FIN 401 Lecture Notes - Lecture 1: Payback Period, Net Present Value, Decision Rule

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tealmink417

24 Feb 2016

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Working capital: how a firm manages its short term operating activities. A good decision rule adjusts for time value of money, risk and whether we determine value has been gained for the firm. Criteria in evaluating proposed investment: npv, payback period, discounted payback period, average accounting return (aar) How to decide between mutually exclusive investments. Npv can always provide the correct answer to that. Keep in mind: npv is the difference between the market value of an asset or a project and its cost. The financial manager acts in the shareholders best interest in indentifying and taking positive. Cash flow (year 5) : manual, calculator. 2000/1. 1 + 2000/1. 1^2 + 4000/1. 1^3 + 4000/1. 1^4 + 5000/1. 1^5 = Npv = present value cost = 12,313 10,000 = ,313. Cf cf0 = -10,000, cf01=-2000, f01=2, cf02=4000, f02=2, cf03=5000, f03=1. Net present value is the difference between the market value of a project and its cost.

Related Questions

5. Which of the following is/are correct?

A. If the salvage value is the same as the book value of theasset, then there is a tax effect.

B. Book value = initial cost - accumulated depreciation

C. After-tax salvage = salvage - Tax Rate x (salvage - bookvalue)

D. Both B and C

6. ________ is the most important alternative to NetPresent Value.

A. IRR

B. Payback Method

C. Average Accounting Return

D. Discounted Payback

7. The mean difference between Payback and DiscountedPayback is:

A. Discounted Payback accounts for the time value of money andPayback does not

B. Discounted Payback accounts for the risk of the cash flowsand Payback does not

C. Only Payback does not provide an indication about theincrease in value

D. Both A and B

8. The ________ measures the time to get the initialcost back.

A. Internal Rate of Return

B. Net Present Value

C. Payback period

D. Profitability Index

9. Which of the following element/s should be consideredwhen evaluating capital budgeting decision rules?

A. Time value of money

B. Adjustment for risk

C. Creating value for the firm

D. All of the above

magentaporcupine879

1. Whenever there is a conflict between NPV and anotherdecision rule, you should always use NPV.

A. True

B. False

2. ________ finds one or more companies that specializein the product or service that we are considering.

A. The Objective Approach

B. The Pure Play Approach

C. The Subjective Approach

D. None of the above

3. The required return of bond is best estimated bycomputing the ________ on the bond.

A. Yield-to-maturity

B. market value

C. Risk

D. Both A and B

4. The return earned on assets depends on the ________of those assets.

A. Book value

B. Net book value

C. Risk

D. Liquidity

5. Which of the following is/are correct?

A. If the salvage value is the same as the book value of theasset, then there is a tax effect.

B. Book value = initial cost - accumulated depreciation

C. After-tax salvage = salvage - Tax Rate x (salvage - bookvalue)

D. Both B and C

6. ________ is the most important alternative to NetPresent Value.

A. IRR

B. Payback Method

C. Average Accounting Return

D. Discounted Payback

7. The mean difference between Payback and DiscountedPayback is:

A. Discounted Payback accounts for the time value of money andPayback does not

B. Discounted Payback accounts for the risk of the cash flowsand Payback does not

C. Only Payback does not provide an indication about theincrease in value

D. Both A and B

8. The ________ measures the time to get the initialcost back.

A. Internal Rate of Return

B. Net Present Value

C. Payback period

D. Profitability Index

9. Which of the following element/s should be consideredwhen evaluating capital budgeting decision rules?

A. Time value of money

B. Adjustment for risk

C. Creating value for the firm

D. All of the above

lilacsardine75

PLEASE HELP WITH A RESPONSE TO THE POST BELOW. Thank you :)

How do we traditionally define capital budgeting infinance?

Capital budgeting is a technique used in Finance by companiesto evaluate and rank the investment projects. These are the largeexpenditure projects including the purchase of plant and equipment,investment in new business, construction of buildings etc.

What is the purpose of capital budgeting in the business firm,and how is it used?

Capital budgeting calculation involves cash flows withconversion into time value of money and arriving at a profit. Thereare several methods used for evaluating capital budgeting projects.Payback period method, Net present value method, internal rate ofreturn method and profitability index. All of these methods help amanager to analyze and select the projects based on profitabilityand returns. It is used to help the managers in arriving atinvestment decisions compared with the cost of capital. They alsogive the knowledge of time period within which cash outflows willbe returned. Large businesses rely on NPV and IRR to takeinvestment decisions. This technique provides a real return valuefor a business rather than just calculating the profits.Traditional accounting involves making decisions based on profitswithout considering the time value of money. Capital budgetingtechnique helps the manager to take decisions with present valuesof future returns.

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FIN 401 Lecture Notes - Lecture 1: Payback Period, Net Present Value, Decision Rule

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