Save
Busy. Please wait.
Log in with Clever
or
show password
Forgot Password?
Don't have an account?  Sign up 
Sign up using Clever
or
Username is available taken
show password


Make sure to remember your password. If you forget it there is no way for StudyStack to send you a reset link. You would need to create a new account. Your email address is only used to allow you to reset your password. See our Privacy Policy and Terms of Service.

Already a StudyStack user? Log In

Reset Password
Enter the associated with your account, and we'll email you a link to reset your password.
focusNode
Didn't know it?
click below
 
Knew it?
click below
Don't Know
Remaining cards (0)
Know
0:00
edit
Embed Code - If you would like this activity on your web page, copy the script below and paste it into your web page.

  Normal Size     Small Size show me how

Finance Chpt 5

Net Present Value and other Investment Criteria

QuestionAnswer
NPV - Investment Rule Accept project if NPV is +ve. For mutually exclusive projects, choose the one with the highest (+ve) NPV.
NPV - Comments Gold standard of investment criteria. Only criterion consistent w. maximising the value of the firm. Provides proper rule for choosing amoung mutually exclusive investments. Only pitfall involves capital rationing - one cannot accept all + NPV projects.
IRR Definition The discount rate at which project NPV = 0
IRR - Investment Rule Accept project if IRR is greater than opportunity cost of capital.
IRR - Comments Same accept-reject decision as NPV in the absence of project interactions. Pifalls = IRR cannot rank mutually exclusive projects (project w. higher IRR may have lower NPV) & the IRR rule cannot be used with multiple IRRs or an upwards sloping NPV profile.
Payback period Definition Time until the sum of project cash flows = the initial investment
Payback - Investment Rule Accept project if payback period is less than some specified number of years.
Payback - Comments A quick and dirty rule of thumb, with several critical pitfalls. Ignores cash flows beyond the acceptable payback period. Ignores discounting. Tends to improperly reject long-lived projects.
Profitability Index Definition Ratio of NPV to initial investment
Profitability Index - Investment Rule Accept project if profitability index is greater than 0. In case of capital rationing, accept projects with highest profitability index.
Profitability Index - Comments Results in same accept-reject decision as NPV in the absence of project interactions. Useful for ranking projects in case of capital
Opportunity Cost of Capital Expected rate of return given up by investing in a project
Risk and Present Value Higher risk projects require a higher rate of return Higher required rates of return cause lower PVs
Investment timing Sometimes you have the ability to defer an investment and select a time that is more ideal at which to make the investment decision. E.g. you may defer the harvesting of trees, by doing so, you defer the receipt & increase the cash flow
Equivalent Annual Cost The cash flow per period with the same present value as the cost of buying and operating a machine.
Capital Rationing Limit set on the amount of funds available for investment.
Soft Rationing Limits on available funds imposed by management (not by investors).
Hard Rationing
Created by: wguate
Popular Finance sets

 

 



Voices

Use these flashcards to help memorize information. Look at the large card and try to recall what is on the other side. Then click the card to flip it. If you knew the answer, click the green Know box. Otherwise, click the red Don't know box.

When you've placed seven or more cards in the Don't know box, click "retry" to try those cards again.

If you've accidentally put the card in the wrong box, just click on the card to take it out of the box.

You can also use your keyboard to move the cards as follows:

If you are logged in to your account, this website will remember which cards you know and don't know so that they are in the same box the next time you log in.

When you need a break, try one of the other activities listed below the flashcards like Matching, Snowman, or Hungry Bug. Although it may feel like you're playing a game, your brain is still making more connections with the information to help you out.

To see how well you know the information, try the Quiz or Test activity.

Pass complete!
"Know" box contains:
Time elapsed:
Retries:
restart all cards