BSNS114 Final Exam Study Set
CapEx (Capital Expenditure) - Answer Up-front cost, money firm spends to invest in a
project - plants, property & equipment.
Salvage (liquidation) value - Answer CF firm will receive if it terminated the project
today.
Expansion project - Answer Major strategic decisions to enter new areas of business or
new markets (can be geographic change or new consumers in the same location).
New product project - Answer Decision on new ventures within existing businesses or
markets - similar to what you've always done but an upgrade.
Replacement project - Answer Decision to replace existing assets with new assets -
upgrading existing assets.
Independent project - Answer A project whose acceptance or rejection doesn't depend
on other projects.
Mutually exclusive projects - Answer Projects in which acceptance of one project
excludes the others from consideration - if you pick one project you can't pick the
others.
PP (Payback period) - Answer How quickly the CFs generated by the project cover the
initial investment.
NPV (Net present value) - Answer Net present value of all CFs.
IRR (Internal rate of return) - Answer The rate of return such that it makes the project
break even (when your project makes back your investments - when NPV = 0).
Multiple IRR problem - Answer If CFs change signs more than once during the life of the
project, there may be more than 1 rate that can force the NPV of the CFs to be equal to
0.
Tax effects - Answer The impact that taxes have on the financial performance of an
individual or business.
OCF (operating cash flows) - Answer A measure of the amount of cash generated by a
company's normal business operations.
BV (Book value) - Answer The value of an asset as reported on a company's balance
sheet.
MV (Market value) - Answer Current value of an asset based on its market price
(determined by other people).
, CFs are incremental - Answer Analyse each project in isolation from the firm by
focussing on the project CF as if it was a mini firm.
FCF (Free cash flows) - Answer The unleveraged (looking at assets not debt & equity)
free cash flows to the firm (paid to suppliers of the capital - debtholders &
shareholders).
3 significant factors that account for the difference between accounting earnings and
project cash flows? - Answer Accrual VS Cash revenues, Accrual VS Cash expense,
Noncash charges
Accrual VS Cash revenues - Answer The accrual system of accounting leads to
revenues being recognised when a sale is made, rather than when the customer pays
for the good/service.
Accrual VS Cash expense - Answer Expenses are recognised when incurred, even if
cash was not paid.
Noncash charges - Answer Capital expenditures are not subtracted from revenues in
the period they were made.
Straight line depreciation method - Answer Assets cost is divided equally over it's useful
life.
Time value of money rule - Answer Receiving CFs earlier is a lot better than receiving
CFs later as TVM rule states that money generally becomes less valuable overtime due
to the effects of inflation.
ATS (After tax salvage) - Answer If you sell your assets at the end of your project & make
a profit, you have to pay taxes on it. The remaining amount is the ATS.
Salvage - Answer How much you can sell your asset for at the end of the project or the
end of its lifetime.
Accounts payable (and examples) - Answer Liability account that represents the amount
of money a company owes to its suppliers or vendors for goods/services that have been
purchased on credit but not paid for. E.g. Bills, electricity payments, taxes.
Accounts receivable - Answer Amount of money that a company is owed by its
customers for goods/services that have been sold on credit but not paid for.
Inventory - Answer Goods or products that a company has on hand & available for sale
to customers.
NWC (Net working capital) - Answer Difference between non-cash current assets
(inventory & accounts receivable) and non-debt current liabilities (accounts payable).
EBIT - Answer Earnings before interest & taxes (operating income)
EBIAT - Answer Earnings before interest after taxes (net income)
CapEx (Capital Expenditure) - Answer Up-front cost, money firm spends to invest in a
project - plants, property & equipment.
Salvage (liquidation) value - Answer CF firm will receive if it terminated the project
today.
Expansion project - Answer Major strategic decisions to enter new areas of business or
new markets (can be geographic change or new consumers in the same location).
New product project - Answer Decision on new ventures within existing businesses or
markets - similar to what you've always done but an upgrade.
Replacement project - Answer Decision to replace existing assets with new assets -
upgrading existing assets.
Independent project - Answer A project whose acceptance or rejection doesn't depend
on other projects.
Mutually exclusive projects - Answer Projects in which acceptance of one project
excludes the others from consideration - if you pick one project you can't pick the
others.
PP (Payback period) - Answer How quickly the CFs generated by the project cover the
initial investment.
NPV (Net present value) - Answer Net present value of all CFs.
IRR (Internal rate of return) - Answer The rate of return such that it makes the project
break even (when your project makes back your investments - when NPV = 0).
Multiple IRR problem - Answer If CFs change signs more than once during the life of the
project, there may be more than 1 rate that can force the NPV of the CFs to be equal to
0.
Tax effects - Answer The impact that taxes have on the financial performance of an
individual or business.
OCF (operating cash flows) - Answer A measure of the amount of cash generated by a
company's normal business operations.
BV (Book value) - Answer The value of an asset as reported on a company's balance
sheet.
MV (Market value) - Answer Current value of an asset based on its market price
(determined by other people).
, CFs are incremental - Answer Analyse each project in isolation from the firm by
focussing on the project CF as if it was a mini firm.
FCF (Free cash flows) - Answer The unleveraged (looking at assets not debt & equity)
free cash flows to the firm (paid to suppliers of the capital - debtholders &
shareholders).
3 significant factors that account for the difference between accounting earnings and
project cash flows? - Answer Accrual VS Cash revenues, Accrual VS Cash expense,
Noncash charges
Accrual VS Cash revenues - Answer The accrual system of accounting leads to
revenues being recognised when a sale is made, rather than when the customer pays
for the good/service.
Accrual VS Cash expense - Answer Expenses are recognised when incurred, even if
cash was not paid.
Noncash charges - Answer Capital expenditures are not subtracted from revenues in
the period they were made.
Straight line depreciation method - Answer Assets cost is divided equally over it's useful
life.
Time value of money rule - Answer Receiving CFs earlier is a lot better than receiving
CFs later as TVM rule states that money generally becomes less valuable overtime due
to the effects of inflation.
ATS (After tax salvage) - Answer If you sell your assets at the end of your project & make
a profit, you have to pay taxes on it. The remaining amount is the ATS.
Salvage - Answer How much you can sell your asset for at the end of the project or the
end of its lifetime.
Accounts payable (and examples) - Answer Liability account that represents the amount
of money a company owes to its suppliers or vendors for goods/services that have been
purchased on credit but not paid for. E.g. Bills, electricity payments, taxes.
Accounts receivable - Answer Amount of money that a company is owed by its
customers for goods/services that have been sold on credit but not paid for.
Inventory - Answer Goods or products that a company has on hand & available for sale
to customers.
NWC (Net working capital) - Answer Difference between non-cash current assets
(inventory & accounts receivable) and non-debt current liabilities (accounts payable).
EBIT - Answer Earnings before interest & taxes (operating income)
EBIAT - Answer Earnings before interest after taxes (net income)
