Exam Preparation Notes

Present Value Formula (Chapter 5)

• Application: Essential for determining the present value of future cash flows.
• Use Cases: Utilized in Chapter 9 for the profitability index and discounted payback calculations, also relevant in Chapter 10 for calculating present value of cash flows.

Ordinary Annuities (Chapter 6)

• Definition: The present value formula for ordinary annuities will be crucial in calculations related to loan payments and savings.
• Loan Payment Calculation: Understanding how to schedule loan payments.
• Common Mistakes: Students often struggle with loan calculations; ensure clarity in formula application.

Profitability Measures (Chapter 9)

• Included Concepts: Discounted profitability and average accounting returns.
• Importance: These metrics evaluate investment decisions within time value of money context.

Net Working Capital and Salvage Value (Chapter 10)

• Key Terms: Evaluate net working capital and calculate salvage value impacts when determining present value.
• Utilization of Chapter 5 Formula: Same foundational formulas used across calculations, ensuring consistent methodology.

Sensitivity Analysis (Chapter 11)

• Exam Exclusion: Financial break-even not included, focus on sensitivity analysis alone.
• Importance: Sensitivity analysis helps assess how changes in assumptions affect outcomes.

Short Answer Questions (Chapter 13)

• Format: Expect three short answer questions; concise depth required (1-2 paragraphs).
• Topics to Prepare: Correlation coefficient, systematic vs non-systematic risk, security market line, diversification.

Weighted Average Cost of Capital (Chapter 14)

• Calculation Overview: Calculates a weighted cost that serves as a discount reference for prior chapters' evaluations.
• Focus: Equity, cost of debt after taxes, and preferred stock calculations.
• Common Formula: When using the capital asset pricing model, remember to integrate the risk-free rate, beta, and market premium.

Important Formulas and Terms

• Depreciation Calculation: Investment divided by years of useful life, minus salvage value (if applicable).
• PVIF (Present Value Interest Factor): To calculate annuities—requires discount rate and number of years.
• Present Value of Annuities Formula for loan payment calculations and savings plans.

Exam Strategy

• Step-by-Step Calculation: Clearly show calculations to receive partial credit even if final answers are incorrect. Avoid only providing the final answer without process.
• Calculator Preparedness: Test functionality prior to exam day. Have backup calculators ready. Only bring student ID.
• Formula Sheet Availability: Formulas provided in the exam; memorization not required—focus on understanding.