final exam finance

  1. Sunk costs
    what a firm has already paid, is an expense they cannot get back.
  2. Complementary vs substitutionary effects
    comp increases while substitute decreases
  3. Free Cash Flow (FCF)
    operating cash flow (OCF) - investment in operating capital (IOC)
  4. OCF
    EBIT- taxes + depreciation
  5. financing fees/ costs
    interest paid to debt holders or dividends paid to stock holders

    are never included as incremental project cash flows
  6. Incremental cash flows
    cash flows attributed to a new project
  7. depreciable basis
    an assets cost plus the amounts you paid for an item such as sales tax, freight charges, and installation fees
  8. after tax cash flow (ATCF)
    • used when the sale of assets for more than depreciated book value as taxable gains and any sale less than for taxable losses.
    • ATCF= book value + (mv-bv) x (1- tax rate)
  9. computing PV of tax benefits
    • 1) dep = end bv - beg bv / life of asset
    • 2)¬†depreciation per year x tax rate
    • 3)¬†28,900 x (1-(1/.13^10)) / (.13)
  10. Computing Net PV
    • take values and divide by 1 + rate raised to the year.
    • 1200 / (1.08)^1 = 111.11
    • add them all up and subtract from the beginning cost 2985 -2000 = 985 profit
  11. Section 179 deductions
    deduction targeted at small businesses that allows them to immediately expense asset purchases up to a certain limit rather than depreciating them over the assets useful lives.
  12. Property eligible for a section 179 deduction
    • machinery and equipment
    • furniture
    • most storage facilites
  13. ineligible property for section 179 deduction
    • buildings and their structural components
    • property of an estate or fund
    • property outside us
  14. EAC (equivalent annual cost)
    perpetuity account
  15. estimating project cash flows requires us to consider
    • cost and revenue
    • the impact on existing products
    • to use existing assets
    • to include certain charger
  16. depreciable basis for real property calculated as
    cost+sales tax + freight charges + installation and testing
  17. accelerated depreciation
    more of the depreciation expense is earlier in the assets life, lowering taxes and increasing cash flow
  18. Modified Accelerated Cost Recovery System
    • MACRS
    • incorporates the half-year convention
    • uses the double-declining balance depreciation method

    the ultimate accelerated dep would be to expense immediately
  19. Differing asset life
    if we decide to go ahead with a new project but we have to choose between two alternatives, each with a different life, we use EAC method
  20. Net Present Value
    is the most common preferred technique for most project evaluations

    represents the purest of the capital budgeting rules

    measures the amount of value created by the project

    completely consistent to maximize firm value
  21. Three factors drive the choice of which decision rule to make
    • the desired format?
    • normal or non-normal cash flows?
    • independently or mutually exclusive project?
  22. Three types of measurement units for financial decisions
    • currency
    • rate of return
    • time
  23. processing capital budgeting decisions
    • identify how to calculate decision statistic
    • decide on appropriate benchmark
    • define what relationship btwn statistic and the benchmark will dictate
  24. NPV strengths and weaknesses
    strengths: no/go decision, not a ratio, works well with independent and mutually exclusive projects ( want to accept the project with the highest positive NPV )

    Weakness: managers who are unfamiliar can misinterpret results
  25. Payback: how long will it take to recoup costs
    • has intuitive appeal
    • remains popular because easy to compute
    • built in assumptions
  26. Discounted payback
    ignores the time value of money
  27. internal rate of return (IRR)
    most popular technique to analyze projects

    is generally consistent with NPV (problems with non normal cash flows and mutually exclusive projects)
Card Set
final exam finance
final exam finance 201