Ch 14

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

0

Calderon Kitchen Supplies is planning to invest $210,000 in a new product. If the present value of the cash inflows is $266,700, the project profitability index is ______.

1.27

Sandy's Soda Co. is planning an investment in new cooling equipment that would cost $56,000. The new equipment would save on operating costs over the next 5 years as follows: $21,500 in year 1; $23,100 in year 2; $19,000 in year 3; $13,900 in year 4; and $15,200 in year 5.The payback period for the cooling equipment is ______ year

2.6

Preference decisions are also called ______ or ___________ decisions

Blank 1: rationing Blank 2: ranking

True or false: When a capital investment decision is being made between two or more alternatives, the project with the shortest payback period is always the most desirable investment.

False

Which of the following statements are true? In order for a project to be acceptable, the discount rate must be higher than the minimum acceptable rate of return. The cost of capital may be used to screen out undesirable projects. When the net present value method is used, the discount rate equals the hurdle rate. When using the internal rate of return method, the cost of capital is used as the hurdle rate.

The cost of capital may be used to screen out undesirable projects. When the net present value method is used, the discount rate equals the hurdle rate. When using the internal rate of return method, the cost of capital is used as the hurdle rate.

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

accounting, unadjusted

A postaudit is a valuable process because ______.

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

The simple rate of return equals the ______.

annual incremental net operating income ÷ initial investment

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

annuity

To screen out undesirable investments, ______ use(s) the cost of capital.

both the net present value and internal rate of return methods

When the cash flows associated with an investment project change from year to year, the payback period must be calculated ______.

by tracking the unrecovered investment year by year

Future cash flows expected from investment projects ______.

can be difficult to estimate

When computing the payback period for a new piece of equipment, the salvage value of the equipment being replaced is ______.

deducted from the cost of the new equipment

Net present value is the ______.

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

Investment required ÷ Annual net cash inflow is the formula to find the factor that enables calculation of the ______.

internal rate of return

In an equipment capital budgeting decision, recovering the original investment means that the ______.

investment has generated enough cash inflows to completely cover the cost of the equipment

a dollar today is worth ____ than a dollar a year from now

more

Working capital ______.

often increases when a company takes on a new project

Reggie's Refrigerators is considering the purchase of some new equipment. The company has limited its purchase options to two alternatives. Option A has an internal rate of return of 10%, and option B has an internal rate of return of 13%. If the required rate of return on the project is 9.5%, ______.

option B is the preferred choice

When computing net present value after tax, income tax expense is treated as a cash _______

outflow

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

payback period

If the original investment in a capital project has been recovered, the net present value will be ______.

positive or zero

Preference decisions are also called ______ decisions. Multiple select question. ranking rationing real options screening

ranking rationing

Typical capital budgeting decisions include ______ decisions. employee hiring and firing cost reduction lease or buy equipment selection product and service pricing

cost reduction lease or buy equipment selection

When net cash inflow is the same every year, the equation used to calculate the factor of the internal rate of return is ______.

investment required ÷ annual net cash inflow

Capital budgeting decisions ______.

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

It is important to know the present value of an investment because a dollar ______.

is worth more today than it will be worth a year from today

A net present value decision that does not involve any revenues is known as a(n) ______ -______ decision

least cost

When a capital budgeting decision does not involve any revenues, the most desirable alternative is the one with the ______.

least total cost from a present value perspective

When analyzing an investment project, uncertain future cash flows ______.

may be estimated using computer simulations

The internal rate of return is compared against the minimum ________ rate of return when analyzing the acceptability of an investment project.

required

Little Tots Gym has a required rate of return of 13%. The gym is considering the purchase of $12,500 of new equipment. The internal rate of return on the project has been calculated to be 11%. This project ______.

should be rejected

Working capital is ______.

treated as a cash inflow when released at the end of a project. treated as a cash outflow when required at the beginning of a project

True or false: When calculating the payback period, the depreciation on the investment is excluded in the calculation of net cash flow.

true

Current assets minus current liabilities is called

working capital

The net present value of a project is ______.

the difference between the present value of cash inflows and present value of cash outflows for a project used in determining whether or not a project is an acceptable capital investment

All cash flows are included, and a net present value is computed for each alternative when using the ______-______ approach

total cost

Which of the following statements are true? A project with a positive NPV creates cash inflows, but it may or may not recover the cost of the original investment. A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds. The net present value method automatically provides for return of the original investment. The net present value method does not provide for return of the original investment.

A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds . The net present value method automatically provides for return of the original investment.

When computing net present value after tax, income tax expense is ______.

treated like every other cash flow

S&P Enterprises is considering purchasing a new piece of equipment that costs $125,000 and has an estimated useful life of 5 years The equipment should increase annual cash receipts by $75,000 per year. Cash expenses to operate the equipment should be $20,000. The company uses straight-line depreciation. If the after-tax cost of capital is 10% and the tax rate is 30%, what is the net present value of this project based on the tables in the appendix?

(Reason: Incremental net income: $75,000 - $20,000 - $25,000 depreciation expense = $30,000 × 30% = $9,000 tax expense. $55,000 - $9,000 = $46,000 annual cash flow × 3.791 = $174,386 - $125,000 = ) $49,386.

A company is considering purchasing a new piece of equipment that costs $100,000 and has an estimated useful life of 5 years. The equipment should increase annual cash receipts by $80,000 per year. Cash expenses to operate the equipment should be $25,000. The company uses straight-line depreciation. If the after-tax cost of capital is 10% and the tax rate is 30%, the net present value of this project based on the tables in the appendix is $

68,700

cash inflow, cash outflow

Cash inflow matches Choice, Working capital is released for use elsewhere within the company Working capital is released for use elsewhere within the company Cash outflow matches Choice, Working capital is tied up for project needs Working capital is tied up for project needs

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

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

A postaudit involves ______.

checking whether expected results are actually realized

Capital budgeting decisions include ______. choosing to lease or buy new equipment acquiring a new facility to increase capacity increasing the salary of the current company president determining which equipment to purchase among available alternatives hiring new factory workers purchasing new equipment to reduce cost deciding to replace old equipment

choosing to lease or buy new equipment acquiring a new facility to increase capacity determining which equipment to purchase among available alternatives purchasing new equipment to reduce cost deciding to replace old equipment

An investor deposits $100.00 and earns $6.00 of interest in the first year and $6.36 of interest in the second year. This means the investment is earning 6% ___________ interest.

compound

Suppose that a project's net present value is negative, but the project would provide intangible benefits that have not yet been estimated. To estimate the annual value of intangible benefits needed to accept the project, ______ the negative net present value excluding intangible benefits by the ______.

divide, present value factor for an annuity

When using net present value to compare projects, the total cost approach ______. cannot be used when more than two alternatives are being considered is the most flexible method available to compare projects isolates cash flows that are relevant from those that are not includes all cash inflows and outflows under each alternative

is the most flexible method available to compare projects includes all cash inflows and outflows under each alternative

The internal rate of return ______.

The discount rate that forces a project's NPV to equal zero.

Which of the following statements are true? Multiple select question. Discounting is another term for compound interest. The more frequently interest is compounded, the faster the balance grows. Compound interest means that interest is paid on interest. Interest may only be compounded annually, quarterly or monthly.

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

Which of the following statements are true? The net present value method does not provide for return of the original investment. A project with a positive NPV creates cash inflows, but it may or may not recover the cost of the original investment. The net present value method automatically provides for return of the original investment. A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds.

The net present value method automatically provides for return of the original investment. A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds.

When a project with a negative NPV has significant intangible benefits, the ______.

annual intangible benefit necessary to make the investment worthwhile should be calculated

An investment that pays the investor $1,000 per year for the next 10 years is an example of a(n) _______

annuity

The interest factor used to find the present value is called the _______ rate.

discount

Finding the present value of a future cash flow is called ______.

discounting

The payback method ______.

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

Typical capital budgeting decisions include ______ decisions.

equipment selection cost reduction lease or buy

If the internal rate of return is ______. less than the hurdle rate the project should be rejected greater than the hurdle rate the project should be rejected less than the hurdle rate the project is acceptable greater than the hurdle rate the project is acceptable

less than the hurdle rate the project should be rejected greater than the hurdle rate the project is acceptable

The Eye Clinic of Dr. Christensen is investing in some equipment to perform corrective eye surgery. It is expected that the equipment purchase will generate an internal rate of return of 24%. This equipment was chosen over equipment to perform cataract eye surgery. Thus, the internal rate of return of the cataract eye surgery equipment must have been ______.

less than the internal rate of return of the corrective eye surgery equipment

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

payback

State Bank is implementing a new marketing campaign that requires an initial investment of $35,000. If the project profitability index is 1.2, the present value of the campaign's future cash flows is $

42000