smartbook chapter 14
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 $266,700 / $210,000
identify each working capital situation with the appropriate treatment
cash inflow: working capital is released for use elsewhere within the company cash outflow: working capital is tied up for project needs
when using the internal rate of return method to rank competing investment projects ____________.
the higher the internal rate of return, the more desirable the project
true or false: when calculating the payback period, the depreciation on the investment is excluded in the calculation of net cash flow.
true depreciation is a non-cash expense, and therefore, should not be included in the calculation of the net cash inflows of a capital investment. thus, it must be added back to determine the annual net cash flow.
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
select all that apply 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
select all that apply when using net present value to compare projects, the total cost approach _____________.
-is the most flexible method available to compare projects -includes all cash inflows and outflows under each alternative
select all that apply typical capital budgeting decisions include ___________ decisions.
-lease or buy -equipment selection -cost reduction
select all that apply if the internal rate of return is ________.
-less than the hurdle rate the project should be rejected -greater than the hurdle rate the project is acceptable
select all that apply capital budgeting decisions include ____________.
-purchasing new equipment to reduce cost -deciding to replace old equipment -acquiring a new facility to increase capacity -choosing to lease or buy new equipment -determining which equipment to purchase among available alternatives
select all that apply 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
select all that apply which of the following statements are true?
-the more frequently interest is compounded, the faster the balance grows -compound interest means that interest is paid on interest
select all that apply working capital is ____________.
-treated as a cash outflow when required at the beginning of a project -treated as a cash inflow when released at the end of a project
select all that apply which of the following are true?
-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 -the cost of capital may be used to screen out undesirable projects
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.
2.6 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 = 0.6, so the total payback period is 2.6 years. payback period = number of years up to the year in which the investment is paid off + (uncovered investment at the beginning of the year in which the investment is paid off / cash inflow in the period in which the investment is paid off)
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.
3.5
any decision that involves a cash outlay now to obtain a future return is a __________ _____________ decision. typical decisions include: -cost reduction decisions. should new equipment be purchased to reduce costs? -expansion decisions. should a new plant, warehouse, or other facility be acquired to increase capacity and sales? -equipment selection decisions. which of several available machines should be purchases? -lease or buy decisions. should new equipment be leased or purchased? -equipment replacement decisions. should old equipment be replaced now or later?
capital budgeting
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 "the payback method is not a true measure of the profitability of an investment. rather, it simply tells a manager how many years are required to recover the original investment. unfortunately, a shorter payback period does not always mean that one investment is more desirable than another."
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
the term capital budgeting is used to describe how managers plan significant investments in projects that have ________ implications.
long-term
when analyzing an investment project, uncertain future cash flows _________.
may be estimated using computer simulations
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
a dollar today is _________ a dollar received a year from today
more valuable than
the simple rate of return method focuses on ________, rather than ________.
net operating income; cash flows
time value of money
recognizes that a dollar today is worth more than a dollar a year from now if for no other reason than you could put the dollar in a bank today and have more than a dollar a year from now
the internal rate of return is the discount rate that results in a net present value of ________ for the investment
zero
the internal rate of return is the discount rate that results in a net present value of _________ for the investment.
zero
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 flow is $_______.
$42,000 profitability index = present value of cash inflows / investment required
annuity
a series of identical cash flows
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
working capital
current assets _e.g. cash, accounts receivable, and inventory) minus current liabilities
the interest factor used to find the present value is called the ____________ rate.
discount
to determine if a project is acceptable compare the internal rate of return to the company's ___________.
hurdle rate
the internal rate of return ___________.
is the discount rate that makes npv equal zero for a project
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
a net present value decision that does not involve any revenues is known as a(n) _____________-___________ decision
least-cost
working capital ______________.
often increases when a company takes on a new project
current assets minus current liabilities is called _______ __________.
working capital
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
to screen out undesirable investments, _________ use(s) the cost of capital.
both the net present value and internal rate of return methods
future cash flows expected from investment projects _________.
can be difficult to estimate
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
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
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 new equipment "if new equipment is replacing old equipment, then any salvage value to be received when disposing of the old equipment should be deducted from the cost of the new equipment, and only the incremental investment should be used in the payback computation. in addition, 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"
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
finding the present value of a future cash flow is called __________.
discounting
suppose a project with a negative net present value would provide intangible benefits. 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
investment required / annual net cash inflow is the formula to find the factor that needed to calculate 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
it is important to know the present value of an investment because a dollar _______ it will be worth a year from today
is worth more today than
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
one dollar earned today is worth ____________.
more than one dollar earned at a future point in time
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 both options are acceptable because they each have an internal rate of return greater than the required rate of return, but option b is preferred because it has a higher internal rate of return
instead of focusing on a project's profitability, the _________ period focuses on the time it takes for an investment to pay for itself
payback
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
preference decisions are also called ___________ or ____________ decisions.
rationing; ranking
preference decisions
relate to selecting from among several acceptable alternatives
screening decisions
relate to whether a proposed project is acceptable - whether it passes a preset hurdle
capital budgeting decisions fall into two broad categories - __________ _________ and ___________ ___________
screening decisions; preference decisions
which of the following capital budgeting decision tools focuses on net operating income rather than cash flows?
simple rate of return
all cash flows are included, and a net present value is computed for each alternative when using the ________-_______ approach
total-cost