate of return (BRR)

Answer 7

Prospective book income/Prospective book assets

Question 8

What is IRR?

Answer 8

Internal rate of return

Question 9

What is the payback period method?

Answer 9

Measures number of years it takes for cumulative cash flow from the project to equal the initial investment

Question 10

What is the payback rule

Answer 10

A project should be accepted if its payback period is less than some specific cut off period

Question 11

What is the rate of return

Answer 11

The ratio of the projects profitability

Question 12

What is the rate of return rule?

Answer 12

Accept investments that offer rates of return in excess of their opportunity costs of capital

Question 13

What is the formula for rate of return?

Answer 13

C-Q/Q

Question 14

In the RR formula, what is C and Q?

Answer 14

C = cash flow 
Q = Cost of investment