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19 Cards in this Set
- Front
- Back
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What is payback method?
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provides the length of time that it will take/ ignores the time value of money
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What is the Net Present Value method?
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is the best measure to use
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What is the profitability index?
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ratio of the present value benefits associated with the project to its costs. That is PI is the ratio of PV benefits to the initial cost
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What is the internal rate of return?
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rate of return a project must earn so that the present value of future cash flows just equals the projects initial outlay
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How is NPV related to discount rate?
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NPV is inversely related to the discount rate. That is as the discount rate increases NPV decreases
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What is capital rationing?
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Limitation on new capital spending
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What are 2 reasons for project ranking?
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1. Captial Rationing
2. Projects are mutally exclusive |
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What is the size disparity problem?
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case flows that are different sizes
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What is the time disparity problem?
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different reinvestment thingys between
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What are unequal lives?
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look up
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What would be the affect in a investment that is equal to 500,000 dollars
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Market value of the firms equity will go up by 500,000
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What is the point of the capital budgeting techniques?
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To find out what if a proposed project will generate enough revenue to make it feasible.
-Use of a number of techniques to see if the project will be acccpeted -used when a company needs to grow -does not incoroporate the risk associatied with the project |
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What is the payback method?
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ignores the time value of money
-uses non discounted cash flows -use the number of years it takes to add up the cash flows to equal the initial outlay |
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What is NPV simiplified?
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NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account.
-most used method -uses time value of money -is time consuming |
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What is the profitability index?
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Basically gives the same result as the NPV but in a ratio format
-Disadvantage- has to calculate long detailed cash flows -gives a relative value |
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What is the IRR in simplified method?
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-IRR is used to project expected income for more than one year
-used to rank projects -makes NPV equal to zero -pick project with highest IRR |
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What are mutually exclusive projects?
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-Mutually exclusive projects means that the acceptance of one project eliminates the others fromconsideration. Projects are said to be mutually exclusive when tehy cannot be undertaken simultaneously.Read more:
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What do you use to rank projects?
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-rank projects by IRR
-use Capital Rationing -and use mutaually excluvisce method |
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What are risk adjusted discount rates?
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- The discount rate calculated by adding a risk premium to the risk-free rate of return. This is used to calculate the rate of return on a risky investment.
-not realistic to use the same RADR for every project, use the one that goes with the amount of risk for that investment. |
