Card 1
Question
What role does strategic assessment play in evaluating investment opportunities?
Answer
It identifies unique capabilities and competitive advantages that can drive a positive-NPV opportunity.
CHAPTER 2
Discover CHAPTER 2: 35 flashcards with questions and answers.
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- English
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Card 2
Question
Why is forecasting future cash flows considered more of an art than a science?
Answer
It combines quantitative analysis with judgment, intuition, and experience.
Card 3
Question
How does the DCF process apply to the valuation of a project or investment?
Answer
It involves estimating future cash flows, choosing a discount rate, and calculating present value.
Card 4
Question
What are mutually exclusive projects in capital budgeting?
Answer
Projects that cannot be selected together; choosing one excludes the others.
Card 5
Question
How can changes in working capital affect investment cash flow calculations?
Answer
Changes in working capital reflect the cash needed for operations, impacting the overall cash flow amounts.
Card 6
Question
What are some drawbacks of the payback period model?
Answer
It ignores the time value of money and future cash flows beyond the payback period.
Card 7
Question
Why is it essential to consider terminal value in the valuation of long-term projects?
Answer
Terminal value estimates the present value of cash flows beyond the forecast period, impacting total value.
Card 8
Question
What is internal rate of return (IRR) and how does it relate to investment valuation?
Answer
IRR is the discount rate that makes NPV zero, indicating the investments potential profitability.
Card 9
Question
What factors influence a firms financial performance that could affect valuation?
Answer
Operational efficiency, revenue growth, cost management, and economic conditions.
Card 10
Question
Explain the concept of discounted payback and its advantages.
Answer
Discounted payback accounts for the time value of money when measuring how long it takes to recover initial cost.
Card 11
Question
What are the components that make up free cash flow (FCF)?
Answer
Sales, operating expenses, taxes, depreciation, CAPEX, and changes in net working capital.
Card 12
Question
What role does the Weighted Average Cost of Capital (WACC) play in DCF analysis?
Answer
WACC is used as the discount rate to adjust for the investments risk when calculating present value.
Card 13
Question
How does the net present value (NPV) help in ranking mutually exclusive projects?
Answer
NPV measures the expected contribution to the firms value, allowing comparison between projects.
Card 14
Question
What is the significance of estimating a risk-appropriate discount rate?
Answer
It adjusts the present value of cash flows to reflect the risk level associated with the investment.
Card 15
Question
What is capital expenditure (CAPEX) and why is it important in valuation?
Answer
CAPEX is the investment in long-lived assets necessary for maintaining and expanding production capacity.
Card 16
Question
How does salvage value factor into the calculations for project cash flow?
Answer
Salvage value is considered when estimating cash flows at the end of a projects life.
Card 17
Question
What are the pros and cons of using an income-based valuation approach?
Answer
Pros: Directly correlates cash flows to value; Cons: Sensitive to assumptions and less suitable for unpredictable cash flows.
Card 18
Question
Why is collaboration with complementary product producers significant in project valuation?
Answer
Collaboration ensures product compatibility and growth in related markets, enhancing revenue potential.
Card 19
Question
Define contribution margin and its importance in project cash flow forecasting.
Answer
Contribution margin = (Price per Unit - Variable Cost per Unit); it indicates the profitability of each unit sold.
Card 20
Question
In what scenarios might an investments growth prospects affect its valuation?
Answer
Steady or rapid growth can lead to favorable forecasts, resulting in higher valuations.
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