Chapter 12 HW/QUIZZES/STUDY PLANS
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.
