D076 WGU UNIT 6 FINANCE SKILLS FOR MANAGERS
capital budgeting criteria - Answer -Metrics and calculations used to determine whether
a project or asset will add value and be a worthwhile investment.
NPV (net present value) - Answer -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).
The net present value is calculated by - Answer -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.
Fundamentally, net present value answers this question: - Answer -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.
There are multiple advantages of the NPV method, three of which will be discussed in
this lesson. The NPV method: - Answer -Considers time value of money
Calculates value added to the firm
Considers risk and required return
the NPV considers the time value of money - Answer -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.
Another advantage of the NPV method is that it tells you how much value is.... - Answer
-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.
NPV method is that it takes risk into account by considering... - Answer -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.
While NPV is the best method to use for capital investment decisions, it has some
disadvantages. - Answer -Requires calculation of appropriate cost of capital
Is not useful to compare projects of varying sizes
What indicates to a firm that a project will increase shareholder wealth? - Answer -The
NPV is positive.
, What part of the NPV calculation is very important but difficult to estimate? - Answer -
The cost of capital
What is an advantage of using the NPV method? - Answer -It calculates the dollar
value that would be added to the firm by doing the project.
What is a disadvantage of using the NPV method? - Answer -It is not an effective way
to compare projects of different sizes.
internal rate of return (IRR) - Answer -the rate of return that a firm earns on its capital
projects.
Mathematically, the IRR is the rate of return that makes the NPV of the project.... -
Answer -equal to zero.This is because it is the rate of return that makes the present
value of the cash inflows exactly equal the present value of the cash outflows
If the return or the IRR exceeds the cost of capital, - Answer -you should accept the
project
if the IRR is short of the cost of capital, - Answer -you should reject the project.
Consider the advantages of the IRR method. The IRR: - Answer -is easy to interpret,
considers time value of money, and
does not require use of required rate of return.
one of the biggest advantages of using the IRR method is that it is easy to interpret. -
Answer -It gives you the rate of return for the initial investment you put in for the project.
If the IRR is calculated to be 12% on a new project with an initial investment of
$150,000, it means that you will earn a 12% return on your investment of $150,000,
pretty straight forward
Similar to the NPV method, IRR also considers the time value of money. - Answer -The
purpose of calculating the IRR is to look for the exact rate at which the sum of all the
discounted future cash flows is equal to the initial investment. In the IRR calculation, the
timing of every future cash flow is considered and discounted appropriately.
In addition, management does not have to estimate the required rate of return to
calculate the IRR. - Answer -The required rate of return can be difficult to calculate, and
is often subjective based on the assumptions made in terms of the value added,
alternative opportunities, and how risky analysts feel the project is. To calculate the
NPV, for instance, you must first calculate an appropriate and accurate required rate of
return, which can take substantial time and effort.
There are several disadvantages of the IRR method. The IRR: - Answer -is not a good
indicator of the amount of value created,
ignores mutually exclusive projects,
capital budgeting criteria - Answer -Metrics and calculations used to determine whether
a project or asset will add value and be a worthwhile investment.
NPV (net present value) - Answer -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).
The net present value is calculated by - Answer -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.
Fundamentally, net present value answers this question: - Answer -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.
There are multiple advantages of the NPV method, three of which will be discussed in
this lesson. The NPV method: - Answer -Considers time value of money
Calculates value added to the firm
Considers risk and required return
the NPV considers the time value of money - Answer -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.
Another advantage of the NPV method is that it tells you how much value is.... - Answer
-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.
NPV method is that it takes risk into account by considering... - Answer -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.
While NPV is the best method to use for capital investment decisions, it has some
disadvantages. - Answer -Requires calculation of appropriate cost of capital
Is not useful to compare projects of varying sizes
What indicates to a firm that a project will increase shareholder wealth? - Answer -The
NPV is positive.
, What part of the NPV calculation is very important but difficult to estimate? - Answer -
The cost of capital
What is an advantage of using the NPV method? - Answer -It calculates the dollar
value that would be added to the firm by doing the project.
What is a disadvantage of using the NPV method? - Answer -It is not an effective way
to compare projects of different sizes.
internal rate of return (IRR) - Answer -the rate of return that a firm earns on its capital
projects.
Mathematically, the IRR is the rate of return that makes the NPV of the project.... -
Answer -equal to zero.This is because it is the rate of return that makes the present
value of the cash inflows exactly equal the present value of the cash outflows
If the return or the IRR exceeds the cost of capital, - Answer -you should accept the
project
if the IRR is short of the cost of capital, - Answer -you should reject the project.
Consider the advantages of the IRR method. The IRR: - Answer -is easy to interpret,
considers time value of money, and
does not require use of required rate of return.
one of the biggest advantages of using the IRR method is that it is easy to interpret. -
Answer -It gives you the rate of return for the initial investment you put in for the project.
If the IRR is calculated to be 12% on a new project with an initial investment of
$150,000, it means that you will earn a 12% return on your investment of $150,000,
pretty straight forward
Similar to the NPV method, IRR also considers the time value of money. - Answer -The
purpose of calculating the IRR is to look for the exact rate at which the sum of all the
discounted future cash flows is equal to the initial investment. In the IRR calculation, the
timing of every future cash flow is considered and discounted appropriately.
In addition, management does not have to estimate the required rate of return to
calculate the IRR. - Answer -The required rate of return can be difficult to calculate, and
is often subjective based on the assumptions made in terms of the value added,
alternative opportunities, and how risky analysts feel the project is. To calculate the
NPV, for instance, you must first calculate an appropriate and accurate required rate of
return, which can take substantial time and effort.
There are several disadvantages of the IRR method. The IRR: - Answer -is not a good
indicator of the amount of value created,
ignores mutually exclusive projects,
