Help
Options
Didn't know it?
click below
click below
Knew it?
click below
click below
Don't Know
Remaining cards (0)
Know
retry
shuffle
restart
0:00
Embed Code - If you would like this activity on your web page, copy the script below and paste it into your web page.
Normal Size Small Size show me how
Normal Size Small Size show me how
ES301 Lesson 5-10
Terms from ES301 Lecture Note 5-10
| Question | Answer |
|---|---|
| What is the Minimum Attractive Rate of Return (MARR)? | - The lowest rate of return that should be chosen to maximize the economic well-being of the organization in view of numerous considerations - Also called hurdle rate, cutoff rate, benchmark rate, minimum acceptable rate of return |
| What are the considerations for MARR? | 1. amount of money available for investment, and the source and cost of these funds 2. number of good projects available and their purpose 3. the amount of perceived risk and the estimated cost administering projects 4. type of organization |
| What is capital rationing? | It is a situation that may arise when the available capital is insufficient to sponsor all worthy investment opportunities |
| What is present worth method? | It is a method is a method in investment of capital where all cash flows are discounted to the present point in time at an interest rate that is generally the MARR |
| What is future worth method? | It is a method in investment of capital based on the equivalent worth all cash flows at the end of the planning horizon at an interest rate (MARR) |
| What is annual worth method? | It is a method in investment of capital based on the equivalent uniform annual worth of all cash flows during the study period at an interest rate (MARR) |
| What is the Internal Rate of Return (IRR) Method? | This method solves for the interest rate that equates the equivalent worth of an alternative's cash inflow to the equivalent worth of cash outflows. |
| What is the External Rate of Return (ERR) Method? | This method is similar to IRR, but it directly take's into account the interest rate external to a project at which net cash flows generated or required by the project over its life can be reinvested. |
| What is the payback (payout) period method? | This method solves for the length of time required to recover the first cost of an investment from the nest cash flow produced by that investment for an interest rate of zero. |
| What is the decision rule for the payback (payout) period method? | To invest in the project having the shortest payback period. |
| What is a mutually exclusive analysis? | This type of economic analysis is where the investor faces different investment alternatives, but only one project can be chosen for investment. |
| What is non-mutually exclusive analysis? | This type of economic analysis is where the investor faces different investment alternatives, and more than one project can be chosen regarding capital or budget constraint. |
| What is the criterion for present worth method? | If at least one alternative has a PW at the MARR that is positive, the alternative with the highest PW should be chosen. Otherwise, choose the do-nothing alternative. |
| What is the criterion for future worth method? | It at least one alternative has a positive FW at the MARR, the alternative with the highest FW should be chosen. Otherwise, choose the do-nothing alternative. |
| What is the criterion for equivalent annual worth (EAW) method? | If at least one alternative has a positive EAW at the MARR, the alternative with the highest EAW should be chosen. Otherwise, choose the do-nothing alternative. |
| What is the criterion for equivalent annual cost (EAC) method? | If do-nothing alternative is not an option, choose the alternative with the lowest EAC at the MARR. Choose the do-nothing alternative if it is feasible, and if all EAC values are positive at the MARR. |
| What is the criterion for incremental IRR method? | This is done by pair wise comparison in a defender/challenger approach. At each comparison, choose the higher cost alternative if the IRR exceeds the MARR. Other wise, choose the lower cost alternative. |
| What is the criterion for benefit-cost ratio (B/C) method? | This is done by pair wise comparison in a defender/challenger approach. At each comparison, choose the higher cost alternative if the IRR exceeds1. Other wise, choose the lower cost alternative. |
| What is incremental analysis? | This is a computation step used to be able to compare two projects and determine which project is better. It breaks project B into two: one that is similar to project A, and the other is an incremental project. |
| What is the benefit-cost ratio (BCR)? | It is a ratio used in cost-benefit analysis to summarize the overall relationship between the relative costs and benefits of a proposed project. |
| What is an independent project evaluation? | It is the evaluation of an individual project designed to achieve specific objectives. |
| What is an independent project? | It is when an investor faces different investment alternatives, and evaluation of a project does not affect the evaluation for other projects. |
| What is an unlimited independent project? | It is an independent project that has no budget constraints. A project can be chosen as long as PW >= 0 at the MARR. |
| What is a budget constrained independent project? | It is an independent project where no more than a specified amount of funds can be invested in all of the selected projects, and each project must be PW>=0 at the MARR. |
Created by:
and_ra
Popular Economics sets