D076 Module 11 AQA ALREADY PASSED

Why is it important to consider all relevant cash flows in an ideal evaluation method for capital investment? - Without considering every cash flow of a potential project, you do not know how the project will enhance the value of a firm. Talia is comparing four mutually exclusive projects. In order to choose the best project to optimize the goal of the firm, which capital budgeting method should Talia use? - Net present value (NPV) Alphabet Co. has $50,000 to spend on capital investment projects for the next year. It will do as many projects as it has cash for. Alphabet Co. calculates the potential incremental cash flows and costs of the projects as well as the NPV, IRR, and PI for each project. How should the company decide which projects to invest in if it wants to maximize the total amount of value created? - It should choose the projects with the highest PIs until all capital has been used What is opportunity cost as it relates to the time value of money? - It is the opportunity you forgo to invest in other options due to the time scope of an investment. Why is the timing of cash flows an important characteristic of capital investment? - Timing of cash flows is related to the opportunity cost associated with those cash flows. Why is there always a cost for bringing funds into a business? - A business must compensate investors for the risk that they are taking to invest in the business. What is the relationship between the risk and the rate of return? - The higher the risk investors have to take on, the higher return they require. How can having more debt benefit a company? - It allows management to retain more control over the company.