Basic Terms - Final

Question 1

The acquisition of long term assets involves…

Answer 1

capital budgeting

Question 2

Net Present Value

Answer 2

dollar measure of an investment’s effect on the value of the company’s assets

Question 3

Future Cash Flows can also be known as

Answer 3

incremental cash flows

Question 4

The calculation of NPV

Answer 4

does not depend on the source of financing

Question 5

What is a main drawback to NPV analysis?

Answer 5

NPV misses the value of options that managers have to expand, scale back, or abandon investment projects once they are undertaken

Question 6

NPV is dependent on…

Answer 6

the discount rate

Question 7

As discount rate increases what happens to NPV?

Answer 7

it decreases

Question 8

When initial inflow is followed by outlows

Answer 8

you would prefer a low IRR

Question 9

Payback Period

Answer 9

the time is takes to get our money back

Question 10

Payback and cash flows

Answer 10

payback does not discount cash flows
ignore it!

Question 11

Payback and investing

Answer 11

Payback does not correspond to a measure of an investments effect on the value of the firm

Question 12

2 tasks in evaluating investment proposals

Answer 12

measure FCF
determining the appropriate discount rate

Question 13

Free Cash Flow =

Answer 13

Operating Cash Flow
- Changes in net working capital
- capital spending

Question 14

Depreciation

Answer 14

is not a part of operating cash flow

Question 15

Net working capital

Answer 15

current assets - current liabilities

inventory + receivables - payables

Question 16

Increase in current assets will ______ NWC which is a ______

Answer 16

increase

use

Question 17

Increases in current liabilities will ______ NWC which is a ________ of cash

Answer 17

decrease

source

Question 19

What exactly will IRR tell you?

Answer 19

the return that you expect to earn each year

Question 20

Internal Rate of Return (IRR)

Answer 20

is the discount rate that implies a zero present value for a series of cash flows