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Flashcards in CMA Part CD Deck (22):
1

Linear programming

problem-solving approach used in situations where managers need to make decisions about how to maximize profits or minimize costs, based upon certain constraints

2

Initial investment

the purchase price, installation cost, and increase in working capital

3

payback method

capital budgeting method that provides a rough measure of project risk, does not distinguish between types of cash inflows and represents the break-even point for an investment

4

profitability index

(PI, or benefit-cost ratio) compares the present value of future cash flows with the initial investment on a relative basis. It is a ratio of the present value of future net cash flows to the initial cash outflow

5

project?s payback

(PB) is the length of time it takes for the cash flows generated by the initial investment (I) to equal the initial investment. Assuming the cash flows occur uniformly throughout the year

6

payback method

merely looks at the length of time it takes to recover the initial investment. It does not consider the life of the project, the time value of money, or the project profitability

7

Capital investment projects

include many possibilities; including proposals for the acquisition of equipment, the expansion of existing product offerings, and additional research and development facilities. Refinancing is not a capital budgeting decision. It is a financing decision

8

Certainty Equivalent (CE)

amount of cash an investor requires at a given point in time to make that investor indifferent between that certain amount and the amount expected (assuming risk) at the same point in time

9

Internal Rate of Return (IRR)

is the discount rate used in the calculation of net present value (NPV) that causes the NPV to equal zero. NPV Present value (PV) of the project?s annual cash flows (calculated at the appropriate discount rate less the project?s net incremental investment)

10

CVP

Cost/Volume/Profit Analysis

11

Cost

resource expended to achieve a specific objective

12

Cost Driver

factor that affects cost

13

Cost Object

anything for which cost data is accumulated

14

Fixed cost

cost that remains fixed within a relevant range-fixed costs vary per unit

15

Variable cost

cost that varies in direct proportion to changes in activities; variable cost are flat at a unit cost

16

Contribution Margin

Rev - All variable expenses

17

CM Ratio

CM/Revenue

18

Tot Cost

fixed + variable costs

19

Operating Income

Operating Rev-Tot Op costs

20

Net Operating Income

Operating Income - Operating income taxes or (1-relevant tax rate)*(operating income)

21

Sales Mix

sometimes referred to as rev mix, relative proportions of products sold and applies to both products and services. Doesn?t reflect what a product sells for

22

CVP Assumptions

a. Linearity-rev and cost functions are linear over the relevant range,b. Certainty-parameters are known or can be reasonably estimated,c. Single product or defined product mix-allows analysts to utilize a weighted average produce,d. Production=sales,e. For multiple products?sales mix must remain constant