Podcast
Questions and Answers
A property's investment value to a particular investor is influenced by which factor?
A property's investment value to a particular investor is influenced by which factor?
When is the profitability index particularly useful?
When is the profitability index particularly useful?
The profitability index is best utilized when projects are:
The profitability index is best utilized when projects are:
What does the purchase price yielding the lowest acceptable rate of return represent?
What does the purchase price yielding the lowest acceptable rate of return represent?
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Which statement about risk analysis in investment projects is true?
Which statement about risk analysis in investment projects is true?
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Which characteristic best describes the net present value?
Which characteristic best describes the net present value?
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How can varying credit terms from the seller affect an investor's decision?
How can varying credit terms from the seller affect an investor's decision?
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Which of the following is a common misconception about project selection?
Which of the following is a common misconception about project selection?
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What do investors typically want from a project’s profitability index?
What do investors typically want from a project’s profitability index?
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What does the summation technique compensate for?
What does the summation technique compensate for?
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Why is using the marginal cost of capital as a discount rate difficult?
Why is using the marginal cost of capital as a discount rate difficult?
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Which risk remains even when considering a 'riskfree' rate of return?
Which risk remains even when considering a 'riskfree' rate of return?
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Which technique is more useful for comparing projects with different initial cash outflows?
Which technique is more useful for comparing projects with different initial cash outflows?
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What can cause dramatic changes in net present value?
What can cause dramatic changes in net present value?
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What is a potential drawback of using a high discount rate?
What is a potential drawback of using a high discount rate?
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Study Notes
Opportunity Cost of Capital as Discount Rate
- Easily understood by most investors
- Allows direct comparison of projects with similar risk
- Permits risk analysis in policy guidelines
Property Investment Value
- Varies based on investor's marginal income tax bracket
- Affected by credit terms offered by the seller
- Varies based on investor's risk tolerance
- Not computed using the risk-free rate of return
Profitability Index
- Useful for comparing projects with different initial cash outlays
- Useful when projects differ in the time of cash inflows
- A profitability index above 1 suggests acceptance
- A profitability index below zero suggests rejection (not accurate)
Choosing Among Mutually Exclusive Projects
- Most useful when projects differ in initial cash outlay
Purchase Price and Investment Value
- The purchase price yielding the lowest acceptable return is the investment value to the investor
- It's the present value of anticipated future cash flows
Summation Technique
- Doesn't compensate for risk or illiquidity
Marginal Cost of Capital as Discount Rate
- Difficult to use when funds come from multiple sources
- Difficult to use when investors are private corporations or non-corporate investors
- Combining both points is the best summary
Risk-Free Rate of Return
- Still involves risks like inflation, lower-than-expected interest rates, and default risk
Discount Rate and Investment Selection
- Using an unreasonably high discount rate makes an investment appear unjustifiably unattractive
- Small discount rate changes can significantly impact net present value
- Future cash flows are more sensitive to discount rate changes
- Discount rate changes affect project rankings when project cash flow timing differs
Comparing Projects with Different Initial Outlays
- The profitability index is generally more useful when comparing projects requiring different initial cash outlays.
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Description
Test your understanding of key concepts in investment valuation, including opportunity cost of capital, profitability index, and comparing mutually exclusive projects. This quiz covers essential strategies for evaluating property investments and understanding their value based on various financial metrics.
