Acct 202 CH 11

What are the 5 main capital budgeting decisions?

1. Cost reduction decisions 2. Expansion decisions 3. Equipment selection decisions 4. Lease or buy decisions 5. Equipment replacement decisions

What are the 3 main types of cash outflows?

1. Initial investment 2. Working capital - current assets - current liabilities 3. Periodic outlays for repairs and maintenance and add'l operating costs.

Simple rate of return has 2 limitations. What are they?

1. It focuses on accounting net operating income rather than cash flows. Could fluctuate from year to year. 2. does not involve discounting cash flows. $1 today is the same as $1 ten years from now.

When performing net present value analysis, managers make which 2 assumptions?

1. assume all cash flows other than the initial investment occur at the end of periods. 2. assume that all cash flows generated by an investment project are immediately reinvested at a rate of return equal to the discount rate.

What are the 3 main types of cash inflows?

1. increase or reduce costs 2. salvage value 3. released working capital @ end - sells off inventory or collects accounts receivable

Most projects have at least ______ types of cash outflows.

3

T/F: The lower the project profitability index, the more desirable the project.

False - the HIGHER the project profitability index, the more desirable the project.

T/F: The total-cost approach is the least flexible method for comparing competing projects.

False. It's the most flexible method for comparing competing projects.

relates to selecting from among several acceptable alternatives.

Preference decision

T/F: The NPV of one project can't be directly compared to the NPV of another project unless the initial investments are equal.

True

T/F: When calculating the payback period, the depreciation on the investment is excluded in the calculation of net cash flow.

True

T/F: The net present value method is generally considered to be more reliable than the internal rate of return method for both screening and ranking projects.

True.

Synonyms for the simple rate of return are the ____ rate of return and the ____ rate of return. net, adjusted accounting, unadjusted cash flow, net accounting, cash flow

accounting, unadjusted

The cost of the capital is the: cost of state and local permits that are required to undertake a project. initial cash required for a capital investment net of the salvage value realized from the sale of the investment. average rate of return a company must pay its long-term creditors and shareholders for the use of their funds. sum of all cash outflows required for a capital investment.

average rate of return a company must pay its long-term creditors and shareholders for the use of their funds.

When the cash flows associated with an investment project change from year to year, the payback period must be calculated: using the equation investment required/annual net cash inflows by tracking the unrecovered investment year by year using the avg. annual net cash inflow using statistical computer software

by tracking the unrecovered investment year by year

How managers plan significant investments in projects that have long term implications such as purchasing new equipment or introducing new products is called: directing funds capital budgeting controlling costs investment initiative

capital budgeting

describes how managers plan significant investments in projects that have long-term implications such as the purchase of new equipment or the introduction of new products.

capital budgeting

average rate of return that the company must pay to its long-term creditors and its shareholders for the use of their funds.

cost of capital

translates the value of future cash flows to their lesser present value

discounting cash flows

rate of return promised by an investment over its useful life.

internal rate of return

Spending the money on opening a new location, purchasing new equipment, implementing new programs, expanding to new product lines, and conducting research are all examples of: revenues inflows returns investments

investments

When considering a purchase of equipment, discounting is necessary because future cost savings are worth _____ today than when they actually occur in the future.

less

The required rate of return is the _____ rate of return a project must yield to be acceptable. maximum minimum exact

minimum

determines whether or not a project is an acceptable investment

net present value

difference between the present value of a project's cash inflows and the present value of the project's cash outflows

net present value

uses discounted cash flows to analyze capital budgeting decisions.

net present value method

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

out-of-pocket costs.

investment required divided by annual net cash inflow

payback period

the length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates.

payback period

the time that it takes for an investment to pay for itself

payback period

Keeps managers honest in their investment proposals

postaudit

involves checking whether or not expected results are actually realized

postaudit.

The term discounting cash flows refers to the process of calculating the ____ value of those cash flows. present future past

present

net present value of the project divided by the investment required equals ______.

project profitability index

Preference decisions are also called ____ decisions. Pick ALL that apply. screening real options rationing ranking

rationing ranking

A screening decision: relates to whether a proposed project is acceptable relates to whether a proposed project is the best option among more than one acceptable project is made after a capital budgeting project is accepted is used to identify projects that need to be improved

relates to whether a proposed project is acceptable

Capital budgeting decisions: Pick ALL that apply require little or no thought before being made require a great deal of analysis prior to acceptance involve an immediate cash outlay in order to obtain a future return are day-to-day decisions made by managers

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

initial investment shown in the denominator of the simple rate of return should be reduced by any ____ ___.

salvage value

relates to whether a proposed project is acceptable - whether it passes a preset hurdle

screening decision

The cost of capital serves as a _____ _____.

screening device

The two broad categories into which capital budgeting decisions fall are _____ decisions and _____ decisions.

screening; preference

also referred to as the accounting rate of return or the unadjusted rate of return

simple rate of return

annual incremental net operating income divided bu initial investment equals ____.

simple rate of return

recognizes that a dollar today is worth more than a dollar a year from now.

time value of money

Inclusion of all cash flows associated with each alternative is a ____ _____ approach.

total cost

current assets less current liabilities

working capital

Typical capital budgeting cash outflows include: Pick ALL that apply working capital invested salvage value of old equipment cost reduction initial equipment investments installation costs

working capital invested initial equipment investments installation costs