FNM01 FINALS 5

• What is the name of the holding company that owns Florida Power & Light?

  FPL Group
• What is required by law for utilities like FPL?

  To have electricity available when demanded
• Why is forecasting power usage difficult for FPL?

  Due to economic uncertainty and industry conditions
• What two sectors are most important to Florida's economy?

  Housing and tourism
• How did the 2008-2009 recession affect electricity usage forecasting?

  It made accurate forecasting nearly impossible
• What was FPL's original capital budget for 2009-2011?

  $7 billion
• What was the reduced capital budget for FPL in 2009?

  $5.3 billion
• What was the main reason for FPL to cut its capital budget?

  To adapt to the declining economy and funding issues
• What impact did FPL's budget cuts have on manufacturers?

  They laid off workers and cut back R&D
• What is capital budgeting?

  • Process of making investment decisions
  • Involves acquisition of fixed assets
  • Critical for long-term business success
• What are examples of capital investments?

  Plant, equipment, and advertising
• What is the first step in the capital budgeting process?

  Generating ideas for investment projects
• Who proposes investment ideas within a firm?

  Various departments like marketing and operations
• What is the financial analyst's role in capital budgeting?

  To analyze projects' risks and returns
• What are the traits of ideal investment criteria?

  1. Easily applied techniques
  2. Considers cash flow
  3. Recognizes time value of money
  4. Accounts for expected risk and return
  5. Leads to higher stock prices
• What are some capital decision-making techniques?

  ARR, payback period, NPV, IRR, PI
• What is the initial outlay for the Western Europe Expansion (WEE)?

  P 250 million
• What is the initial outlay for the Southeast U.S. Toehold (SUST)?

  P 50 million
• How is the accounting rate of return (ARR) calculated?

  Net income divided by book value of assets
• What minimum ARR does Global Wireless require for projects?

  At least 25%
• What is the average book value (ABV) for the WEE project?

  P 125 million
• What is the average book value (ABV) for the SUST project?

  P 25 million
• What is the ARR for the WEE project?

  52.8%
• What is the ARR for the SUST project?

  61.6%
• What are the steps to determine ARR for a project?

  1. Determine average book value
  2. Determine average net income
  3. Calculate accounting rate of return
  4. Compare investments
  5. Make decision
• Why is capital budgeting important to the economy?

  It influences investment decisions and economic growth
• How do economic conditions affect capital budgeting decisions?

  They create uncertainty in forecasting and funding
• What departments may propose investment projects?

  Marketing, operations, engineering, and IT
• What are the consequences of deferring projects for FPL?

  Increased costs and potential project cancellations
• How does capital budgeting relate to firm value?


  It helps determine which projects enhance value
• What is the first step to answer the problem question for ARR?

  Determine the average book value
• What is the average book value of the WEE project?

  P125 million
• How is the average book value calculated for the WEE project?

  Average book value is calculated as $(P250 - P0) / 2$
• What is the average book value of the SUST project?

  P25 million
• How is the average net income for WEE calculated?

  Average net income is $330 / 5$
• What is the average net income for the SUST project?

  P15.4 million
• How do you calculate the accounting rate of return (ARR) for WEE?

  ARR WEE = $P66 million / P125 million$
• What is the ARR for the SUST project?

  ARR SUST = $P15.4 million / P25 million$
• What is the ARR for the WEE project?

  52.8%
• What is the ARR for the SUST project?

  61.6%