Week 3 Flashcards
Extent Decisionsand Investment Decisions
Extent decisions
a decision regarding how much or how many of a product to produce
Marginal analysis
an examination of the additional benefits of an activity compared to the additional costs incurred by that same activity
Marginal cost equation
MC = TCQ+1 – TCQ
Marginal cost (MC) definition
Cost to make and sell one additional unit of output
Variable costs definition
Costs which change with the level of output
Total costs
Fixed costs + Variable costs
Variable costs equation
VC = MCxQ
Average costs definition
Per unit cost of production
Average cost equation
Average costs = total costs / quantity
Marginal revenue definition
Additional revenue gained from producing and selling one more unit
Profit maximisation =
MR = MC
Break-even quantity
Amount needed to sell to cover your costs
Break-even quantity equation
Q=FC/(P-MC)
Contribution margin
the amount of sales revenue that remains for a product or service after its variable costs are deducted.
Low discount rate
is an interest rate used in discounted cash flow (DCF) analysis that favors longer-term projects and a higher present value of future cash flows
High discount rate
money in the future is worth less than money today, and that there is greater risk associated with an investment
Net present value definition
the difference between the present value of cash inflows and the present value of cash outflows over a period of time.
NPV payoff over two period
Xt + 1 / 1+ r Xt + 1
Payoff over ? period
Xt + change in s and j = 1 1/ (1+r) j Xt + j
Present value equation
PV 1= C1/(1+r) 1
