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83 terms

Finance Exam 2

STUDY
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NPV
The difference between an investments market value and its costs is refereed to as ?
Discounted Cash Flow Valuation
The process of valuing an investment by discounting its future cash flows is called ?
Accepted , Rejected
An investment should be _________ if the NPV is positive, and _________ if the NPV is negative.
Payback
Based on the _________ rule, an investment is acceptable if its calculated payback period is less than some pre-specified number of years.
Discounted Payback
The _______ _________ period is the length of time until the sum of the discounted cash flows is equal to the initial investment.
Discounted Payback
Based on the _________ __________ rule, an investment is acceptable if its discounted payback is less than some prespecified number of years.
Average Accounting Return (AAR)
An investment's average net income divided by its average book value is referred to as the ?
Acceptable
Based on the Average Accounting Return rule, a project is ________ if its average accounting return exceeds a target average accounting return.
Internal rate of return (IRR)
The most important alternative to NPV is the ?
IRR
The discount rate that makes the NPV of an investment zero is the ?
acceptable
Based on the IRR rule, an investment is __________ if the IRR exceeds the required return.
rejected
An investment should be _________ if the IRR does does not exceed the required return.
Multiple rates of return
The possibility that more than one discount rate will make the NPV of an investment zero is referred to as ?
Mutually Exclusive investment decisions
A situation in which taking one investment prevents the taking of another is called?
Profitability Index
The present value of an investment's future cash flows divided by its initial costs is referred to as the ?
Profitability Index
The benefit-cost ratio is also referred to as the ?
not required
Modifying the cash flows is ________ _________ to compute an internal rate of return when a project's cash flows are conventional.
greater , less
When evaluating a project using the profitability index, a number ______ than one indicates a positive NPV, and a number ________ than one indicates a negative NPV.
Incremental cash flows
The difference between a firm's future cash flows with a project and those without the project are referred to as ?
Incremental cash flows
The _______ _______ _______ for project evaluation consist of any and all changes in the firm's future cash flows that are a direct consequence of taking the project.
Stand-alone
Once we identify the effect of undertaking the proposed project on the firm's cash flows, we need focus only on the project's resulting incremental cash flows. This is called the ______-________ principle.
Stand-alone principle
This is the assumption that evaluation of a project may be based on the project's incremental cash flows.
not relevant
Any cash flow that exists regardless of whether or not a project is undertaken is ______ _______.
sunk cost
A _____ _______ is a cost that has already been incurred and cannont be removed and therefore should not be considered in an investment decesion.
Opportunity Cost
An ______ _______ is the most valuable alternative that is given up if a particular investment is undertaken.
erosion
The cash flows of a new project that come at the expense of a firm's existing projects is referred to as _________.
erosion
_______ is relevant only when the sales would not otherwise be lost.
aftertax
Whenever we write incremental cash flows, we mean ______ incremental cash flows.
Pro-forma , projected
The first thing you need to begin evaluating a proposed investment is a set of _________, or ________ financial statements.
Project Operating Cash Flow -
Project Change in NWC -
Project Capital Spending
Project Cash Flow = ______ - ______ - _______
OCF
EBIT + Depreciation - Taxes = _____
1. EBIT + Dep - Taxes
2. Top-Down approach
3. Tax shield approach
4. Bottom-up approach
What are the 4 different ways to calculate OCF?
Top Down approach
Which OCF approach is this?
OCF = Revenue - Total Costs - Taxes
Bottom up approach
Which OCF approach is this?
OCF = Net Income + Dep + Interest
Tax shield approach
Which OCF approach is favored in Microeconomics?
Tax Shield approach
Which OCF approach is this?
OCF = (revenue - total costs)(1-t) + t(depreciation)
Assets
OCF represents the profits generated by ________.
outflow
An increase in NWC is a cash ________.
Sensitivity of NPV to a variable (elasticity)
What is the formula below?
% change in NPV / % change in variable
Forecasting Risk
The possibility that we will make a bad decision because of errors in the projected cash flows is called?
Scenario analysis
The basic form of what-if analysis is called _____ _______.
Scenario analysis
______ _______ is the determination of what happens to NPV estimates when we ask what-if questions.
Sensitivity analysis
_______ ________ is a variation on scenario analysis that is useful in pinpointing the areas where forecasting risk is especially severe.
Simulation analysis
_____ ______ is a combination of scenario and sensitivity analysis.
Break-even
______ ______ analysis is a popular and commonly used tool for analyzing the relationship between sales volume and profitability.
Variable
_______ costs are costs that change when the quantity of output changes.
Fixed
_______ costs are costs that do not change when the quantity of output changes during a particular time period.
Marginal or Incremental
_______ or ________ cost is the change in cost that occurs when there is a small change in output.
Marginal or Incremental
_______ or _______ revenue is the change in revenue that occurs when there is a small change in output.
Accounting
The most widely used measure of break-even analysis is the _________ method.
accounting
The _______ break-even point is simply the sales level that results in a zero project net income.
Cash
______ break-even is the sales level that results in a zero OCF.
Financial
________ break-even is the sales level that results in a zero NPV.
Operating leverage
______ _______ is the degree to which a project of firm is committed to fixed production costs.
Capital intensive
Projects with a relatively heavy investment in plant and equipment will have a relatively high degree of operating leverage. Such projects are said to be _____ _______.
Degree of Operating Leverage (DOL)
The percentage change in operating cash flow relative to the percentage change in quantity sold is referred to as ?
Capital rationing
______ ______ is the situation that exists if a firm has a positive NPV projects but cannot find the necessary financing.
Soft rationing
______ _______ is the situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting.
Hard rationing
______ _______ is the situation that occurs when a business cannot raise financing for a project under any circumstances.
Net Income
In accounting break-even, _____ _____ equals zero.
OCF
In cash break-even, _______ equals zero.
NPV
In financial break-even, ______ equals zero.
Equivalent annual cost
The annual annuity stream of payments that has the same precent value as a project's costs is referred to as ?
Equivalent annuan cost
______ ______ ______ is the present value of a project's costs calculated on an annual basis.
depreciated
Land cannot be _______.
zero
The NPVis equal to ______ if a project is operating at its financial break even point.
capital intensive
A _____ ______ is one that has a relatively high degree of operating leverage.
sensitivity
________ analysis is an investigation of what happens to NPV when only one variable is changed.
Net Income
_____ ______ must equal zero at the accounting break-even point.
OCF
______ must equal zero at the cash break even point.
NPV
______ must equal zero at the financial break even point.
low
A firm with low operating leverage will have ____ fixed costs compared to a firm with high operating leverage.
Stand alone principle
The analysis of a project based on the project's relevant cash flows is referred to as the ?
A zero NPV for the project
A bid price of a project is based on what?
A rate equal to the required return
What rate of return will a firm earn if it accepts a project with a sales price per unit set equal to the bid price?
be replaced when they wear out
The EAC of two machines assumes the machines will?
discounted payback period
The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the?
IRR
The discount rate which causes the NPV of a project to equal zero is the ?
depreciation tax shield
The amount of tax that is saved because of the depreciation expense is referred to as the ?
sensitivity
An analysis of the change in a project's NPV when a single variable is changed is called _______ analysis.
Interest
The operating cash flow for a project should exclude ?
I, III, and IV only
Which of the following statements are identified with financial break-even point?
I. The present value of the cash inflows exactly offsets the initial cash outflow.
II. The payback period is equal to the life of the project.
III. The NPV is zero.
IV. The discounted payback period equals the life of the project.
$5
Jill's Jello produces 30,000 units and sells those units for $10 each. The company spends $60,000 on rent and machinery, and $5 per unit in materials and labor. The marginal profit for the firm is: