Financial Concepts and Terminologies Quiz
18 Questions
45 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

Which of the following best describes the purpose of computing Equivalent Annual Cost (EAC)?

  • To determine the total cost per year of owning, operating, and maintaining an asset over its lifetime (correct)
  • To determine the tax liability on an asset
  • To calculate the present value of an asset
  • To calculate the depreciation expense of an asset
  • What is the reason for computing EAC?

  • Interest rates
  • Inflation
  • Depreciation
  • Taxativity (correct)
  • In what type of firms does the termination of a major founder(s) result in the termination of the firm?

  • Proprietorship and limited partnership (correct)
  • Non-profit organizations
  • Sole proprietorship and partnership
  • Corporation and LLC
  • Which type of entity typically has limited liability to the amount of capital conferred?

    <p>Corporations</p> Signup and view all the answers

    What does EBITDA represent?

    <p>A measure of gross operating cash flow</p> Signup and view all the answers

    For what type of cash flows can the Net Present Value be computed?

    <p>For all types of cash flows</p> Signup and view all the answers

    What do fixed costs exclude?

    <p>Production costs</p> Signup and view all the answers

    What does the current ratio measure?

    <p>Liquidity</p> Signup and view all the answers

    What does the payback period count?

    <p>The number of years requested to recoup the initial investment</p> Signup and view all the answers

    What is the formula for calculating net working capital?

    <p>Current assets minus current liabilities</p> Signup and view all the answers

    What is contribution margin per unit?

    <p>Sales minus variable costs</p> Signup and view all the answers

    What is the internal rate of return (IRR)?

    <p>The rate at which the net present value is zero</p> Signup and view all the answers

    What is the purpose of incremental cash flow analysis?

    <p>To scale problem of the cash flows</p> Signup and view all the answers

    What does real cash flow differ from nominal cash flow in terms of?

    <p>Inflation</p> Signup and view all the answers

    What is the internal rate of return (IRR)?

    <p>A single number used to summarize the financial merits</p> Signup and view all the answers

    What is the method to tackle the scale problem of cash flows?

    <p>Incremental internal rate of return</p> Signup and view all the answers

    What is the method that cannot tackle the timing problem of cash flow?

    <p>Payback period</p> Signup and view all the answers

    What is the relationship between discounted payback period and payback period?

    <p>Discounted payback period is never smaller than payback period</p> Signup and view all the answers

    Study Notes

    Equivalent Annual Cost (EAC)

    • EAC serves as a method to compare the annual cost of different projects or investments with varying lifespans.
    • Computing EAC helps in making decisions for projects by converting costs into an equivalent annual amount.

    Termination of Founders Impact

    • In certain firms, especially sole proprietorships or partnerships, the termination of a major founder leads to the termination of the firm.
    • This often occurs in closely-held family businesses or firms heavily reliant on a founder's leadership.

    Limited Liability

    • Limited liability is typically associated with corporations and limited liability companies (LLCs), where owners are not personally liable beyond their investment.

    EBITDA

    • EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, representing a firm's operational profitability by focusing on earnings from core business functions.

    Net Present Value (NPV)

    • NPV can be computed for cash flows that occur at different times, evaluating the profitability of an investment by discounting future cash flows to present value.

    Fixed Costs

    • Fixed costs exclude variable costs and are expenses that remain constant regardless of production levels in the short term.

    Current Ratio

    • The current ratio measures a company’s ability to pay its short-term liabilities with its short-term assets, indicating liquidity and financial health.

    Payback Period

    • The payback period counts the time required for an investment to generate cash flows sufficient to recover its initial cost.

    Net Working Capital Formula

    • Net working capital is calculated as current assets minus current liabilities, reflecting liquidity and operational efficiency.

    Contribution Margin per Unit

    • Contribution margin per unit represents the revenue remaining after variable costs have been subtracted, contributing to covering fixed costs and profit generation.

    Internal Rate of Return (IRR)

    • IRR is the discount rate at which the net present value of an investment's cash flows equals zero, indicating the expected annual return.

    Incremental Cash Flow Analysis

    • Incremental cash flow analysis is used to evaluate the additional cash flows generated by a project, aiding in decision-making for capital investments.

    Real vs. Nominal Cash Flow

    • Real cash flow adjusts for inflation, providing a more accurate measure of purchasing power over time compared to nominal cash flow, which reflects current market values.

    Scale Problem of Cash Flows

    • The scale problem can be tackled using techniques such as the Internal Rate of Return (IRR), which adjusts for investment size and cash flow magnitude.

    Timing Problem of Cash Flow

    • The payback method does not effectively address the timing problem of cash flows, as it ignores cash flows beyond the payback period.

    Discounted Payback vs. Payback Period

    • The discounted payback period accounts for the time value of money, whereas the payback period ignores it, potentially leading to different conclusions in investment analysis.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Description

    This quiz will test your knowledge on various financial concepts such as Equivalent Annual Cost (EAC) and the reasons why it is computed. You will also be asked about the termination of a firm's life in relation to proprietorship and limited partnership. Sharpen your financial skills and take this quiz now!

    More Like This

    Business Finance Terminology
    17 questions
    Cost Terminology in Business Accounting
    24 questions
    Business Finance Terminology
    13 questions
    Introduction to Cost Terms and Purposes
    40 questions
    Use Quizgecko on...
    Browser
    Browser