Chapter 7

Question 1

used to analyze the profitability or financial viability of an investment on long-term or non-current assets that last for a number of years and/or on an enterprise that has a long gestation period.

Answer 1

investment analysis

Question 2

purchase of farm capital assets is a form of

Answer 2

farm capital investment

Question 3

why do farmers invest?

Answer 3

they expect the long-term returns above the cost of the investment are greater then any immediate returns

Question 4

also known as capital budgeting

Answer 4

investment analysis

Question 5

concept stating that value of money today is different from its value in the future

Answer 5

time value of money

Question 6

capital originally invested (or borrowed)

Answer 6

principal

Question 7

amount paid for the use of capital or amount received for the money invested

Answer 7

interest

Question 8

principal plus interest

Answer 8

full amount

Question 9

ratio of the interest earned in one time unit to principal

Answer 9

interest rate

Question 10

maturity of loans, expressed in days, months, or years

Answer 10

time

Question 11

simple interest formula

Answer 11

I = Prt

Question 12

investment analysis restricted to business transactions where time involved is at most one year

Answer 12

simple interest

Question 13

method that accrues “interest on interest”

Answer 13

compound interest

Question 14

sum of the increases over the principal by the end of the term of investment

Answer 14

compound interest

Question 15

cause of higher payments because of principal increasing over time

Answer 15

compound interest

Question 15

cause of higher payments because of principal increasing over time

Answer 15

compound interest

Question 16

total amount due which consists of the principal and the compound interest

Answer 16

compound amount

Question 17

number of unit of time in one year as basis for computing interest

Answer 17

conversion period

Question 18

simplest formula for final compound amount

Answer 18

F = P(1+i)^n

Question 19

formula for for computing final compound at end of n period

Answer 19

F = P(1+j/m)^mt

Question 20

process of finding the future value of a present amount, when accumulated interest also earns interest.

Answer 20

compounding

Question 21

interest earned on both the initial principal and the interest reinvested from prior periods

Answer 21

compound interest

Question 22

interest earned only on the original principal amount invested.

Answer 22

simple interest

Question 23

process of finding the present value of a future
amount

Answer 23

discounting

Question 24

interest rate in finding present values of a future amount

Answer 24

discount rate

Question 25

done because a sum to be received in the future is worth less than the same amount today

Answer 25

discounting

Question 26

discounting formula

Answer 26

PV = FV (1+j/m)^-mt

Question 27

the sum of the present values of all the payments of the annuity

Answer 27

present value of annuity

Question 28

value of the annuity at the beginning of its term

Answer 28

present value of annuity

Question 29

sequence of periodic payments made at regular intervals of time

Answer 29

annuity

Question 30

time between succesive payment dates of an annuity

Answer 30

payment interval

Question 31

time from the beginning of the first payment interval to the end of the last one

Answer 31

term of the annuity

Question 32

formula for PVA

Answer 32

PVA=R X 1-(1+j/m)^mt all over j/m

Question 33

the sum of all the periodic payments at the end of the term.

Answer 33

future value of annuity

Question 34

value of annuity at the end of its term

Answer 34

future value of annuity

Question 35

accumulation of the annuity

Answer 35

future value of annuity

Question 36

future value of annuity

Answer 36

PVA=R X (1+j/m)^mt - 1 all over j/m

Question 37

rate percent quoted/stated by the lender to the borrower, or in the other sense the actual monetary price that borrowers pay to lenders for the use of borrowed capital

Answer 37

nominal rate

Question 38

it is the rate which, if compounded annually, is equivalent to the given rate

Answer 38

effective rate

Question 39

formula for effective rate

Answer 39

w = (1+j/m)^m - 1

Question 40

can also be used to compare the annual interest between loans with different compounding terms or conversion periods (daily, monthly, semi-annually, quarterly, or annually)

Answer 40

effective rate

Question 41

in determining cash flows, only incremental cash flow matters

Answer 41

true

Question 42

include all operating and investment cash flows

Answer 42

relevant cash flows

Question 43

obtained by multiplying production by the unit price of the commodity

Answer 43

gross revenue or income

Question 44

for fixed assets, this pertained to the value remaining unused at the end of investment project

Answer 44

residual or terminal value

Question 45

resale value of a fixed asset that is used, and then put open for resale.

Answer 45

residual or terminal value

Question 46

for land, this is the market value including improvements, at the time the investment is terminated.

Answer 46

residual or terminal value

Question 47

purchase price/actual value of fixed capital items

Answer 47

fixed capital investment

Question 48

examples are material input costs; fuel cost; labor cost; land rent and crop/livestock insurance;

Answer 48

cash operating and maintenance expenses (production costs)

Question 49

include marketing costs, office utilities, salaries of administrative personnel,

Answer 49

selling and administrative expenses

Question 50

2 general measures of profitability

Answer 50

undiscounted measures -do not consider time value of money (TVM) discounted measures -consider time value of money (TVM)

Question 51

a type of undiscounted measure stating the number of years it takes to recover all the capital invested.

Answer 51

payback period

Question 52

it is useful to highlight those investments that are not viable

Answer 52

payback period

Question 52

it is useful to highlight those investments that are not viable

Answer 52

payback period

Question 53

a type of undiscounted measure that recognizes that is not only income that is important to the farm but also the amount of capital used to produce it

Answer 53

return on investment (ROI)

Question 54

what ROI percentage is preferred

Answer 54

50% or more

Question 55

it is the opportunity cost of capital, representing the minimum rate of return required to justify the investment.

Answer 55

discount rate

Question 56

type of measure that considers the time value of money

Answer 56

discounted measures

Question 57

involves 2 additional elements which are discount rate and discounting period

Answer 57

discounted measures

Question 58

ratio of the sum of the discounted value of gross benefits to the sum of the discounted value of gross costs

Answer 58

benefit-cost ratio(BCR)

Question 59

condition in accepting the BCR computed

Answer 59

should be >1

Question 60

represents the present worth of the incremental net benefits.

Answer 60

net present value (NPV)

Question 61

condition in accepting the NPV computed

Answer 61

should be >0, meaning profitable

Question 62

the discount rate that equates the present values of the project’s benefits and costs

Answer 62

internal rate of return (IRR)

Question 63

maximum rate of return that an investment project could pay if all resources were borrowed, or if the investment project is to recover the investment and operating costs and still break even

Answer 63

internal rate of return (IRR)

Question 64

condition in accepting IRR

Answer 64

IRR>opp cost

Question 65

a straightforward measure of analyzing the effects of risks and uncertainty in investment analysis

Answer 65

sensitivity analysis

Question 66

conducted to assess the profitability of an investment when the discount rate is increased or decreased,

Answer 66

sensitivity analysis

Question 67

deals with the assessment of whether an investment will generate sufficient cash flows at the right time to meet the required cash outflows including loan payment

Answer 67

financial feasibility analysis

Question 68

the cumulative net cash flow (after financing) shows a financial shortfall, it requires additional financing

Answer 68

financial feasibility analysis