Chapter 12 HW/QUIZZES/STUDY PLANS

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Estimating the future net cash inflows of the investments

After identifying potential capital​ investments, the next step in the capital budgeting process is which of the​ following?

present value of the net cash inflows from the investment minus the investments intial investment

An​ investment's NPV is calculated as which of the​ following?

Acquisition of a piece of equipment that will be used for many years.

Chapter 12 deals with Capital Budgeting. What is an example of a capital investment that would be considered in Capital​ Budgeting?

payback=

Full years + (Amount to complete recovery in next year)/ (Projected cash inflow in the next year)

NPV

In capital rationing decisions, the profitability index must be computed to compare investments requiring different initial investments when the_______method is used.

subtract annual depreciation expense.

In order to convert the average annual net cash inflow from the asset back to the average annual operating income from the​ asset, one must

payback period

Initial investment/ Expected annual net cash inflow

1.20

Quicksilver Creations is evaluating a project that would require an initial investment of​ $34,000. The present value of the net cash inflows associated with this project would be​ $40,800. The profitability index for this project would be closest to

profitability index

Since each investment presents a positive​ NPV, Bramley Manufacturing should use the________ to compare the profitability of each investment

Juda Products is trying to decide which of the following projects to invest​ in: times Project A costs $ 280 comma 000 and offers eight annual net cash inflows of $ 62 comma 000. times Project B costs $ 395 comma 000 and offers ten annual net cash inflows of $ 72 comma 000. Compute the IRR of each project and use this information to identify the better investment

The IRR for Project A is between 14% and 16% . The IRR for Project B is between 12% and 14% . Project A is better because the IRR is higher .

The cost of the​ investment, less residual​ value, divided by the life of the asset

The accounting rate of return requires the use of the accrual basis of accounting and​ therefore, the annual depreciation must be caluclated. How do you calculate the annual​ depreciation?

The interest rate that makes the NPV of an investment equal to zero

The internal rate of return is which of the​ following?

Net present value

The profitability index allows a company to compare alternative investments in present value and considers differences in the investments. It is typically used in conjuction with which capital​ model?

Number of periods Principal amount Interest rate

The time value of money depends on which of the following​ factors?

principle amount number of period interest rate

The time value of money depends on which of the following​ factors?

highest profitability index

When potential capital investments of different size are​ compared, management should choose the one with the

highest profitability index.

When potential capital investments of different size are​ compared, management should choose the one with the

Internal rate of return

Which capital budgeting model incorporates the time value of money and determines the actual rate of​ return?

Net present value

Which capital budgeting model incorporates the time value of money and indicates if an asset will earn the minimum required rate of​ return?

Accounting rate of return

Which capital budgeting model is the only one that uses the accrual basis of accounting versus the cash​ basis?

Payback period

Which capital budgeting model is the​ simpilest, but ignores the time value of​ money?

It is computed as​ follows, regardless of whether cash flows are equal or​ unequal: Initial investment​ / Expected annual net cash inflow

Which of the following is false with regards to the payback​ period?

internal rate of return

Which of the following methods calculates the​ investment's unique rate of​ return?

Accounting rate of return

Which of the following methods focuses on the operating income an asset generates rather than the net cash inflows it​ generates?

internal rate of return

Which of the following methods of analyzing capital investments factors in the time value of​ money?

payback period

_________focuses on time, not profitability

IRR

_______finds the discount rate that brings the investment's NPV to zero

IRR, NPV

______and_______incorporate the time value of money

Payback period

highlights risky investments.

Payback period

ignores salvage value after the payback period.

ARR

measures profitability but ignores the time value of money.

ARR

uses accrual accounting income.

IRR

uses discounted cash flows to determine the asset's unique rate of return.


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