1the convention for the interest factor eqns and tables is that the cash flows occur when?
end of each year
2when does the break even point occur?
when altering the value of any one of the variables in a situation, holding all other values constant, find the value for the variable that makes the 2 alternatives economically equal
3a break-even analysis is used to describe what?
the percent of capacity of operation for a manufacturing plant at which income will cover expenses
4what is a payback period?
period of time required for the profit or other benefits of an investment to equal the cost of an investment (cost/savings or investments / benefits)
5what is the definition of risk in economics?
the chance of an outcome other than what is planned to occur or expected to occur
6why is equivalence important in economics?
money today is not equal to money at any other point in time
7what m value should you use for continuous compounding?
365
8what does the period reach for continuous compounding?
infinity
9what is the rate of return (yield to maturity)?
interest rate that makes annual benefit equal to annual cost (want the highest RoR possible)
10how is the difference determined in a benefit cost analysis?
subtracting lower intitial cost alternative cash flows from higher initial cost cash flows
11if B/C >= 1, which alternative is acceptable?
higher cost
12if B/C < 1, which alternative is acceptable?
lower cost
13what does a bond value consist of?
present value of all future transactions of the bond (interest payments and repayment)
14what are the steps to solving a benefit cost analysis problem where there are more than two alternatives?
1. Rank alternatives in terms of increasing intitial investment starting with do nothing ($0)
2. Compare first two alternatives (if B/C > 1, go with higher cost alternative)
3. Continue comparing alternatives until the final one is chosen (if one has already lost, do not test it again)
15If interest is compounded annually, then the effective interest rate is ___
the same
16Nominal interest rates don't consider what?
compounding period
17If compounding occurs more than once per year, then the effective interest rate will be ___
higher