Lecture 2

Question 1

t

Answer 1

Time, usually in periods such as years or months

Question 2

P

Answer 2

Value of money at a time t, designated as the present time

Question 3

F

Answer 3

Value of money at some future time, such as t= n . In the future.

Question 4

A

Answer 4

Series of consecutive, equal, end of period amounts of money

Question 5

n

Answer 5

Number of interest periods, it either is years or months, depending on how the interest rate is defined

Question 6

i

Answer 6

Interest rate or rate of return per time period. Either percent per year or percent per month.

Question 7

Cash flow diagrams

Answer 7

A graphical representation with cash flows on vertical axis and time on horizontal axis

Question 8

Cash inflows

Answer 8

Revenues (R), receipts, incomes, savings generated by project and activities that flow in. + Used.

Question 9

Cash outflows

Answer 9

Disbursements (D), costs, expenses, taxes caused by projects and activities that flow out. Minus sign used.

Question 10

Net cash flow NCF for each time period

Answer 10

NCF = cash inflows (R) - cash outflows(D)

Question 11

How many perspectives can a cash flow diagram be drawn in?

Answer 11

Only one at a time

Question 12

What is the convention used for cash flow diagrams.

Answer 12

The end of period convention, were all revenues or disbursements are placed at the end of the period

Question 13

Point estimate

Answer 13

A single value estimate of a cash flow element

Question 14

Range estimate

Answer 14

Arrange estimate of cash flow elements. They provide more insight into the risk and range of possible outcomes.

Question 15

Inflation

Answer 15

Inflation measures how much more expensive a set of goods and services has become over a certain period, usually a year

Question 16

How does inflation change purchasing power?

Answer 16

As inflation increases purchasing power decreases

Question 17

How does inflation impact loans and investments?

Answer 17

Inflation increases interest, interest rates on loans and decreases rate of return on investment.

Question 18

Interest rates

Answer 18

A fee that is paid to use someone else’s money

Question 19

Rate of return

Answer 19

A fee that is earned for letting someone else use your money

Question 20

Interest rate formulas

Answer 20

Interest = amount owed now - principal
Interest rate % = interest accrued per time unit/ principal * 100

Question 21

Rate of return formula

Answer 21

Return = amount owed now-principal
Rate of return%= interest accrued per time unit/ original amount*100

Question 22

Simple interest

Answer 22

Interest is calculated using principle only.
Interest =(principal)(number of periods)(interest rate)

Question 23

Compound interest

Answer 23

Interest is based on principal plus all accrued interest. That means interest earned interest and compounds overtime.
Interest = (principal+ all accrued interest)(interest rate)

Question 24

What type of interest should you assume?

Answer 24

Compounding

Question 25

Equity financing

Answer 25

Funds from retained earnings, new stock issues, or owners infusion of money. The funds are expected to yield a return

Question 26

Debt financing

Answer 26

Borrowed funds from outside sources, loans, bonds, mortgages, adventure, capital pools. Interest is paid to the lender on these funds.

Question 27

Pooled financing

Answer 27

Combination of equity financing and debt financing

Question 28

Weighted average cost of capital

Answer 28

The weighted average cost of the different sources of capital being used to fund a project. WACC= (fraction of Debt capital)(cost of debt capital) + (fraction of equity capital)(cost of equity capital)

Question 29

Minimum attractive rate of return

Answer 29

Often a minimum at attractive rate of return is defined as a rate of return a fee that is earned for letting someone else use your money. Return = amount owed now- principal Uses rate of return % formula

Question 30

Minimum attractive rate of return

Answer 30

MARR is a reasonable rate of return established to evaluating and selecting alternatives. un investment is then justified economically if it is expected to return at least the MARR. MARR usually considers the risk inherent to a project. The higher, the risk the higher, the MARR.

Question 31

Relationship between ROR, MARR, WACC for an economically justified project

Answer 31

RoR >= MARR > WACC

Question 32

Types of cost

Answer 32

Fixed, variable, marginal, and average costs Sunk costs Opportunity cost Reoccurring and non-reoccurring cost Incremental costs Cash costs versus book costs Life cycle cost

Question 33

Fixed costs

Answer 33

Don’t change in line with the level of output or activity

Question 34

Variable cost

Answer 34

Change in line with the level of output or activity

Question 35

Average cost

Answer 35

Total cost divided by number of units produced

Question 36

Sunk costs

Answer 36

Money already spent as a result of a decision that was made in the past. In general, sun costs should be disregarded in decision-making, this can be hard, but they should not determine how you evaluate the set of opportunities that are now available to us.

Question 37

Opportunity costs

Answer 37

Using resources for one project, prevent us from using them for another project, or having invested them. We call this loss, the opportunity cost of using the resources for our selected application.

Question 38

Recurring and non-recurring cost

Answer 38

Recurring costs are anticipated and occur at predictable integrals. Non-recurring cost our ad hoc expenses.

Question 39

Incremental costs

Answer 39

Represent the difference between two alternative options

Question 40

Cash costs versus book costs

Answer 40

Cash cost. Money move from your company account to another companies account. Book costs. Money does not move from your companies account, but costs are recorded in your accounting records.

Question 41

Life cycle costs

Answer 41

The cost over the full life cycle of a product/project

Question 42

General equation for compounding

Answer 42

F = P(1+i)^n

Question 43

Single payment compound amount factor

Answer 43

(1+i)^n Usually referred to F/P factor

Question 44

Single payment present worth factor

Answer 44

(1+i)^-n P-F factor

Question 45

A uniform series A and P assumes that

Answer 45

Cash flow occurs in consecutive periods starting one year after P. Cash flow amount is the same in each period

Question 46

A is given find P formula

Answer 46

P = A ( (1+i)^n -1/(i(1+i)^n))

Question 47

Uniform series and and F assumes that:

Answer 47

Cash flow occurs in consecutive periods ending in the same period as F. Cash flow amount is the same in each period

Question 48

F is given find A formula

Answer 48

A = F(i/((1+i)^n -1)

Question 49

How do arithmetic gradients change

Answer 49

By the same amount each period

Question 50

G is given find p

Answer 50

P = G( ((1+i)^n -i*n-1)/(i^2(1+i)^n)

Question 51

How to solve an arithmetic gradient when a base amount is present

Answer 51

Break the problem into parts the base amount forms a uniform series, which is converted to P_a and this leaves a series with an emetic gradient, which is converted to P_g As a present Worth P_t = P_a+ P_g