Week 5 Flashcards

1
Q

What are the 3 phases of a product/service?

A
  1. pre-production phase: R&D, production set-up and marketing costs.
  2. production phase: manufacturing and marketing costs
  3. post-production phase: after-sales service and production facility decommissioning costs
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2
Q

What is life cycle costing?

A

Managing costs in all phases of the life cycle

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3
Q

Name 4 advantages of life cycle costing.

A
  1. full set of costs and revenues associated with each product becomes visible
  2. differences among products in % of total costs incurred at early stages are highlighted (the higher % in beginning –> more risk)
  3. Useful for selection of suppliers
  4. interrelation: among business function cost categories are highlighted
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4
Q

What are 3 disadvantages of life cycle costing?

A
  1. time consuming and costly
  2. limited data availability
  3. vulnerable to technological developments
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5
Q

What is Real Option Reasoning (ROR) with the 3 options?

A

Recognition of an opportunity that accompanies an upfront investment. 3 options:
1. option to expand
2. option to stop operations, abandon or postpone investments
3. option to scale up operations

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6
Q

What is the difference between game theory (GT) and ROR?

A

GT looks at actions among other rational players and indicates that firms have an incentive to invest early. ROR does not take this into account.

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7
Q

Name 3 advantages of ROR

A
  1. reduces potential losses
  2. reduces potential cash outflows
  3. increases firm value (however if wait too long –> competitor takes opportunity (GT))
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8
Q

Name 3 reasons why ROR is not used in some firms (Denison et al. (2012)

A
  1. management has more knowledge about DCF
  2. management is more sensitive to risk high-lighted by ROR
  3. ROR is perceived as less accurate and more subjective
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