Lecture 5: Flashcards
(6 cards)
1
Q
What are expected cashflows?
A
- They are forecasts
- Can be biased either too optimistic or pessimistic
- Even if unbiased they are prone to error
2
Q
What questions can arise when NPV > 0?
A
- When NPV > 0 it means the project is offering supernormal profits
Company needs to ask following questions:
- What is the source of the economic advantage? Has the company got market power it can protect?
- How long are economic rents sustainable?
- How will competitors react?
3
Q
What are the steps of a capital budgets preparation?
A
- Search for investment opportunities
- Screening (is project consistent with strategic plans? Is it feasible?)
- Definition of the project and alternatives
- Evaluations (NPV, IRR, ARR etc used)
- Authorisation
- Monitoring and Post- audit
4
Q
What are firms sensitive to information and forecasting biases?
A
- Defnition stage
- Individual incentives
- Special interests
5
Q
What are post completion audits?
A
- Improve the quality of existed decisions
- Improves the quality of future
- Enable corrective action on existing projects
6
Q
What are the problems with implementing post audits?
A
- Measuring incremental cash flows
- Using accounting measures of performance
- Historical cost
- Accounting depreciation
- Inflation, unrecorded assets, creative accounting
