Unit 4 Flashcards
1
Q
Net Present Value (for project)
A
Difference between MV and Cost (not final answer)
2
Q
Strengths of NPV
A
- Uses cash flows, which are better than earnings
- Other approaches ignore cash flows beyond a certain date
- fully incorporates the time value of money
3
Q
Payback period
A
- Average time a project starts making a profit
- Must be LESS than target period to ACCEPT
- Must be MORE than target period to REJECT
4
Q
Shortfalls of payback period
A
- TVM is ignored
- Biased against long term projects
- Requires arbitrary cutoff point
- Ignores CF beyond cutoff point
5
Q
Advantages of payback period
A
- Easy to understand
- Adjusts for uncertainty for later
- Biased towards liquidity
6
Q
Average Accounting Return
A
- Investment’s average net income by its average book value
- Must be MORE than target period to ACCEPT
- Must be LESS than target period to REJECT
7
Q
Advantages of AAR
A
- Easy to calculate
- Needed information is easily available
8
Q
Disadvantages of AAR
A
- Not a true rate of return (TVM ignored)
- Uses arbitrary benchmark cuttoff rate
- Based on book values and not CF and MV
9
Q
Depreciation and tax
A
Relevant cash flow = wear and tear tax shield = (Wear and tear × tax rate)
W&T is a non-cash expense, so only relevant because it affects taxes
10
Q
Recoupment and salvage value
A
If salvage value is different from tax value of asset, there’s a tax effect
Tax value = initial cost - accumulated W&T
After tax salvage = salvage - T(salvage - tax value)
11
Q
Qualitative factors
A
- Reliability of machine purchased
- Machine life span
- Suppliers reliability
- Environmental aspects
- Social aspects (job losses)