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In-Class Activity 2

https://www.youtube.com/watch?v=8LB-CV6QcSc

Please watch the video, “The Asset Investment Decision” and respond to the following questions.  Remember your responses must demonstrate a thorough understanding of the topics being discussed.

1.       What did the lecturer say another term for Asset Investment Decision was?

2.       What are some of the companies he mentioned that use asset investment decisions?

3.       What model is going to be used for the presentation? What did he say was needed for this model?

4.       Identify and discuss the 4 assumptions to be used throughout the presentation?

5.       Discuss, in your own words, the question he asked “Why in theory does the firm value go up $6405?”  Do you understand the idea behind this theory?

6.       Why does knowing how the money will be spent impact whether you will lend it?  Give a personal example of how you have used this idea in lending something.

7.       What is the discount rate for a project with no risk? Why is this the case?

8.       What are the advantages and disadvantages of NPV?

9.       What did he mean when he said that “options have value?” How does this impact NPV?

10.   How did he define payback period?

11.   What are the advantages and disadvantages of payback period?

12.   Discuss this notion, “If NPV rules, why bother calculating payback period. (Two reasons)

13.   What is IRR?

14.   What is the decision rule for IRR?

15.   What was the decision rule pitfall 1? Why did it change?

16.   What is profitability index?

17.   What is the decision rule for PI?

18.   What is the problem with using NPV criteria for mutually exclusive projects with unequal lives?

 

19.   Discuss the concept of equivalent annual cost 

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