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AFM291 Lecture Notes - Lecture 3: Net Present Value, Discount Window, Decision Rule

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blueporpoise731
11 Sep 2017
School
University of Waterloo
Department
Accounting & Financial Management
Course
AFM291
Professor
Mindy Wolfe

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Document Summary

The benefits and costs of a decision should be evaluated using these market prices, and when the value of the benefits exceeds the value of the costs, the decision will increase the market value of the firm. Interest rate factor defi(cid:374)es the e(cid:454)(cid:272)ha(cid:374)ge rate a(cid:272)ross ti(cid:373)e, a(cid:374)d has u(cid:374)its of (cid:862)$ i(cid:374) o(cid:374)e (cid:455)ear/$ toda(cid:455). (cid:863) The risk free interest rate depends on supply and demand. 3. 3 present value and the npv decision rule. The npv represents the value of the project in terms of cash today: npv decision rule when making an investment decision, take the alternative with the highest. Positive npv will increase the wealth of the firm and its investors. Choosing this alternative is equivalent to receiving its npv in cash today. Accepting or rejecting a project: accept those projects with positive npv because accepting them is equivalent to receiving their.

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Related Questions

Business management

QUESTION 1

  1. Which of the following outlines the organization's purpose, assumptions, values, and direction?

    Mission

    Purpose

    Strategic plan

    Strategic goal

    Tactical goal

2 points

QUESTION 2

  1. Scientific management focuses on

    improving the efficiency of the individual worker.

    managing the overall organization.

    using capital more efficiently.

    enhancing the social aspects of the workplace.

    creating mathematical models of organization processes.

2 points

QUESTION 3

  1. The idea that manufacturing costs per unit decrease as the number of units produced increases is known as

    economies of scale.

    venture capitalism.

    a franchising agreement.

    first-mover advantage.

    None of these.

2 points

QUESTION 4

  1. The component of strategy that indicates how the organization intends to allocate resources is

    resource deployment.

    scope.

    competitive advantage.

    synergy.

    None of these.

2 points

QUESTION 5

  1. The process of choosing one alternative from among many alternatives is called

    satisficing.

    problem solving.

    bounded rationality.

    decision making.

    None of these.

2 points

QUESTION 6

  1. Mercedes-Benz sells high quality automobiles at high prices. It uses a(n)

    differentiation strategy.

    low-cost strategy.

    diversification strategy.

    related diversification strategy.

    BCG strategy.

2 points

QUESTION 7

  1. Which of the following is NOT generally considered to be a role performed by small businesses?

    Creation of new jobs

    Development of new products

    Manufacture of materials for large businesses

    Distribution of products made by large businesses

    Provision of capital for expansion of large businesses

2 points

QUESTION 8

  1. Which of the following is a disadvantage of group decision making?

    More alternatives are likely to be generated.

    More information will be brought to bear on the problem.

    More time will be needed to make the decision.

    More communication about the decision will result.

    All of these.

2 points

QUESTION 9

  1. Which of the following is an example of an owner of a business?

    Individual investors who buy stock in that business

    Partners

    People who have legal property rights to that business

    Individuals who finance and start up a new business

    All of these.

2 points

QUESTION 10

  1. The best alternative is the most ____ alternative.

    efficient

    controllable

    profitable

    effective

    valid

2 points

QUESTION 11

  1. Which of the following decision-making models is based on the belief that human behavior is often imperfect?

    Rational

    Emotional

    Classical

    Behavioral

    Sequential

2 points

QUESTION 12

  1. A disadvantage of using interacting groups to make decisions is

    group politics.

    a void of expert opinion.

    an increase in programmed costs.

    faster decision making.

    too much brainstorming.

2 points

QUESTION 13

  1. Nokia and Samsung make cell phones that operate on the Microsoft system. They operate in the ____ industry.

    transportation

    manufacturing

    retailing

    services

    wholesaling

2 points

QUESTION 14

  1. All of the following are advantages of group decision making EXCEPT

    groupthink may occur.

    better decisions generally emerge.

    enhanced communication may result.

    more information and knowledge are available.

    None of these.

2 points

QUESTION 15

  1. Facebook operates in which industry?

    Construction

    Wholesaling

    Manufacturing

    Services

    All of these.

2 points

QUESTION 16

  1. Four friends home from college want to start a moving business to earn money during the summer. To determine whether this is a good idea, they need to find the answer to which of the following questions?

    Who are my customers, and where are they?

    Who are my competitors, and where are they?

    How can I differentiate my product from that of my competitors?

    In what quantities and at what price will my customers buy my service?

    All of these.

2 points

QUESTION 17

  1. The classical management perspective consists of

    scientific management and administrative management.

    management science and scientific management.

    behavioral management and the operations management.

    contemporary management and behavioral management.

    contingency management and universal management.

2 points

QUESTION 18

  1. Which of the following persons is a manager?

    Cardinal Timothy Dolan, Archbishop of New York

    Nick Saban, football coach at the University of Alabama

    Linda Kaplan Thaler, chief creative officer of Kaplan Thaler Group

    Marissa Mayer, CEO of Yahoo

    All of these.

2 points

QUESTION 19

  1. Organizations that provide resources to other organizations are known as

    suppliers.

    competitors.

    regulators.

    interest groups.

    importers.

2 points

QUESTION 20

  1. A(n) ____ strategy requires little initial investment, is heavily regulated, and provides little opportunity to modify products for local conditions.

    importing/exporting

    licensing

    joint venture

    direct investment

    global sourcing

2 points

QUESTION 21

  1. All of the following are included in the task environment of organizations EXCEPT

    competitors.

    customers.

    regulators.

    suppliers.

    the economy.

2 points

QUESTION 22

  1. "Decision making under risk" means the decision maker

    has no data on which to base his or her decision.

    is risk-averse, avoiding risky investments.

    knows all the risks involved in the decision.

    can estimate decision data with some probability.

    is making an important decision with long- term consequences.

2 points

QUESTION 23

  1. A standing plan that outlines the steps to be followed in a particular circumstance is called a(n)

    SOP.

    single-use plan.

    policy.

    contingency plan.

    program.

2 points

QUESTION 24

  1. Which of the following is NOT one of the reasons for new business failure described in your text?

    Sufficient capital

    Incompetence

    Neglect

    Weak control systems

    Inexperience

2 points

QUESTION 25

  1. Interpersonal skills enable managers

    to take an overall view of how the parts of the organization interrelate and to think strategically.

    to solve detailed problems for their subordinates.

    to understand and interact effectively with others in the organization.

    to diagnose organizational problems correctly.

    None of these.

2 points

QUESTION 26

  1. Herbert Simon noted that managers generally fail to make rational decisions because they are limited by their own values, skills, habits, and unconscious reflexes as well as by incomplete information. What name did Simon give this phenomenon?

    Satisficing

    Bounded rationality

    Brainstorming

    Rational decision making

    Decision framing

2 points

QUESTION 27

  1. Nike and Reebok are best described as

    strategic allies.

    competitors.

    customers.

    regulators.

    suppliers.

2 points

QUESTION 28

  1. The first person to identify the managerial functions of planning, organizing, leading, and controlling was

    Elton Mayo.

    Lillian Gilbreth.

    Henri Fayol.

    Hugo Munsterberg.

    Mary Parker Follett.

2 points

QUESTION 29

  1. Strategic goals are set by

    first-line managers.

    middle managers.

    top managers.

    stockholders.

    All of these.

2 points

QUESTION 30

  1. Using the BCG matrix, SBUs are classified on the basis of

    market growth rate and cash generation potential.

    market share and market growth rate.

    competitive advantage and financial strength.

    a strategic business unit and product life cycle.

    None of these.

2 points

QUESTION 31

  1. ____ skills are needed for specialized tasks within the organization.

    Human

    Organizational

    Conceptual

    Technical

    None of these.

2 points

QUESTION 32

  1. McGraw Hill operates in publishing and construction. This is an example of ____ diversification.

    differentiation

    unrelated

    single-product

    BCG

    related

2 points

QUESTION 33

  1. The management pioneer who performed the Hawthorne studies at Western Electric was

    Lillian Gilbreth.

    Elton Mayo.

    Henry Gantt.

    Frank Gilbreth.

    Frederick Taylor.

2 points

QUESTION 34

  1. An organization's obligation to protect and enhance the society in which it operates is called

    legal responsibility.

    ethical responsibility.

    social responsibility.

    cultural responsibility.

    societal responsibility.

2 points

QUESTION 35

  1. An entrepreneur does all of the following EXCEPT

    operate.

    organize.

    plan.

    assume risk.

    hire a professional manager.

2 points

QUESTION 36

  1. The primary purpose of the management process is to

    develop organizational goals and make logical decisions.

    organize the various functions in a logical manner.

    ensure that all employees are working together effectively.

    achieve organizational goals efficiently and effectively.

    make sure things go as planned.

2 points

QUESTION 37

  1. How do top managers spend most of their time?

    Overseeing day-to-day operations

    Routine administrative tasks

    Implementing plans of first-line managers

    Making decisions and creating goals

    Coordinating the work of first-line managers

2 points

QUESTION 38

  1. In the classical decision making model, "optimization" means

    implementing two or more alternatives simultaneously.

    choosing the alternative with the best overall expected outcomes.

    gathering the most complete information before making the decision.

    reaching a satisfactory level of performance.

    None of these.

2 points

QUESTION 39

  1. A written summary of the business strategy and its implementation plan is known as

    a niche summary.

    a first-mover advantage.

    a business plan.

    economies of scale.

    a franchise agreement.

2 points

QUESTION 40

  1. The aspects of a business that the firm performs at a higher level than its competitors are known as the firm's

    niches.

    capital-intensiveness.

    distinctive competencies.

    strategic weakness.

    first-mover advantage.

2 points

QUESTION 41

  1. For a Perkins restaurant, which of the following would be considered to be a supplier?

    A family of 5

    Wendy

QUESTION 1 The knowledge of financial accounting can assist people with decisions such as whether to extend credit to a business. True False 0.2 points Saved QUESTION 2 Employees of a company would not have a reason to use the information provided by financial accounting. True False 0.2 points Saved

QUESTION 3 Financial accounting should be used for assessing the financial health of large organizations only. True False 0.2 points Saved

QUESTION 4 Financial accounting can be helpful for a job candidate who is assessing the financial future of a potential employer. True False 0.2 points Saved QUESTION 5 Lenders might use the information produced by financial accounting when making loan decisions. True False 0.2 points Saved

QUESTION 6 Credit analysts prefer not to use information provided by financial accounting, as it is not accurate. True False 0.2 points Saved

QUESTION 7 Financial accounting is helpful to investment advisors. True False 0.2 points Saved

QUESTION 8 Financial accounting is more useful than managerial accounting. True False 0.2 points Saved

QUESTION 9 The decision to buy or rent equipment is an example of a decision aided by managerial accounting. True False 0.2 points Saved

QUESTION 10 Which of the following statements is true of financial accounting? A. It is used by external parties to make investment decisions. B. It is used to make lease or purchase decisions. C. Managerial accounting is another name for financial accounting, D. It is primarily used to make internal decisions of a business. E. The effectiveness of advertising can be judged using financial accounting. 0.2 points Saved QUESTION 11 The charge for using money over time, often associated with long-term loans, is known as: A. interest. B. principal. C. distribution charge. D. cash dividend. E. preferred dividend. 0.2 points Saved QUESTION 12 Which of the following is a common feature of financial and managerial accounting? A. Both have same objectives B. Both are prepared according to U.S. GAAP C. Both are reported at year end in the annual report D. Both are analyzed by external users while making investment decisions E. Both are used by the management in making decisions 0.2 points Saved

QUESTION 13 Dividends are required to be paid to stockholders on an annual basis. True False 0.2 points Saved

QUESTION 14 An individual who owns one or more shares of stock in a corporation is an owner of that corporation. True False 0.2 points Saved

QUESTION 15 Corporations do not exist as separate legal entities apart from their owners. True False 0.2 points Save Answer

QUESTION 16 It is very difficult to buy or sell ownership shares of a corporation in a stock exchange. True False 0.2 points Saved

QUESTION 17 Stock markets match up investors who wish to buy shares with those who wish to sell them. True False 0.2 points Saved

QUESTION 18 Legal process by which owners of an organization apply to a state government to have it identified as an entity legally separate from its owners is called: A. stocking. B. filling. C. attributing. D. registration. E. incorporation. 0.2 points Saved

QUESTION 19 An advantage of ownership in a sole proprietorship over ownership in a corporation is: A. tax benefits. B. having a board of directors. C. the ability to raise capital through issuance of stock. D. separation of owner and business as legal entities. E. limited liability for debts. 0.2 points Saved

QUESTION 20 Who hires the management of a corporation? A. Stockholders B. Board of directors C. Creditors D. Government E. SEC 0.2 points Saved QUESTION 21 Inventory refers to the: A. excess amount paid for an asset over its fair value. B. intangible assets of a business. C. merchandise bought or manufactured for the purpose of selling. D. amount of net income reinvested by company for future operations. E. revenue generated from investment. 0.2 points Saved QUESTION 22 Investors use financial information to predict whether a: A. company will recruit more employees. B. company's stock price will increase C. company has invested in buildings. D. company will pay salaries. E. company's bond price will increase. 0.2 points Saved

QUESTION 23 Financial accounting can be compared to a portrait. True False 0.2 points Saved

QUESTION 24 Financial statements provide the form and structure for the conveyance of financial information that will create a likeness of the reporting organization. True False 0.2 points Saved

QUESTION 25 The information reported in financial statements must be exact for an investor to make any decision. True False 0.2 points Saved

Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The following information is available.

Product G Product B
Selling price per unit $ 120 $ 150
Variable costs per unit 45 90
Contribution margin per unit $ 75 $ 60
Machine hours to produce 1 unit 0.4 hours 1.0 hours
Maximum unit sales per month 500 units 250 units

The company presently operates the machine for a single eight-hour shift for 22 working days each month. Management is thinking about operating the machine for two shifts, which will increase its productivity by another eight hours per day for 22 days per month. This change would require $7,500 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.)

Determine the contribution margin per machine hour that each product generates

Product G

Product B

Total

Contribution Margin per unit

$75.00

$60.00

Machine hours per unit

0.4

1.0

Contribution margin per machine hour

$187.50

$60.00

Maximum number of units sold

500

250

Hours required to produce maximum units

200

250

450

How many units of Product G and Product B should the company produce if it continues to operate with only one shift? How much total contribution margin does this mix produce each month?

Product G

Product B

Total

Hours dedicated to the production of each product

Units produced for most profitable sales mix

Contribution margin per unit

Total contribution margin - one shift

3. If the company adds another shift, how many units of Product G and Product B should it produce? How much total contribution margin would this mix produce each month?

Product G

Product B

Total

Hours dedicated to the production of each product

Units produced for most profitable sales mix

Contribution margin per unit

Total contribution margin - two shifts

4. Suppose that the company determines that it can increase Product G’s maximum sales to 600 units per month by spending $6,500 per month in marketing efforts. Should the company pursue this strategy and the double shift?

Product G

Product B

Total

Hours dedicated to the production of each product

Units produced for most profitable sales mix

Contribution margin per unit

Total contribution margin - two shifts and marketing campaign