managerial exam 3

Payback method

investment required/annual net cash inflows

NPV

PV cash inflows-PV cash outflows

IRR

set NVP = 0 so we get the rate at which cash outflow=cash inflow

use the rate you get and look at the present value annuity sheet to get the IRR %

cash outflow/cash inflow

profitability index

present value of cash inflow/ investment required

SRR

annual incremental net operating income / initial investment

Uses cash flows

NVP

IRR

Payback

Uses NOI

SRR

cash flows

NOI + depreciation

payback method

how many years it takes to pay back initial investment

uses time value of money

NVP

IRR

does NOT use time value of money

Payback

SRR

cost of capital

• average rate of return a company must pay creditors for use of their fund

• can be substituted as discount rate if discount rate not provided

NVP

• calculate NPV of all cash outflows and inflows using the discount factor associated with the discount rate and the year of cash outflow/inflow

• if + then acceptable

• if 0 then acceptable

• if - then not acceptable

IRR

discount rate that makes the NPV of all cash flows equal to 0 in a discounted cash flow analysis

SRR

also called accounting rate of return

NOI

• sales-COGS-other expenses

or

• sales-variable expenses- fixed expenses

Depreciation expense

• If NOI given, then add back depreciation expense to NOI to get cash flows

• if given cash flows, deduct any depreciation expense from cash flows to get NOI

cash inflows

positive

cash outflows

negative

David Ramseys 7 steps to financial freedom

1. save 1,000 for emergency fund

2. pay off all debt

3. save 3-6 months of expenses in a filly funded emergency fund

4. invest 15% household income

5. save for children’s college fund

6. pay off home early

7. build wealth and give

activity variance

• change in revenue and expenses when the master budget is refigured for actual activity levels

• compare flexible budget to master

• want flexible revenue to be higher, expenses to be lower then master budget

revenue and spending variance

• explains change in revenue and expenses related to a change in cost behaviors

• compare actual results to flexible budget

• want actual results to have higher revenue and lower expenses then flexible budget

favorable

when they have the overall effect of increasing NOI

unfavorable

when they have the overall effect of decreasing NOI

Variance

show in absolute value

Variance %

variance/flexible or (master)

management by expectation

• when evaluating variances need to be investigated further

• only investigate material variances (F and U)

materiality

measured in % or $

Planning budget

aka master budget

min dollar of intangible benefits

Negative net present value to be offset ÷ Present value factor

time value of money

dollar today is worth more than the same dollar in the future