ch1

Question 1

what is our objective when deciding what projects we should pick

Answer 1

1. accept all investments with return over the cost of capital
2. invest only if the project yield if the return is higher than the opportunity cost
3. opportunity cost of investment returns= returns available to sh in financial markets from investments with the same risk as the project

Question 2

5 stages of capital budgeting

Answer 2

1. identification of projects
2. information acquisition
3. predictions
4. choosing among the alternatives
5. implementation and control

Question 3

methods to choose a project

Answer 3

discounted cf method
-npv, irr
payback
ARR

Question 4

when thinking about accepting a project think about, not just the financial side

Answer 4

flexibility
quality
impact on customers
impact on competitors

Question 5

IRR

Answer 5

RL + [NL/(NL-NH)] X (RH-RL)

Question 6

Comparison of NPV and IRR

Answer 6

NPV
-expressed as money
-individual projects can be added to see the effect of accepting projects
-can be used where regular rate of return varies of the life of the project
-Assumes internal cashflows are reinvested at the cost of capital

IRR
-Expressed as a %
-can’t add projects together
-Assumes internal cashflows are reinvested at the IRR

Question 7

Payback advan

Answer 7

simple
good when liquidity constraints exist and fast payback is needed
good for risky investments in uncertain markets
often used as intial screening

Question 8

ARR

Answer 8

Shows the rate at which an £ of investment generates operating income

Question 9

when answering a question look at

Answer 9

cost consideration
quality considerations
product considerations
human resources considerations