Finance
Final Finance Exam Notes
Definitions:
1. Capital Budgeting is the process of evaluating proposed large, long-term investment projects.
Capital budgeting is primarily concerned with evaluating investment alternatives.
The first step in the capital budgeting process is idea development.
A characteristic of capital budgeting is the internal rate of return must be greater than the cost of capital.
One of the simplest capital budgeting decision method is the payback method.
Capital budgeting techniques are usually used only for projects with large cash outlays.
2. Payback period is the number of time periods it will take before the cash inflows of a proposed project equal the amount of the initial project investment (a cash outflow). The payback period is calculated by counting the number of years it will take to recover the cash invested in a project.
3. Net present value is the dollar amount of the change in the value of the firm as a result of undertaking the project.
With non-mutually exclusive projects, the net present value and the internal rate of return methods will accept or reject the same project.
The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method assumes that cash flows are reinvested at the firm's weighted average cost of capital.
The net present value assumes returns are reinvested at the cost of capital.
If an investment project has a positive net present value, then the internal rate of return is greater than the cost of capital.
4. Internal rate of return is that rate of return at which the NPV from the above investments will become zero.
5. Mutually exclusive are two projects wherein the taking up of one project prevents the taking up of the other project. If projects are mutually exclusive, the selection of one alternative precludes the selection of other alternatives.
6. Capital rationing is the practice
Definitions:
1. Capital Budgeting is the process of evaluating proposed large, long-term investment projects.
Capital budgeting is primarily concerned with evaluating investment alternatives.
The first step in the capital budgeting process is idea development.
A characteristic of capital budgeting is the internal rate of return must be greater than the cost of capital.
One of the simplest capital budgeting decision method is the payback method.
Capital budgeting techniques are usually used only for projects with large cash outlays.
2. Payback period is the number of time periods it will take before the cash inflows of a proposed project equal the amount of the initial project investment (a cash outflow). The payback period is calculated by counting the number of years it will take to recover the cash invested in a project.
3. Net present value is the dollar amount of the change in the value of the firm as a result of undertaking the project.
With non-mutually exclusive projects, the net present value and the internal rate of return methods will accept or reject the same project.
The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method assumes that cash flows are reinvested at the firm's weighted average cost of capital.
The net present value assumes returns are reinvested at the cost of capital.
If an investment project has a positive net present value, then the internal rate of return is greater than the cost of capital.
4. Internal rate of return is that rate of return at which the NPV from the above investments will become zero.
5. Mutually exclusive are two projects wherein the taking up of one project prevents the taking up of the other project. If projects are mutually exclusive, the selection of one alternative precludes the selection of other alternatives.
6. Capital rationing is the practice