chp 12

the interest factor used to find the present value is called the ______ rate

discount

Committing funds today with the expectation of earning a return on those funds in the future in the form of additional cash flows is required when a company makes a(n) ___.

investment

Instead of focusing on a project's profitability, the _______ period focuses on the time it takes for an investment to pay for itself.

payback

Investment required/Annual net cash inflow is the formula for the:

payback period

if the original investment in a capital project has been recovered, the net present value will be:

positive or zero

One of the two broad categories of capital budgeting decisions, a _____ decision, relates to selecting from among several acceptable alternatives.

preference

the basic premise of the payback method is

the faster the cost of the investment is recovered, the more desirable the investment

When using the internal rate of return method to rank competing investment projects:

the higher the internal rate of return, the more desirable the project

current assets minus current liabilities is called ________ ______

working capital

the internal rate of return is the discount rate that results in a net present value of ______ for the investment

zero

Select the capital budgeting approaches that use discounted cash flows.

- internal rate of return method - net present value method

capital budgeting decisions:

- involve an immediate cash outlay in order to obtain a future return - require a great deal of analysis prior to acceptance

the payback method:

- not a true measure of investment profitability -ignore all cash flows that occur after the payback period - does not consider the time value of money

Typical capital budgeting decisions include

-Cost reduction decisions -Equipment selection decisions -Lease or buy decisions

When using net present value to compare projects, the total cost approach:

-Is the most flexible method available to compare projects. -Includes all cash inflows and outflows under each alternative.

Which of the following are true regarding the time value of money?

-Projects that provide earlier returns are preferable to those that promise later returns. -By collecting a project's return quickly, the investor has the opportunity to re-invest that money to earn even more.

which of the following statements are true regarding compound interest

-The more frequently interest is compounded, the faster the balance grows. -Compound interest means that interest is paid on interest.

Synonyms for the simple rate of return are the ______ rate of return ________ and the rate of return

-accounting -unadjusted

When making a capital budgeting decision, it is most useful to calculate the payback period:

-if a company is "cash poor" -as part of the screening process

Capital budgeting methods that focus on cash flows rather than incremental operating income are:

-payback -net present value -internal rate of return

Preference decisions are also called _____ decisions.

-rationing -ranking

The net present value of a project is:

-used in determining whether or not a project is an acceptable capital investment .-the difference b/n the present value of cash inflows and present value of cash outflow for a project.

One dollar earned today is worth:

More than one dollar earned at a future point in time

A postaudit is a valuable process because:

actual values can be used to determine if the project is performing as expected

A(n) ____ is a series of equal cash flows.

annuity

Another term for the minimum required rate of return is the cost of _______.

capital

how managers plan significant investments in projects that have long term implications such as purchasing new equipment or introducing new products is called ________ ________

capital budgeting

When discussing capital investments, the term out-of-pocket costs refers to:

cash outlays for salaries, advertising, and other operating expenses.