1) Net present value can be very helpful in deciding among the purchasing of cap
ID: 426283 • Letter: 1
Question
1) Net present value can be very helpful in deciding among the purchasing of capital equipment.
True /False
2) An Organization that is financially leveraged would have:
A lower operating margin
A high current ratio
A high debt to assets ratio
A positive net margin
3) Which is a measure of liquidity?
Asset turnover
Debt to assets ratio
Acid or quick ratio
Operating Margin
4) Appropriate liquidity allows a firm to:
Meet its short-term financial obligations and carry out planned financial transactions
Quickly sell almost all of its assets if threatened with bankruptcy
Minimize the amount of interest it can earn on its invested monies
Understand the amount of debt needed to fund long-term projects
5) All of the following are major problems with net present value except:
Accurately determining future cash flows
Accounting for non-financial, mission based reasons T
he finite amount of available capital
Determining an accurate discount rate
6) A key aspect of net present value is?
Unequal cash flows
Time value of money
Accounting for depreciation
Salvage values
7) In determining capital allocation, a leader should use just one of the three financial analyses methods discussed.
True /False
Explanation / Answer
1) True
Net Present Value (NPV) and Internal Rate of Return (IRR) can be very helpful in making capital budgeting decisions, which involve purchase of land, infrastructure, equipment, vehicles etc.
2) A high debt to assets ratio
Financial leverage is the ratio of debt to equity / asset. So financially leveraged organization would have a high debt to assets ratio.
3) Acid or quick ratio
Quick ratio is a measure of liquidity. It is measured as = (current assets - inventory) / current liabilities. It is a measure of the company's ability to payoff its short term debts. It is also known as acid-test ratio or simply acid ratio. The numerator of the formula has quick asstes that can be converted to cash in the short term, i.e. within 90 days. Inventory is not a quick asset, so it is subtracted from the current assets.
4) Meet its short-term financial obligations and carry out planned financial transactions
5) The finite amount of available capital
6) Time value of money
Net Present Value is the net value of the future cash flows discounted by an appropriate interest rate. The present value of future cash flows is lesser, because the value of money deteriorates over time. This is the concept of time value of money.
7) False
Combination of the three methods should be used to make better capital allocation decisions.
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