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Questions and Answers
What is the primary decision a firm must make regarding investments?
What is the primary decision a firm must make regarding investments?
What does the payback period measure?
What does the payback period measure?
Which method is not based on cash flow for investment decisions?
Which method is not based on cash flow for investment decisions?
According to the payback rule, which project should be selected?
According to the payback rule, which project should be selected?
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What characterizes an annuity in investment terms?
What characterizes an annuity in investment terms?
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Study Notes
Investment Decisions in Firms
- Firms face numerous investment options.
- Limited capital necessitates careful investment allocation.
- Crucial to determine the best investment strategies.
Investment Evaluation Methods
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Cash flow-based methods: Focus on future cash inflows.
- Payback period: Calculates time to recover initial investment.
- Net Present Value (NPV): Considers time value of money.
- Internal Rate of Return (IRR): Discount rate yielding zero NPV.
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Non-cash flow (accounting-based) methods: Rely on accounting data.
- Average accounting return: Measures profitability relative to investment.
Payback Period
- Calculates the time needed for cumulative projected cash flows to equal the initial investment.
- Firms use a desired payback period to evaluate projects.
- Projects with shorter payback periods are generally preferred.
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Description
Explore the fundamentals of investment decision-making in firms, including cash flow-based methods like Payback Period, NPV, and IRR. Learn how to evaluate investment strategies effectively and understand the importance of careful capital allocation. This quiz covers both cash flow and accounting-based methods for assessing potential projects.
