Ch 12 Smart Book

To determine if a project is acceptable compare the internal rate of return to the company's ______. profit margin tax rate hurdle rate sales ratio

hurdle rate

Select all that apply When using net present value to compare projects, the total cost approach ______. isolates cash flows that are relevant from those that are not cannot be used when more than two alternatives are being considered is the most flexible method available to compare projects 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 term capital budgeting is used to describe how managers plan significant investments in projects that have ______ implications. short-term long-term both short-term and long-term

long-term

Select all that apply The net present value of a project is ______. the present value of the project's projected annual tax savings the difference between the present value of cash inflows and present value of cash outflows for a project the cost of an investment less the present value of the project's salvage value used in determining whether or not a project is an acceptable capital investment

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

When using the internal rate of return method to rank competing investment projects ______. any internal rate of return greater than zero is preferable the higher the internal rate of return, the more desirable the project the higher the internal rate of return, the less desirable the project any internal rate of return greater than the required return is preferable

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

Match the following net present value ranges with the acceptability of the proposed project. Positive or zero

Acceptable

Studio Films is considering the purchase of some new film equipment that costs $150,000. It has a 5 year useful life with no salvage value. The new equipment is expected to increase revenues by $115,000 annually. Annual incremental cash operating expenses are expected to be $40,000. The simple rate of return on the equipment is ___________%

Blank 1: 30 or thirty 30 $115,000 - $40,000 - $30,000 ($150,000/5) depreciation - $45,000 net operating income/$150,000 initial investment = 30%

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 $ ____________.

Blank 1: 42,000 or 42000

A new machine requires an investment of $630,000 and will generate $100,000 in cash inflows for 7 years, at which time the salvage value of the machine will be $130,000. Using a discount rate of 10%, the net present value of the machine is $ ______________________.

Blank 1: 76510, (76,510), or 76,510

The term _____________________ ______________ is used to describe 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.

Blank 1: capital Blank 2: budgeting

Preference decisions are sometimes called _____________ decisions or __________________ decisions.

Blank 1: rationing Blank 2: ranking

When computing the simple rate of return, the initial investment should be reduced by any ______________ value realized from the sale of the old equipment.

Blank 1: salvage, residual, or scrap

Current assets minus current liabilities is called ____________ ____________.

Blank 1: working Blank 2: capital

Current assets minus current liabilities is called _______________ ____________.

Blank 1: working Blank 2: capital

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

Blank 1: zero or 0

Select all that apply Which of the following statements are true? The cost of capital may be used to screen out undesirable projects. When using the internal rate of return method, the cost of capital is used as the hurdle rate. When the net present value method is used, the discount rate equals the hurdle rate. 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 using the internal rate of return method, the cost of capital is used as the hurdle rate. When the net present value method is used, the discount rate equals the hurdle rate.

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

accounting, unadjusted

The cost of capital is the ______. cost of state and local permits that are required to undertake a project 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 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

When computing the simple rate of return, the annual incremental net operating income in the numerator should ______ the investment's depreciation charges. not be changed by be increased by be reduced by

be reduced by

Net present value is the ______. expected net operating income of a project actual return on investment of a project sum of the present value of a project's cash inflows and the present value of the project's cash outflows difference between the present value of a project's cash inflows and the present value of the project's cash outflows

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

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

equipment selection cost reduction lease or buy

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 accounting net income from the project ÷ annual net cash inflow annual net cash ÷ required investment investment required ÷ accounting net income from the project

investment required ÷ annual net cash inflow

A capital investment project's payback period is the ______. length of time it takes for the project to recover its initial cost from the net cash inflows generated length of time it takes for the project to begin to generate cash inflows useful life of the capital asset purchased estimated length of the capital investment project from the initial cash outflow to the end of the project

length of time it takes for the project to recover its initial cost from the net cash inflows generated

The concept of the time value of money is based on the notion that a dollar today is worth (more/less) _________ than a dollar a year from now.

more

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%, ______. neither option is acceptable option A is the preferred choice either option is equally acceptable option B is the preferred choice

option B is the preferred choice

If the original investment in a capital project has been recovered, the net present value will be ______. negative or zero either positive, negative or zero, depending on the discount rate positive or zero

positive or zero

One of the two broad categories of capital budgeting decisions, a(n) __________ decision relates to whether a proposed project is acceptable—that is, whether it passes a preset hurdle.

screening

One of the two broad categories of capital budgeting decisions, a(n) ____________________ decision relates to whether a proposed project is acceptable—that is, whether it passes a preset hurdle.

screening

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 is acceptable

should be rejected

Poppy's Gumball Co. is planning to invest in a new marketing campaign that would require an initial investment of $85,000. The project is expected to provide incremental annual income of $27,200. The simple rate of return on the project is ______. 47% 32% 312.5% 212.5%

32% Reason: $27,200 ÷ $85,000 = 32%

Identify each working capital situation with the appropriate treatment. Cash outflow

Working capital is tied up for project needs

A postaudit involves ______. checking whether expected results are actually realized taking on a capital investment project directly following the analysis phase paying for audit services provided

checking whether expected results are actually realized

Select all that apply The payback method ______. cannot evaluate projects with uneven cash flows does not consider the time value of money is not a true measure of investment profitability does not consider how quickly an investment is recovered ignores all cash flows that occur after the payback period

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

When a capital budgeting decision does not involve any revenues, the most desirable alternative is the one with the ______. highest salvage value for the capital asset longest asset useful life earliest cash outflows least total cost from a present value perspective

least total cost from a present value perspective

Investment required ÷ Annual net cash inflow is the formula for the ______. discount rate simple rate of return payback period net present value

payback period

Select all that apply Preference decisions are also called ______ decisions. rationing real options ranking screening

rationing ranking

Water World is planning to build a new attraction at its water park. A new wave pool has a project profitability index of 1.09, and a new water slide has a profitability index of 1.14. The best choice for Water World is the ______. wave pool water slide

water slide

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

Blank 1: total Blank 2: cost

Select all that apply Identify capital budgeting decisions. Expansion decisions Equipment replacement decisions Employee attainment decisions Product costing decisions

Expansion decisions Equipment replacement decisions

True or false: When calculating the payback period, any depreciation deducted in arriving at the project's net operating income must be added back to obtain the project's expected annual net cash inflow. True False

True

Investment required ÷ Annual net cash inflow is the formula to find the factor that needed to calculate the ______. cost of capital net present value internal rate of return simple rate of return

internal rate of return

When the annual net cash inflow is the same each year, the payback period equals the __________________ required divided by the annual net cash _______________.

Blank 1: investment Blank 2: inflow or flow

Preference decisions are sometimes called ____________ decisions or ______________decisions.

Blank 1: rationing Blank 2: ranking

True or false: The net present value can be used to determine whether a project should be accepted. True False

True

The internal rate of return is ______. a project's minimum required rate of return a discount rate of zero the appropriate salvage value of purchased equipment the rate of return of an investment project over its useful life

the rate of return of an investment project over its useful life

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 ______. 3.70 .27 .787 1.27

1.27 Reason: $266,700 ÷ $210,000 = 1.27

Select all that apply Select the capital budgeting approaches that use discounted cash flows. Net present value method Simple rate of return method Internal rate of return method Payback method Cost-volume-profit method

Net present value method Internal rate of return method

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. True False

False

Pam's Pet Palace is considering an investment in dog grooming equipment that would increase cash receipts by $12,000 annually. The initial cost of the equipment is $50,000. The equipment has an estimated 10 year life and will have a $5,000 salvage value. Using a discount rate of 8%, what is the net present value of this equipment? $32,835 $30,520 $35,520 $82,835

$32,835 Reason: $80,520 ($12,000 × 6.710) + $2,315 ($5,000 ×.463) = $82,835 - $50,000 = $32,835

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 ______. 3.70 1.27 .787 .27

1.27 Reason: $266,700 ÷ $210,000 = 1.27

Sandy's Soda Co. is planning to purchase new equipment that costs $56,000 and will save on operating costs for 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 ______ years. 5 2 4 3

3 Reason: After two years $44,600 ($21,500 + $23,100) will have been paid back leaving $11,400 ($56,000 - $44,600). $11,400 ÷ $19,000 = .6, so the total payback period is 2.6 years, which is rounded off to 3 years.

Capri Industries is considering an investment that has an initial cost of $26,500 and the following expected cash inflows: Year Cash Inflow 1 $6,000 2 $8,000 3 $10,000 4 $5,000 5 $3,000 The expected payback period is ______ years. 4 3 2 5

4 Reason: After three years $24,000 ($6,500 + $8,000 + $10,000) will have been paid back, leaving $2,500 ($26,500 - $24,000). $2,500 ÷ $5,000 = 0.5, so the total payback period is 3.5 years, which is rounded off to 4 years.

Capri Industries is considering an investment that has an initial cost of $26,500 and the following expected cash inflows: Year Cash Inflow 1 $6,000 2 $8,000 3 $10,000 4 $5,000 5 $3,000 The expected payback period is ______ years. Multiple choice question. 2 3 4 5

4 Reason: After three years $24,000 ($6,500 + $8,000 + $10,000) will have been paid back, leaving $2,500 ($26,500 - $24,000). $2,500 ÷ $5,000 = 0.5, so the total payback period is 3.5 years, which is rounded off to 4 years.

Select all that apply Which of the following statements are true? 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 creates cash inflows, but it may or may not recover the cost 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.

The simple rate of return is also referred to as the ____________ or ____________ rate of return.

Blank 1: accounting Blank 2: unadjusted

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

Blank 1: least Blank 2: cost

Two capital budgeting approaches that use discounted cash flows are the __________________ ____________ value method and the ______________ ______________ of return method.

Blank 1: net Blank 2: present Blank 3: internal Blank 4: rate

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

Blank 1: preference, ranking, or rationing Blank 2: screening

Match the following net present value ranges with the acceptability of the proposed project. Negative

Unacceptable

Identify each working capital situation with the appropriate treatment. Cash inflow

Working capital is released for use elsewhere within the company

To screen out undesirable investments, ______ use(s) the cost of capital. neither the net present value nor internal rate of return methods only the net present value method both the net present value and internal rate of return methods only the internal rate of return method

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 ______. using the equation investment required ÷ annual net cash inflows by tracking the unrecovered investment year by year using statistical computer software using the average annual net cash inflow

by tracking the unrecovered investment year by year

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

capital

When computing the payback period for a new piece of equipment, the salvage value of the equipment being replaced is ______. ignored added to the cost of the new equipment treated as part of the cash inflow for year 1 deducted from the cost of the new equipment

deducted from the cost of the new equipment

Select all that apply Conducting a postaudit ______. determines which capital project should be selected for investment flags any manager's attempts to inflate benefits or downplay costs in a project proposal provides an opportunity to reinforce and possibly expand successful projects provides an opportunity to cut losses on floundering projects

flags any manager's attempts to inflate benefits or downplay costs in a project proposal provides an opportunity to reinforce and possibly expand successful projects provides an opportunity to cut losses on floundering projects

The rule used when comparing competing investments is the ______ the project profitability index, the more desirable the project. lower higher

higher

In an equipment capital budgeting decision, recovering the original investment means that the ______. funds used to pay for the equipment were provided by selling an old piece of equipment investment has generated enough cash inflows to completely cover the cost of the equipment equipment was returned and the funds used to pay for the equipment were taken back

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

The internal rate of return ______. is also known as the simple rate of return method is the discount rate that makes NPV equal zero for a project does not consider the time value of money is the rate of return required for all investments made by a company

is the discount rate that makes NPV equal zero for a project

The term capital budgeting is used to describe how managers plan significant investments in projects that have ______ implications. long-term both short-term and long-term short-term

long-term

In the context of the time value of money, one dollar today is worth ______ a dollar a year from now. less than more than the same as

more than

In the context of the time value of money, one dollar today is worth ______ a dollar a year from now. the same as less than more than

more than

The simple rate of return method focuses on ______, rather than ______. cash flows, net operating income the initial investment, salvage value salvage value, the initial investment net operating income, cash flows

net operating income, cash flows

Select all that apply Capital budgeting methods that focus on cash flows rather than incremental operating income are ______. simple rate of return net present value internal rate of return payback

net present value internal rate of return payback

Working capital ______. is the value recaptured after the end of an investment's use is the cost savings provided by the capital investment often increases when a company takes on a new project is the amount paid for ownership of the investment

often increases when a company takes on a new project

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

payback

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

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

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

relates to whether a proposed project is acceptable

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

relates to whether a proposed project is acceptable

Select all that apply The two broad categories into which capital budgeting decisions fall are ______ and ______ decisions. screening preference replacement purchasing

screening preference

Select all that apply The two broad categories into which capital budgeting decisions fall are ______ and ______ decisions. screening replacement preference purchasing

screening preference

The capital budgeting methods that focus on incremental operating income rather than cash flows is ______. net present value payback internal rate of return simple rate of return

simple rate of return

The internal rate of return is ______. a project's minimum required rate of return the appropriate salvage value of purchased equipment the rate of return of an investment project over its useful life a discount rate of zero

the rate of return of an investment project over its useful life

Select all that apply Working capital is ______. not treated as a cash flow in an investment project. 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. not discounted when computing the net present value of an investment

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.