FINA 2303 Chapter 9

अब Quizwiz के साथ अपने होमवर्क और परीक्षाओं को एस करें!

Profitability Index Benefits

1) Closely related to NPV, generally leading to identical decisions. 2) Easy to understand and communicate 3) May be useful when available investment funds are limited

Internal Rate of Return Benefits

1) Closely related to NPV, often leading to identical decisions 2) Easy to understand and communicate

Average Accounting Return Benefits

1) Easy to Calculate 2) Needed Information will usually be available

Discounted Payback Period Benefits

1) Includes Time Value of Money 2) Easy to Understand 3) Does not accept negative estimated NPV investments 4) Biased towards liquidity

Profitability Index Shortcomings

1) May lead to incorrect decisions in comparisons of mutually exclusive investments

What defines the business of a firm?

Fixed Assets

Payback Period

The amount of time required for an investment to generate cash flows sufficient to recover its initial cost

Capital Budgeting Decision

The decision whether to invest in a factory or a new machine is a capital budgeting decision.

Net Present Value (NPV)

The difference between an investment's market value and its cost.

Internal Rate of Return (IRR)

The discount rate that makes the NPV of an investment zero

Discounted Payback Period

The length of time required for an investment's discounted cash flows to equal its initial cost

Multiple Rates of Return

The possibility that more than one discount rate will make the NPV of an investment zero

Profitability Index (PI)

The present value of an investment's future cash flows divided by its initial cost. Also called the benefit-cost ratio.

Discounted Cash Flow (DCF) Valuation

The process of valuing an investment by discounting its future cash flows

Discounted Payback Period Shortcomings

1) May reject positive NPV investments 2) Requires arbitrary cutoff point 3) Ignores cash flows beyond the cutoff date. 4) Biased against long-term projects, such as research and development, and new projects

Internal Rate of Return Shortcomings

1) May result in multiple answers or not deal with nonconventional cash flows. 2) May lead to incorrect decisions in comparisons of mutually exclusive investments

Average Accounting Return Shortcomings

1) Not a true rate of return; time value of money is ignored. 2) Uses an arbitrary benchmark cutoff rate 3) Based on accounting (book) values, not cash flows and market values.

Payback Period Benefits

1) Simple and Basic - Minor Decisions 2) Investments that pay back rapidly and has benefits extending beyond the cutoff period probably has a positive NPV 3) Payback Period rule tends to favour investments that free up cash for other uses quickly

Payback Period Shortcomings

1) Time Value of Money is completely ignored 2) Fails to consider any risk differences 3) Cutoff period is set arbitrarily 4) Biased against long-term projects, such as research and development and new projects

Net Present Value Profile

A graphical representation of the relationship between an investment's NPV and various discount rates.

Mutually Exclusive Investment Decisions

A situation in which taking one investment prevents the taking of another.

Profitability Index Rule

Accept if >1, Reject if <1

Net Present Value Rule

An investment should be accepted if the net present value is positive and rejected if it is negative.

Average Accounting Return (AAR)

An investment's average net income divided by its average book value.

Internal Rate of Return Rule

Based on the IRR rule, an investment is acceptable if the IRR exceeds the required return. It should be rejected otherwise.

Average Accounting Return Rule

Based on the average accounting return rule, a project is acceptable if its average accounting return exceeds a target average accounting return.

Discounted Payback Period Rule

Based on the discounted payback rule, an investment is acceptance if its discounted payback is less than some pre-specified number of years.

Payback Period Rule

Based on the payback rule, an investment is accepted or rejected if its calculated payback period is less than some pre-specified number of years


संबंधित स्टडी सेट्स

Lesson 3: The Protestant Reformation

View Set

7 habits of a highly effective teen

View Set

Ch 14 - Physical Activity, Fitness, and Cancer

View Set

Ch 18 - Feeding, Eating, and Elimination Disorders

View Set

Sherpath - Ch. 35: Spiritual Health

View Set

A view from the bridge GCSE English

View Set