MGT8803 Finance
Study online at https://quizlet.com/_77x8vw
1. Why is the Pay- 1) Optimum payback is subjective
back period not a 2) Penalizes long-term projects
great option for 3) Ignores cash flows
valuation?
2. What are some 1) Multiple IRRs can exist
problems with 2) The Scale problem
IRR? 3) The Timing Problem
3. NPV vs IRR -NPV and IRR will generally give the same decision
Exceptions:
-Non-conventional cash flows- cash flow signs change more than once
-Mutually exclusive projects
-Initial investments are substantially different
-Timing of cash flows is substantially different
4. Capital Budget- the process of determining exactly which assets to invest in and how much to invest
ing
5. Principles of Rele- -Principle 1: Record cash flows when the money actually moves, not when the
vant Cash Flows accountant using accrual concept says they occur
-Principle 2: Imagine two worlds, one in which the investment is made and one in
which it is rejected. All cash flows that are different in these two worlds are relevant
to the decision, and those that are the same are irrelevant
6. Sunk Costs Not relevant for present decision
7. Test Marketing Marketing research expenses expended
Cost
8. Erosion Costs Cash flow transferred to a new project from sales and customers of other products
of the firm
1/5
, MGT8803 Finance
Study online at https://quizlet.com/_77x8vw
9. Opportunity Lost revenues from alternative uses of the asset
Costs
10. Real Return The percentage change in the amount of stuff you can actually buy
11. Nominal Return The percentage change in the amount of money you have
12. Capita Budgeting Can either express cash flows in real terms and discount them at the real interest
and Inflation rate
OR
Convert real cash flows to nominal cash flows by allowing them to grow at rate of
inflation and discount them at the nominal rate
13. Depreciation is nominal
always expressed
in _____ terms
14. Issue is impor- 1. Long horizons
tant when deal- 2. High inflationary times
ing with
15. Uncertainty int sensitivity analysis
he forecasts can
be addressed by
conducting...
16. Sensitivity Analy- • Target Market Share
sis • Cost Overrun
• Inflation
• Competition
• Discount Rate
Valuable Options
17. dividends and capital gains
2/5
Study online at https://quizlet.com/_77x8vw
1. Why is the Pay- 1) Optimum payback is subjective
back period not a 2) Penalizes long-term projects
great option for 3) Ignores cash flows
valuation?
2. What are some 1) Multiple IRRs can exist
problems with 2) The Scale problem
IRR? 3) The Timing Problem
3. NPV vs IRR -NPV and IRR will generally give the same decision
Exceptions:
-Non-conventional cash flows- cash flow signs change more than once
-Mutually exclusive projects
-Initial investments are substantially different
-Timing of cash flows is substantially different
4. Capital Budget- the process of determining exactly which assets to invest in and how much to invest
ing
5. Principles of Rele- -Principle 1: Record cash flows when the money actually moves, not when the
vant Cash Flows accountant using accrual concept says they occur
-Principle 2: Imagine two worlds, one in which the investment is made and one in
which it is rejected. All cash flows that are different in these two worlds are relevant
to the decision, and those that are the same are irrelevant
6. Sunk Costs Not relevant for present decision
7. Test Marketing Marketing research expenses expended
Cost
8. Erosion Costs Cash flow transferred to a new project from sales and customers of other products
of the firm
1/5
, MGT8803 Finance
Study online at https://quizlet.com/_77x8vw
9. Opportunity Lost revenues from alternative uses of the asset
Costs
10. Real Return The percentage change in the amount of stuff you can actually buy
11. Nominal Return The percentage change in the amount of money you have
12. Capita Budgeting Can either express cash flows in real terms and discount them at the real interest
and Inflation rate
OR
Convert real cash flows to nominal cash flows by allowing them to grow at rate of
inflation and discount them at the nominal rate
13. Depreciation is nominal
always expressed
in _____ terms
14. Issue is impor- 1. Long horizons
tant when deal- 2. High inflationary times
ing with
15. Uncertainty int sensitivity analysis
he forecasts can
be addressed by
conducting...
16. Sensitivity Analy- • Target Market Share
sis • Cost Overrun
• Inflation
• Competition
• Discount Rate
Valuable Options
17. dividends and capital gains
2/5
