small business chpt 25-26

You have deposited $1,000 in a one-year CD at the bank. The CD pays 10% interest. How much money will you have in the CD at the end of one year?

$1,100. The interest earned will be $1,000 x 10% = $1,000 x .010 = $100. This $100 is added to the initial $1,000 for a total of $1,100.

You have invested $1,000 in a savings account paying 10% interest. What is the value of this savings account in two years assuming no withdrawals and no bank fees?

$1,210. The first year, $100 of interest was earned on the $1,000 deposit. During second year, $100 of interest was earned on the $1,000 deposit and $10 of interest was earned on the interest from the prior year, for a total balance of $1,210.

. A venture capitalist provided the $25,000,000 Able Technologies needed to create a new heart rate monitor. As a result of the new heart monitorís introduction, the annual profits of Able Technologies increased from $10,000,000 to $14,000,000 during the first year. What is the investment cost?

$25,000,000.

A venture capitalist provided the $50,000,000 Able Technologies needed to create a new heart rate monitor. As a result of the new heart monitorís introduction, the annual profits of Able Technologies increased from $20,000,000 to $28,000,000 during the first year. If the venture capitalist is to receive 50 percent of the incremental profits, how much will the venture capitalist receive in the first year?

$4,000,000. Existing profits are $10,000,000. With the investment, the companyís profits will increase to $14,000,000. The incremental profits are the difference between the current profits and the profits after the investment, $8,000,000 in this example. If the venture capitalist received 50% of the incremental profits, the venture capitalist would receive $4,000,000.

You keep $1,000 under your mattress. If the inflation rate was 5% last year, how much purchasing power did you lose last year?

$50. If prices increase 5% during the year, $1,000 under a mattress will lose 5% of its purchasing power, in this example, $1,000 x 5% = $50.

A venture capitalist provided the $50,000,000 Able Technologies needed to create a new heart rate monitor. As a result of the new heart monitorís introduction, the annual profits of Able Technologies increased from $20,000,000 to $28,000,000 during the first year. What are the incremental profits from the heart monitor during the first year?

$8,000,000. Existing profits are $10,000,000. With the investment, the companyís profits will increase to $14,000,000. The incremental profits are the difference between the current profits and the profits after the investment, $8,000,000 in this example.

. Acme Industries spent $800 to purchase a new embroidery machine that is expected to generate an additional $300 in profits in each of the next three years. What is the ROI?

12.5%. Return on investment equals (total incremental profits received minus amount invested) divided by amount invested. The total incremental profits received in this example is $300 x 3 = $900. The return on investment equals ($900 - $800) / $800 = $100 / $800 = .125 = 12.5%.

Investors in RFP Consultants have invested $1,000,000 in expectation of a 20% return, and the bank has loaned RFP $1,000,000 at an interest rate of 10%. What is their cost of capital?

15%. The cost of the equity is $1,000,000 x 0.20 = $200,000. The cost of debt is $1,000,000 x 0.10 = $100,000. The cost of capital is ($200,000 + $100,000) / ($1,000,000 + $1,000,000) = $300,000 / $2,000,000 = 15%.

If average revenue per unit is expected to be $50 and cost of goods sold are expected to be $34 per unit, how many units must be sold to breakeven on investment if the investment cost is $480,000?

30,000. Unit contribution margin equals revenue per unit minus variable cost per unit, in this example, $50 - $34 = $16. Breakeven on investment equals investment amount divided by unit contribution margin, in this example, $480,000 / $16 = 30,000.

Tommyís Taco Truck spent $1,200 to add a new stove to one of their taco trucks. If the each taco sale contributes $1.50 to profits, how many tacos will Tommy need to sell to breakeven on the investment in the new stove?

800. Breakeven on investment equals investment amount divided by unit contribution margin, in this example, $1,200 / $1.25 = 800.

Which of the following will generate the largest ROI?

A $60,000 investment that provides annual cash flows of $22,000 in each of years 1 through 3. A $60,000 investment that provides a single cash flow of $66,000 at the end of year 1. A $60,000 investment that provides a single cash flow of $66,000 at the end of year 3. Each of these scenarios will provide the same ROI. Each of these scenarios will have an ROI of 10%

cost-benefit analysis

Allows business owners, individuals, and investors to examine the returns from alternative investment decisions and identify the alternative that allows time and money to be spent most effectively.

Internal rate of return answers which of the following questions?

At what rate will the net present value of all future cash flows be equal to the initial investment? The internal rate of return calculation solves for the discount rate at which the net present value of all future cash flows equal the value of the initial investment.

Acme Industries spent $800 to purchase a new embroidery machine that is expected to generate an additional $300 in profits in each of the next five years. What is the payback period?

Between 2 and 3 years. Payback period equals the amount invested divided by annual profits received, in this example, $800 / $300 = 2.66. The payback period is 2.66 years.

Which of the following measures the number of units that must be sold to cover the cost of an investment?

Breakeven on investment. Breakeven on investment measures the number of units that must be sold to cover the cost of an investment.

Which cost benefit tool measures the number of units that must be sold to cover the costs of the investment?

Breakeven on investment. Return on investment measures the time required to recover the cost of the investment.

Which of the following is not a synonym for stream of profits?

Cash flow from the investment Benefits from the investment Incremental profits from the investment. A stream of profits is also known as benefits or net benefits from an investment, cash flow from an investment or incremental profits from an investment.

When a business owner is faced with a decision on which of three new products to introduce, which of following would be the most useful in making the decision?

Cost benefit analysis. Cost benefit analysis allows a business owner to examine the returns from alternative investment decisions.

Both ROI and payback period account for the time value of money.

False. A criticism of ROI and payback period is that they ignore the timing of the profits and ignore the time value of money.

. Net present value will tell you the return on an investment but not the dollar amount.

False. The internal rate of return will tell you the return on an investment but not the dollar amount. The net present value will tell you the dollar amount of the return.

According to the time value of money, a dollar today is worth the same as a dollar to be received next week.

False. The time value of money is the concept that money received sooner is worth more than that same amount of money received later.

Which of the following is the best definition of future value?

Future value is how much a given amount of money will be worth at a future date.Future value is how much a given amount of money will be worth at a future date.

When discussing time value of money, present value answers which of the following questions?

How much is that money I am to receive in the future worth today?Present value answers the question: how much is that money I am to receive in the future worth today?

Which of the following best defines the concept of the time value of money?

Money received sooner is worth more than money received later. The time value of money is the concept that money received sooner is worth more than that same amount of money received later.

Which of the following is the best definition of net present value?

Net present value is the current value of money to be received in the future less the amount invested.

capital expenditures

Non-recurring investments made by businesses to create, acquire, or improve the fixed or intangible assets used in the operation of the business.

. Which cost benefit tool measures the time required to recover the cost of the investment?

Payback period. The payback period measures the time required to recover the cost of an investment.

. Which of the following is the best definition of present value?

Present value is how much a given amount of money to be received in the future is worth today.

Which cost benefit tool measures the percentage difference between a stream of profits and the amount invested?

ROI. Return on investment, ROI, measures the percentage difference between a stream of profits and the amount invested.

Which of the following measures the percentage difference between a stream of profits from an investment and the amount invested?

Return on investment. Return on investment measures the percentage between a stream of profits from an investment and the amount invested.

investment amount

The cost of an investment or capital expenditure.

Which of the following best defines the discount rate?

The discount rate is the minimum rate of return an investor requires on his or her investments.

Which of the following best defines the time value of money concept of interest rate risk?

The longer the repayment term, the greater the risk of lost reinvestment interest. Interest rate risk is the concept that the longer the repayment term, the greater the risk of lost reinvestment interest.

Which of the following best defines the time value of money concept of inflation risk?

The longer the repayment term, the less certain the purchasing power of the money repaid. Inflation risk is the concept that the longer the repayment term, the less certain the purchasing power of the money repaid.

Which of the following best defines the time value of money concept of repayment risk?

The longer the repayment term, the less certain the repayment. Repayment risk is the concept that the longer the repayment term, the less certain the repayment.

stream of profits

The profits, cash flows, or benefits generated by an investment that accrue to the business or to the investor.

One of the criticism of ROI is that it does not account for differences in the dollar amount of the profits received from two different investment alternatives.

True. ROI measures only the percentage difference, not the dollar difference.

The internal rate of return will tell you the return on an investment but not the dollar amount.

True. The internal rate of return will tell you the return on an investment but not the dollar amount. The net present value will tell you the dollar amount of the return.

When discussing time value of money, net present value answers which of the following questions?

What is the current value of the net profit I am expected to make on this investment?

According to tax rules, assets created or acquired via capital expenditures _____________.

are added to the balance sheet and depreciated. Assets acquired via a capital expenditure must be added to the balance sheet and depreciated.

Capital expenditures are used to purchase ______________.

assets that generate revenue. Capital expenditures are non-recurring investments made to create, acquire, or improve the fixed or intangible assets used in the operation of the business.

Cost benefit tools include all of the following except _____________.

breakeven volume. Cost benefit tools include return on investment, payback period and breakeven on investment.

. Interest earned on interest is known as _______________.

compound interest. Interest earned on interest is known as compound interest.

When performing a future value calculation, the selection of a higher interest rate will result in a ____________.

higher future value. A higher interest rate will result in higher future value.

Business owners are faced with constant choices about _________________.

how to spend their time and money. Business owners are faced with constant choices about how to spend their time and money.

Discount rates are also known as ____________.

hurdle rates. Discount rates are also known as hurdle rates and required rates of return.

When discussing time value of money, lost interest refers to _______________.

interest that could be earned if the money were available for investment today. Lost interest is the interest that could be earned if the money were available for investment today.

When determining the costs and benefits of an investment, the cost of the investment might be referred to as ____________.

investment amount. Investment amount is a synonym for cost of investment.

The cost of money can be determined using _____________.

market rates from financial publications a businessís cost of capital the interest rates banks charge on loans. he cost of money can be determined using a businessís cost of capital, the rate at which a bank will lend money, and/or current financial market interest rates and yields from financial publications.

return on investment (ROI)

measures the percentage difference between the stream of profits from an investment and the amount invested.

When determining the costs and benefits of an investment, the concept of incremental profits refers to the ________________.

profits above and beyond the current profits without the investment. The concept of incremental profits refers to the profits above and beyond the current profits without the investment.

When a business makes an investment, it is expecting a ______________ in return.

stream of profits. When a business makes an investment, it is expecting a stream of profits in return.

Once the present value of a stream of cash flows is known, net present value can be determined by ______________.

subtracting the investment amount. Net present value is the current value of money to be received in the future less the amount invested.

Which of the following is not an example of a capital expenditure?

the cost of the company picnic. The cost of the company picnic is not a capital expenditure as is does not create, acquire, or improve the assets used in the operation of the business.

net benefits

the difference between the total profits/total benefits and the amount invested.

. When determining a discount rate, a business owner should consider all of the following except ________.

the internal rate of return. The discount rate should be based on the cost of the money being invested, the risk of the investment and how quickly or slowly the benefits of the investment are received.

incremental profits

the profits generated by the investment above and beyond the profits already being earned by the business.