Business Finance 2 Dersi 4. Ünite Sorularla Öğrenelim

What does capital expenditure refer to?

Capital expenditure refers to outlay of funds by the firm that is expected to produce benefits over a period of time longer than one year.

What does strategy refer to?

Strategy refers to formulation and implementation of a company’s key decisions.

What does capital budgeting refer to?

Capital budgeting refers to the process of evaluating and selecting long-term investments which are consistent with the firm’s main objective of maximizing shareholders’ wealth.

What does corporate strategy refer to?

Corporate strategy refers to strategies for company’s whole portfolio of resources, and strategies for business unit’s products, as well.

What does economic profit refer to?

Economic profit refers to the risk-adjusted present value of revenue minus all costs, including the opportunity cost of capital.

What are the three basic steps of capital budgeting activity process?

1. Identifying potential investments
2. Analyzing the set of investment opportunities, isolating those that will create shareholder value, and prioritizing them if necessary
3. Implementing and monitoring the investment projects selected

Why is depreciation important in relation to the estimation of investment projects’ cash flows?

Depreciation is considered as a relevant cash flow to capital investment project evaluation which should be included in the analysis. In fact, depreciation is a non-cash expense item, but it affects the taxable income of a company. It means that although one does not need any cash to pay depreciation expense each year, it changes the amount of taxes paid which is a cash expense. Remember the income statement and note that depreciation expense is subtracted from revenue, and EBITDA (earnings before interest, tax, depreciation and amortization) is found. It means that it is deducted before the tax expense is calculated. By this way, depreciation creates a tax-shield. Likewise, in capital investment project’s income statement, depreciation is deducted before the tax expense is calculated. To calculate the cash flow of a project, we should add depreciation amount back to the project’s net income.

What are the reasons to make a capital investment project?

1. Replacement of the existing plant and equipment
2. Modernization of the existing plant and equipment
3. Expansion of the existing and new products

What does incremental cash flow refer to?

Incremental cash flow refers to a change in a firm’s net cash flow attributable to an investment project.

What does opportunity cost refer to?

Opportunity cost refers to the return on the best alternative use of an asset; the highest return that will not be earned if funds are invested in a particular project.

What are the project types for relative state of the investments regarding dependence on each other?

1. Mutually exclusive projects: the type of projects in which selecting one project prevents other projects from being undertaken.
2. Independent projects: the type of projects in which projects are not in direct competition with one another.
3. Contingent projects: the type of projects in which approval or rejection of a project is contingent on approval or rejection of another project.

What does investment refer to?

Investment refers to all kinds of spendings made to acquire, sustain, and increase production factors.

What does competitive advantage refer to?

Competitive advantage refers to a firm’s attribute that may allow the firm to generate economic profits.

What is the source of positive economic profits?

Positive economic profits (or positive net present value projects) can stem from two sources: i) market imperfections, ii) creating competitive advantage.

What is the general opinion regarding positive net present value in perfectly competitive markets?

In perfectly competitive markets it is assumed that it is not possible to find investment projects which provide positive net present value.

What is payback period?

Payback period technique tells the length of time it takes to get the initial cash outflow back.

Why are financing costs important in relation to the estimation of investment projects’ cash flows?

Financing costs are irrelevant cash flows to capital investment project evaluation which should not be included in the analysis. Although interest and loan payments require cash outflow, one should exclude them while making estimations of cash flows. The reason is cost of financing or minimum rate of required return is included in the capital budgeting analysis in the discount rate. Financing costs are incorporated in the process with the discount rate. Therefore, it would be double-considering if we included financing costs as cash outflows.

What is discounted payback period?

Discounted payback period technique
tells the length of time it takes cumulative
present values of cash inflows will be equal
to the initial cash outflow.

What does sunk cost refer to?

Sunk cost refers to a cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected.

What do externalities refer to?

Externalities refer to the way in which accepting a project affects the cash flows in other areas of the firm.