Ch. 16 Cost Management

In a capital budgeting context, current assets (other than cash) less current liabilities equals net ____ ____.

working capital

JPL, Inc. is considering the purchase of a new machine. The net cost of this machine is $300,000. Net working capital of $50,000 would be required throughout the 5-year investment, Cash revenues are expected to be $500,000 per year and cash expenses are expected to be $280,000 per year. The asset will be depreciated using SL with no salvage (i.e. $60,000 per year depreciation expenses). Given JPL's total tax rate of 35%, calculate the annual after-tax cash EXPENSE

$182,000

JPL, Inc. is considering the purchase of a new machine. The net cost of this machine is $300,000. Net working capital of $50,000 would be required throughout the 5-year investment, Cash revenues are expected to be $500,000 per year and cash expenses are expected to be $280,000 per year. The asset will be depreciated using SL with no salvage (i.e. $60,000 per year depreciation expenses). Given JPL's total tax rate of 35%, calculate the annual after-tax cash receipts

$325,000

Relevant financial data for the analysis of proposed capital investment projects includes ______.

-Future after-tax revenues associated with the proposed investment -incremental administrative costs due to the acceptance of a proposed project

In the situation with multiple sign changes in the pattern of cash flow associated with an investment proposal, acceptable DCF project-acceptance criteria includes _____.

-MIRR -NPV

The cost of common stock (and retained earnings) as estimated by the capital asset pricing model (CAPM) includes the _____.

-Particular firm's "beta coefficient" -estimated market return on a market portfolio of securities, Rm -Risk-free rate of interest

A proper capital budgeting analysis includes an analysis of after-tax cash flows and the timing of these flows because _____.

-The timing of cash flows matter due to the time value of money -companies are valued based on their ability to generate "free cash flow" -companies are valued on the basis of their dividend-paying ability

Mutually exclusive investment projects _____.

-are the norm in real-world capital budgeting -involve situations where the selection of one investment alternative precludes the selection of other alternatives

Multiple internal rates of return (IRRs) for a given investment proposal _____.

-can occur when the project has non-normal cash flows -prevents the use of the decision rule: accept a project if its IRR > weighted-average cost of capital (WACC)

Common behavioral problems associated with the capital budgeting process include _____.

-escalating commitment -incrementalism -uncertainty intolerance

To properly analyze an asset-replacement decision we need to _____.

-focus on the incremental (i.e. differential) costs and revenues associated with the two decision alternatives -calculate, at the termination of the project, differential after-tax cash proceeds from the sale or disposal of each asset (old versus new) -determine, at the end of he life of the project, differential recovery of net working capital (old versus new asset)

Within a capital budgeting context, capital rationing ____-.

-implies the need to develop a method to allocated available funds for investment projects in an optimum way -refers to the situation where there are limited funds available to support new investment projects -indicates a company does not have ready access to capital markets to raised funds for investment purposes

Breakeven after-tax cash flow _______.

-is a measure of risk or uncertainty, within a capital budgeting context -can be estimated for a project by using the GOAL SEEK function in Excel

Net working capital _______.

-is invested during project initiation -increases cash inflows at project disposal

Under conditions of capital rationing, available funds to support capital investment projects should be allocated on the basis of the _____.

-profitability index (PI) associated with alternative investment projects under consideration -NPV per dollar of investment capital associated with each project

As a method for evaluating proposed capital investments, the payback period method is limited because _______.

-the model ignores return (after-tax cash inflows) beyond the payback period -the decision criterion (that is, whether to reject or accept a project) is not well defined

A company has a $200,000 bank loan outstanding at 9% interest and $100,000 of $20 par value preferred stock outstanding (5,000 shares) that pays a 15% dividend. The current mmarket value of the stock is $110,000 or $22 per share. Given a tax rate of 30%, calculate the company's cost of preferred stock.

13.64%

The weighted-average cost of capital (WACC) for a company represents

An estimate of the average after-tax cost f obtaining capital (funds) for a company

A project that involves a large expenditures of funds and expected future benefits that last for several years is a(n) ______ _____.

Capital Investment

When a firm has limited investment funds for a given accounting period, they are facing a case of _____ ______.

Capital rationing

True or false: Depreciation deductions themselves are not relevant to capital budgeting analysis.

False

True or false: For efficiency (cost-saving) purposes, decision makers can normally use projected financial statement data (costs and revenues) to evaluate a proposed capital investment project.

False

When the acceptance of one investment alternative precludes the acceptance of one or more competing alternatives, the projects are said to be _____.

Mutually exclusive

When outflows are expressed as negative numbers, the estimated net present value (NPV) of a proposed capital investment project is _________.

The sum of the present value of cash inflows and present value of cash outflows

The process of identifying, evaluating, selecting and controlling long-term project investments is called _____ ______.

capital budgeting

Non-cash expenses _____.

decrease the firm's income tax liability

In a proper analysis of a proposed capital investment project, the _____ _____ is used to convert future after-tax cash flows to a present-value basis

discount rate

By incorporating the WACC (or some other specified interest rate) into the payback period model, we are able to compute the present value or ______ payback period

discounted

When current managers are the ones responsible for the negative results of past actions, _______ is more likely to be an issue in the capital budgeting process.

escalating commitment

Managers may not be motivated to make decisions that are in the best interest of the organization when NPV is used for decision making, but accrual accounting income numbers are used subsequently for performance evaluation. This is an example of a(n) _____ _____ issue.

goal congruency

When a company has two investment proposals and is faced with capital rationing, the appropriate decision rule is to choose the investment with the ______.

higher profitability index (PI)

In a capital budgeting analysis, allocated overhead costs should be ______.

ignored because these costs are not incremental to the project-acceptance decision

In a proper capital budgeting analysis, sunk costs should be _____.

ignored because these costs are not incremental to the project-acceptance decision

Situations in which needed capital investments may not be pursued because of the amount of time and work required to secure their approval is referred to as ______.

incrementalism

Managers may require shorter paybacks for capital investment projects due to the behavioral issue of ______.

intolerance of uncertainty

Managers may require shorter paybacks for capital investment projects due to the behavioral issue of _______.

intolerance of uncertainty

The accounting (book) rate of return (ARR) for a proposed investment project ______.

is found by dividing some measure of accounting income by some measure of investment in the project

A company is considering two projects--F & G. If F is accepted, then G cannot be accepted. If G is accepted, then F cannot be accepted. This implies that F and G are ___ ____ projects.

mutually exclusive

When, during the life of a project, there is a large cash outflow at time 0 followed by a series of positive after-tax cash inflows, the project is said to have

normal cash flows

The time (in years) required for the after-tax cash inflows from an investment to equal the initial outlay for the investment is called the ____ _____.

payback period

An in-depth review of a completed capital investment project, for purposes of comparing projected results (benefits and costs) to realized results (both financial and non-financial) is referred to as a(n) ______.

post audit

One way to achieve goal congruence in the capital budgeting process is to conduct a(n) _______ - _________ comparison between forecasted and realized amounts for a given investment project

post audit