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31 Cards in this Set
- Front
- Back
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The Opportunity Cost Rate
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the rate of return you could earn on an alternative investment of similar risk.
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The Opportunity Cost Rate assess...
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riskiness and is used for the discount of cash flows
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The Opportunity Cost Rate has to be of...
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similar risk
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Lump Sums are...
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Single values
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An Annuity is ...
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a series of equal payments at fixed intervals for a specific number of periods
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Uneven Cash Flows involve...
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uneven or non constant cash flows
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Why is it better to compound at a higher rate?
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because the more times you compound interest, the more money you will make
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Investment Opportunities affect the cost of money by affecting the ability to ...
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to pay for borrowed capital. (Ex: If a prospective business is highly profitable there will be a higher interest rate. If the business is not so profitable, then the borrower will have to pay the lender a lower one)
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Time Preferences affect the cost of money ...
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according to future need or current need of the money in the loan to be given out. (Ex: If a lender will need the loan money in the future, then the interest rate will be low, if they might need the money now the interest rate will be high)
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Risk affects the costs of money ...
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by categorizing a business venture being of high risk, of which the loan would be in high interest, or the business venture being of low risk, of which having a low interest rate.
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Inflation affects the value of money ...
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because the higher the expected rate of inflation, the higher the interest rate demand will be (Debt suppliers must demand higher interest rates when inflation is high to offset the resulting loss of purchasing power).
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Types of debt:
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Term Loan, Bond, Mortgage Bond, Senior Debt/ Junior Debt, Debenture, Subordinate Debenture, Municipal bond
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Term Loan is a
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long-term debt of level payments for a definite period of time from a bank
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Bond is a...
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a long-term debt, issued by a business or the government, that is obliged to pay interest to the lender
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Mortgage Bond is a...
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secured bond related to real property as collateral
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Senior Debt/Junior Debt is the ...
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difference between mortgage bonds: 1st mortgage = Jr, 2nd Mortgage = Sr.
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Debenture is a ...
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unsecured bond that has no lien against specific property as a security for the obligation
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Subordinate Debenture is a ...
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debt security that in the event of bankruptcy has a claim on assets that is below other debt
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Municipal bond is a ...
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tax-exempt bond issued by a governmental entity, such as a healthcare financing authority, for non-profits
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What are the 3 factors that primarily influence the general level of interest rates?
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The Federal Reserve policy, the Federal Budgetary Policy, the Level of Economic Activity, and Time Preference
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Capital budgeting
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is the process of analyzing potential expenditures on fixed assets and deciding whether the firm should undertake those investments.
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Capital budgeting decisions are so important to businesses because...
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they affect the business for an extended period of time. It helps to prioritize scarce resources and it is important for future profit but for past net profit.
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What are the Cash Flow Estimation concepts?
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Incremental cash flows, Sunk Costs, Opportunity cost, Net working capital, Strategic Value, Inflation effects
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Incremental cash flow
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A cash flow that arises solely from a project that is being evaluated and hence should be included in the project analysis.
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Cash Flow versus Accounting Income:
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Accounting income statements define revenues and costs in terms that do not necessarily reflect the actual movement of cash. In capital investment decisions, the decision must be based on the actual dollars that flow into and out of business that are direct results of a project being evaluated. A firm’s true profitability depends more on its cash flows than on income as reported in accordance with GAAP.
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Sunk Cost:
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a cost that has already occurred or is irrevocably committed. Snuck costs are non-incremental to project analyzes and should not be included.
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Opportunity cost:
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The cost associated with the loss of potential gain from other alternatives when one alternative is chosen.
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Net working capital:
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A liquidity measure equal to current assets minus current liabilities.
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Strategic Value:
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is a major source of hidden value that stems from future investment opportunities that can be undertaken only if the project currently under construction is accepted.
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Inflation effects:
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have a considerable influence on a project’s profitability, it must be considered in any sound capital budgeting. It also must be built into the projects estimated cash flows.
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Categories of Project Classifications are ... (6)
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Mandatory Replacement, Discretionary Replacement, Expansion of Existing Services or Markets, Expansion into New Services or Markets, Environmental Projects, and Other.
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