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Flashcards in Financial Decision models Deck (22):
1

Cash flow Effects

Direct

Indirect

Net effect

2

Stages of cash flows

Inception of the project

Operations

Disposal of the project

3

Methods that consider the time value of money are

DCF (discounted cash flow)

NPV (net present value)

Internal rate of return

4

A discount or hurdle rate is determined in advance for which capital budgeting technique?

Net present value

5

What is an acceptable procedure to evaluate cash flows with risk?

Discount rates may be used that reflects the degree of risk

6

NPV focuses on what?

Cash flow

7

Advantage of using NPV over internal rate of return model in discounted cash flow analysis

NPV can be used when there is no constant rate of return required

8

Profitability index is used when?

The capital rationing needs to be considered when comparing projects

9

Profitability index equation?

ONE limitation is?

present value of net future cash inflow / present value of net initial investment

It requires detailed long term forecasts of the projects cash flows.

10

NPV uses what rate to discount cash flow

hurdle rate (discount percentage rate)

11

NPV of a project is a function of

current and future cash flows, including proceeds from sale of old asset

12

capital budgeting is based on

managements predictions of an uncertain future

13

Capital financing relates to

longer periods of time that are subject to greater levels of uncertainty

14

ONE limitation of payback period, discounted cash flow, internal rate of return, and NPV

They rely on the forecasting of future data

15

Capital budgeting decisions do not include

Financing short-term working capital needs (more operational in nature)

16

in capital budgeting decisions, MARCS and straight line depreciation will

equal in total

17

Relevant cost are those cost that will

differ among many alternatives

18

NPV method recognizes the

time value of money and discounts cash flow over the life of the project using the hurdle rate

19

List the rates used in NPV

Cost of capital
Hurdle rate
Discount rate
Required rate of return

20

NPV method of capital budgeting assumes that

cash flows are reinvested at the discount rate

21

One disadvantage of NPV is

It does not provide that true rate of return on investment

22

The accelerated method of depreciation in NPV calculation affects the value in what way?

Increases the present value of the depreciation tax shield