Financial Analysis Flashcards

A proposed project has a positive net present value (NPV) at the company's required rate of return. What does this generally indicate?

Answer: The project is expected to create value and should be considered for acceptance

A positive NPV means discounted cash inflows exceed the investment, so the project adds value.

Which concept explains why $1,000 received today is worth more than $1,000 received in three years?

Answer: Time value of money

Money available now can be invested to earn a return, so it is worth more than the same amount later.

What is the internal rate of return (IRR) of an investment?

Answer: The discount rate at which the investment's NPV equals zero

IRR is the break-even discount rate that sets the present value of inflows equal to the initial outlay.

A coachee wants to keep funding a failing project because '$2 million has already been spent.' Which financial principle should the coach help them consider?

Answer: Sunk costs are irrelevant to future decisions

Sunk costs can't be recovered, so decisions should rest only on future costs and benefits.

How is return on equity (ROE) calculated?

Answer: Net income ÷ shareholders' equity

ROE shows how much profit a company generates on the capital its shareholders have invested.

A company has $300,000 in total debt and $600,000 in shareholders' equity. What is its debt-to-equity ratio?

Answer: 0.5

Debt-to-equity = $300,000 ÷ $600,000 = 0.5, meaning $0.50 of debt for each dollar of equity.

An operations leader's inventory turnover ratio rises from 4 to 8 with no stockouts. What does this most likely indicate?

Answer: Inventory is being sold and replaced more efficiently

Higher inventory turnover (COGS ÷ average inventory) means less capital is tied up in stock.