Accounting 2: Chapter 13 (exam 4)

What is net present value? can it be negative? 13-6 Net present value is the present value of cash inflows - the present value of the cash outflows. The net present value can be negative if the present value of the outflows is ______ than the present value of the inflows.

greater

A ________ is a follow-up after the project has been completed to see whether or not expected results were actually realized.

postaudit

Which method involves selecting the cheapest alternative when revenues are not involved? a) Total-cost approach b) Incremental-cost approach c) Least-cost approach

answer: c) Least-cost approach

Which of the following ignores the time value of money? a) Net Present Value b) Internal Rate of Return c) Payback Period d) Profitability Index

answer: c) Payback Period

what is meant by an investment projects internal rate of return? how is it computed? 13-9 The internal rate of return is the rate of return on an investment project over its life. It is computed by finding the discount rate that results in a _______ net present value for the project.

zero

why isn't accounting net income used in the net present value and internal rate of returns methods of making capital budgeting decisions? 13-4 Accounting net income is based on accruals rather than on cash flows. Both the net present value and internal rate of return methods focus on ____ _____.

cash flows

identifying two simplifying assumptions associated with discounted cash flow methods of making capital budgeting decisions 13-7 One assumption is that all cash flows occur at the ______ of a period. Another is that all cash inflows are immediately _______ at a rate of return equal to the discount rate.

end; reinvested

Net Present Value Method The net present value of one project cannot be directly compared to the net present value of another project unless the investments are ________.

equal

The higher the profitability index, the more ______ the project.

desirable

what is the difference between capital budgeting screening decisions and capital budgeting preference decisions? 13-1 A capital budgeting screening decision is concerned with whether a proposed investment project passes a preset _________, such as a 15% rate of return. A capital budgeting preference decision is concerned with choosing from among two or more alternative investment projects, each of which has passed the hurdle.

hurdle

what is meant by the term payback period? how is the payback period determined? how can it be useful? 13-14 The payback period is the length of time for an investment to fully _______ its initial cost out of the cash receipts that it generates -The payback method is useful when a company has cash flow problems. - The payback method is also used in industries where obsolescence is very rapid.

recover

Capital budgeting tends to fall into two broad categories. 1. _______ decisions. Does a proposed project meet some preset standard of acceptance? 2. _______ decisions. Selecting from among several competing courses of action.

1) Screening 2) Preference

internal rate of return Acceptable or not? if internal rate of return is: 1) Equal to or greater than the minimum required rate of return... 2) Less than the minimum required rate of return... 3) When using the internal rate of return, the cost of capital acts as a _____ rate that a project must clear for acceptance.

1) acceptable 2) rejected 3) hurdle

net present value: 1) All cash flows other than the initial investment occur at the ______ of periods. 2) All cash flows generated by an investment project are immediately reinvested at a rate of return _____ to the discount rate.

1) end 2) equal

Once you have computed a net present value, you should interpret the results as follows: 1. A positive net present value indicates that the project's return _____ the discount rate. 2. A negative net present value indicates that the project's return is ____ than the discount rate.

1) exceeds 2) less

Choosing a Discount Rate 1) The company's cost of capital is usually regarded as the _____ required rate of return. 2) The cost of capital is the average return the company must _____ to its long-term creditors and stockholders.

1) minimum 2) pay

1) The payback method focuses on the payback period, which is the length of ______ that it takes for a project to recoup its initial cost out of the cash receipts that it generates. 2) does not consider the time value of _____ - ignores cash flows after payback period. - shorter payback period = not always more desirable

1) time 2) money

1) The internal rate of return is the rate of return promised by an investment project over its useful life. It is computed by finding the discount rate that will cause the net present value of a project to be ______. 2) It works very well if a project's cash flows are identical every year. If the annual cash flows are not identical, a trial-and-error process must be used to find the internal rate of return.

1) zero

preference decision •Screening Decisions -Pertain to whether or not some proposed investment is ___________; these decisions come first. •Preference Decisions -Attempt to rank acceptable alternatives from the ____ to least appealing. (higher IRR = more desirable)

acceptable most

An investment that involves a series of identical cash flows at the end of each year is called an...

annuity.

Project Marvel is a five-year project. The project has a total cash inflow of $350,000. The present value of such inflows is $275,000. The project requires an initial investment of $200,000 and additional working capital of $25,000. What is the net present value of the project? a) $0 b) $50,000 c) ($50,000) d) ($250,000)

answer: b) $50,000

The ________ is defined as the discount rate at which the present value of a project's cash inflows will equal the present value of its cash outflows. a) Internal Rate of Return b) Minimum Required Rate of Return c) Simple Rate of Return

answer: a) Internal Rate of Return

When using the internal rate of return method to rank competing investment projects, an investment that has an internal rate of return of 20% is ________ than an investment that has an internal rate of return of 17%. a) more desirable b) less desirable c) cannot determine

answer: a) more desirable

The phenomenon of earning interest on both the interest and the amount invested is known as ________. a) discounted value b) present value c) compound interest d) future value

answer: c) compound interest

A negative net present value indicates that the project's return is ________. a) greater than the minimum required rate of return b) equal to the minimum required rate of return c) less than the minimum required rate of return d) cannot determine

answer: c) less than the minimum required rate of return

An investment of $10,000 today is estimated to return $11,500 a year from now. The $11,500 is called the ________ of the investment. a) discounted value b) present value c) compound interest d) future value.

answer: d) future value.

An investment proposal with an initial investment of $100,000 generates annual net cash inflow of $20,000 for a period of 10 years. The project has a net present value of $10,000. What is this investment proposal's payback period? a) 10 years b) 5 years c) 2 years d) 3 years

answer: investment required / annual net cash inflow b) 5 years

What is meant by the term discounting 13-3 Discounting is the process of computing the present value of a future cash flow. Discounting gives recognition to the time value of money and makes it possible to meaningfully add together cash flows that occur at ______ _____.

different times

The capital budgeting techniques that best recognize the time value of money are those that involve _________ cash flows.

discounted

The net present value method compares the present value of a project's cash _____ with the present value of its cash _______. The difference between these two streams of cash flows is called the net present value.

inflows; outflows

Simple Rate of Return Method : 1) Does not focus on cash flows - rather it focuses on accounting net ___ ___ *Should be reduced by any salvage from the sale of the old equipment

operating income.

Why are discounted cash flow methods of making capital budgeting decisions superior to other methods? 13-5 Unlike other common capital budgeting methods, discounted cash flow methods recognize the ___ __ _ ___ and take into account all future cash flows.

time value of money

what is the major criticism of the payback and simple rate of return methods of making capital budgeting decisions? 13-15 Neither the payback method nor the simple rate of return method considers the ___ ___ __ __. Under both methods, a dollar received in the future is weighed the same as a dollar received today. Furthermore, the payback method ignores all cash flows that occur after the initial investment has been recovered.

time value of money