Finance Skills for Managers - D076 Unit 6
practice test questions correctly defined a+
guaranteed.
capital budgeting criteria - n
ANS✔
Metrics and calculations used to determine whether a project or asset will add value
and be a worthwhile investment.
Qs
NPV (net present value) - n
ANS✔
it is the sum (or net) of the present values of all of the project's expected cash
inflows and outflows. (The term net refers to what is left over after all costs are
deducted).
Qs
The net present value is calculated by - n
ANS✔
summing the present values of all expected cash inflows and then subtracting the
present value of expected cash outflows such as the initial outlay, which is the cost
of doing the project today. The resulting net present value tells you how much value
is created in today's dollars after accounting for the cost of doing the project.
Qs
Fundamentally, net present value answers this question: - n
ANS✔
If NPV is positive, you should accept the project. If NPV is negative, you should
reject the project. If NPV is positive, it means that the project is potentially
profitable and will add value to shareholder wealth. If negative, the project will
destroy shareholder wealth.
,Qs
There are multiple advantages of the NPV method, three of which will be discussed
in this lesson. The NPV method: - n
ANS✔
Considers time value of money
Calculates value added to the firm
Considers risk and required return
Qs
the NPV considers the time value of money - n
ANS✔
It takes into account the idea that today's dollar is worth more than a dollar in the
future. Each and every period, cash flows are discounted to the present time so you
can compare costs and benefits at different points in time as if they were at the
same point in time in period 0.
Qs
Another advantage of the NPV method is that it tells you how much value is.... - n
ANS✔
added to the firm with the investment project. The NPV is a dollar amount, so if you
calculate the NPV of $15,000, you are adding $15,000 to the firm's value by doing
the project at today's value.
Qs
NPV method is that it takes risk into account by considering... - n
ANS✔
the required rate of return, or cost of capital, as a discount rate. Each investment
and each year of cash flows has different inherent risks.
Qs
While NPV is the best method to use for capital investment decisions, it has some
disadvantages. - n
ANS✔
, Requires calculation of appropriate cost of capital
Is not useful to compare projects of varying sizes
Qs
What indicates to a firm that a project will increase shareholder wealth? - n
ANS✔
The NPV is positive.
Qs
What part of the NPV calculation is very important but difficult to estimate? - n
ANS✔
The cost of capital
Qs
What is an advantage of using the NPV method? - n
ANS✔
It calculates the dollar value that would be added to the firm by doing the project.
Qs
What is a disadvantage of using the NPV method? - n
ANS✔
It is not an effective way to compare projects of different sizes.
Qs
internal rate of return (IRR) - n
ANS✔
the rate of return that a firm earns on its capital projects.
Qs
practice test questions correctly defined a+
guaranteed.
capital budgeting criteria - n
ANS✔
Metrics and calculations used to determine whether a project or asset will add value
and be a worthwhile investment.
Qs
NPV (net present value) - n
ANS✔
it is the sum (or net) of the present values of all of the project's expected cash
inflows and outflows. (The term net refers to what is left over after all costs are
deducted).
Qs
The net present value is calculated by - n
ANS✔
summing the present values of all expected cash inflows and then subtracting the
present value of expected cash outflows such as the initial outlay, which is the cost
of doing the project today. The resulting net present value tells you how much value
is created in today's dollars after accounting for the cost of doing the project.
Qs
Fundamentally, net present value answers this question: - n
ANS✔
If NPV is positive, you should accept the project. If NPV is negative, you should
reject the project. If NPV is positive, it means that the project is potentially
profitable and will add value to shareholder wealth. If negative, the project will
destroy shareholder wealth.
,Qs
There are multiple advantages of the NPV method, three of which will be discussed
in this lesson. The NPV method: - n
ANS✔
Considers time value of money
Calculates value added to the firm
Considers risk and required return
Qs
the NPV considers the time value of money - n
ANS✔
It takes into account the idea that today's dollar is worth more than a dollar in the
future. Each and every period, cash flows are discounted to the present time so you
can compare costs and benefits at different points in time as if they were at the
same point in time in period 0.
Qs
Another advantage of the NPV method is that it tells you how much value is.... - n
ANS✔
added to the firm with the investment project. The NPV is a dollar amount, so if you
calculate the NPV of $15,000, you are adding $15,000 to the firm's value by doing
the project at today's value.
Qs
NPV method is that it takes risk into account by considering... - n
ANS✔
the required rate of return, or cost of capital, as a discount rate. Each investment
and each year of cash flows has different inherent risks.
Qs
While NPV is the best method to use for capital investment decisions, it has some
disadvantages. - n
ANS✔
, Requires calculation of appropriate cost of capital
Is not useful to compare projects of varying sizes
Qs
What indicates to a firm that a project will increase shareholder wealth? - n
ANS✔
The NPV is positive.
Qs
What part of the NPV calculation is very important but difficult to estimate? - n
ANS✔
The cost of capital
Qs
What is an advantage of using the NPV method? - n
ANS✔
It calculates the dollar value that would be added to the firm by doing the project.
Qs
What is a disadvantage of using the NPV method? - n
ANS✔
It is not an effective way to compare projects of different sizes.
Qs
internal rate of return (IRR) - n
ANS✔
the rate of return that a firm earns on its capital projects.
Qs
