Topic 3: Part 1 Flashcards Preview

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Flashcards in Topic 3: Part 1 Deck (14):
1

Mutual exclusivity

If projects are mutually exclusive, undertaking one project precludes the firm from undertaking the other one.
Eg plot of land

2

Capital rationing

Capital rationing is the allocation of scarce resources when resources are inefficient to fund all possible projects.
Eg money, supply of skilled labour, time management

3

Hard rationing

Refers to externally imposed constraints
-one plot of land

4

Soft rationing

Refers to internally imposed constraints
-management money/budgets/time management/long payback period (PB)

5

If projects are neither exclusive, no capital constrains

Choose all profitable projects
-projects with NPV>0

6

Projects are mutually exclusive

We simply wish to maximise NPV

7

Mutual exclusive and capital constraint

Highest NPV subject to being able to finance it

8

Only a capital constraint

Project combination with the highest NPV

9

Scalability

Maintain level of performance at different scales

10

Replacement chain method

Chain the projects until all possible projects have equal length

11

Why are uneven project horizons an issue?

-there is no clear cut way of how to judge them
-use replacement chain approach
-chain the projects until all possible projects have equal length

12

Advantages for linear programming

-can handle multi-period capital constraints where starting one project in one period
-can handle various project constraints
-allows for interpretation of the optimal solution

13

Disadvantages for linear programming

-requires perfect forecast of when projects are available, their cash flows, and NPV
-also perfect forecast of cost of capital/discount rate for the future

14

What are the concerns about uneven project horizons?

-does doing something now prevent me from something more profitable in the future?
-short project, can we repeat it?
-variables may change in the future, uncertain