Definitions
Formulas
Theory
Practice
Lottery
100
What is the analysis which can be used to evaluate a particular industry's attractiveness, profitability and return of investment? This analysis sheds light on the risk factors associated with each of the elements.
Porter's Five Forces
100
What is: We*Ke + Wd*Kd
Weighted Average Cost of Capital (WACC)
100
What is source of the investment's capital?
Equity and debt
100
An investment project costing 1mio. will be finance by €0.6 mio. in debt and €0.4 mio. in equity. Debt financing has an interest rate of 8% p.a. , and the rate of return of investors require is 15% p.a. What is WACC?
WACC = 10,8%
100
What is a finance tool which is used to make cash flows generated at different points in time comparable to one another?
Discounting
200
What is number of level streams/ equal amounts payable at fixed time intervals?
Annuity
200
What is: NPV * (1+I)
Future Value (FV)
200
A very solid strategic model that comprehensively links together all the strategic tools and offers a good overview of the internal and external position and situation for a given company.
SWOT analysis
200
You deposit €100,000 at a 10% p.a. interest rate. how much will you have in your account after 1 year?
€110,000
200
False/True question: Amounts grow when compounded into the future. Amounts decrease when discounted back in time.
True
300
What is called the rate of return which yields a net present value of precisely 0?
Internal Rate of Return (IRR)
300
What is: (FV/NPV) - 1
I (interest rate) (2.3)
300
Investment theory typically uses three primary measures to evaluate the profitability of an investment. What are these measures?
Net Present Value (NPV) Internal Rate of Return (IRR) Annuity (A)
300
€4,000 will grow to €8,000 in 8 years. What is the implied annual rate of interest?
9.05%
300
How many years will it take for €7,000 yielding 7% per year to grow to €13,770?
10 years
400
What is : NPV * PVIFA^-1
Annuity (A)
400
What is : A* PVIFA
NPV
400
Which measures can be used for evaluating alternative investment with different lifetimes? NPV - ? absolute IRR - ? relative IRR - ? Annuity - ?
NPV (always) - highest NPV absolute IRR - not applicable relative IRR - difficult to apply Annuity - not applicable
400
€1mio. is paid out in 20 level annual payments. The interest rate is 5% p.a. How much will be paid out annually?
€80,245.87
400
What is: (((1 + I)^N) - 1)/ I
Future value interest factor for an annuity (FVIFA)
500
A successive number of investments where the same basic investment with the same cash flow is repeated in perpetuity.
Chain Investment
500
What is (Initial Investment + NPV)/ Initial Capital Investment
PI
500
What are the key weaknesses of the Payback method?
1. Cash flows in different periods receive equal weighting 2. Cash flows after the payback period are ignored 3. The threshold payback period is subjectively determined.
500
What is payback period (discounted and not discounted) for the following investment? Discount rate: 10% 0: -200,000 1: 40,000 2: 60,000 3: 80,000 4: 80,000 5: 60,000 6: 40,000
Payback (not discounted) = 3.5 Payback discounted = 3.99
500
Which of the investments (Alternative chain investments) would you chose? Please justify: Investment 1 Investment 2 0: -250,000 0: -200,000 1: 75,000 1: 100,000 2: 100,000 2: 150,000 3: 125,000 3: 100,000 4: 100,000 5: 75,000
Investment 1: NPV = 109,611.24 Annuity = 28,915.17 NPV chain = 289,152.69 Investment 2: (Chosen) NPV= 90,007.51 Annuity = 36,193.35 NPV Chain = 361,933.53
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