ACCTG 8 AND 9

8.4 under what cirmcutsances will net presenr value and IRR lead to the same accept=reject decision. When might they conflict

The IRR on an investment is the rewuired return that results in a zero NPV when it is used as a discount rate

Calculating PAYBACK SCENARIO:

The initial cost is 500. After the first two years, the cash flow total is 300. After the third year the total cash flow is 800., so the project pays back sometime between year 2 and year 3. Because the total cash flows accumulated for the first two years are 300 We need to recover $200 in the third year. The third year's cash flow is 500, so we will wait for 200/500=.40 years to do this. The payback period is 2.4 years. Or about two years and five months

what does the profitiability index measure

The present value of an investment's future cash flows divided by its initial cost. Also benefit-cost ratio. so if a present costs 200 and the present value of its future cash flow is 220, the profibilatiy index value would be 220/200

purpose of closing entries

The purpose of the closing entry is to reset the temporary account balances to zero on the general ledger, the record-keeping system for a company's financial data.

Is it true that an advantage of the irr rule over the npv rule is that we don't need ro know the required return of to use the irr value?

Yes, because the IRR can be estimated without the appropriate discount rate

Average Accounting Return

an investment's average net income divided by its average book value

A positive NPV exists when the market value of a project exceeds its cost. Unfortunately, most of the time the market value of a project:

cannot be observed

Cash flows used in project estimation should always reflect:

cash flows when they occur. aftertax cash flows.

Investment in net working capital arises when Blank______.

cash is kept for unexpected expenditures inventory is purchased credit sales are made

The cash flows of a new project that come at the expense of a firm's existing projects is called

erosion

Side effects from investing in a project refer to cash flows from:

erosion effects

The difference between a firm's cash flows with a project versus without the project is called Blank______.

incremental cash flows

how would you state the profibilaity index rule?

more generally, if project has positive NPV, Then the present value of the future cash flow must be bigger than the initial statement

Which of the following is an example of a sunk cost?

project consultation fee

Opportunity costs are classified as Blank______ costs in project analysis.

relevant

what are the weakeness of the aar rule?

the aar is not a rate true rate of return. Time value of money is ignored uses an arbitary benchmark cutoff rate based on accounting net income and book values, not cash flows and market value

Side effects from investing in a project refer to cash flows from:

erosion effects. beneficial spillover effects.

NPV

NET PRESENT VALUE: How much value os created or added by an investment

If a new project requires an investment in net working capital when it is launched, then at the end of the project, NWC will be:

100 percent reversed.

we need to calculate the present value of the future cash flows at 15% The net cash inflow will be 20,000 cash income less than 14,000 in costs per year for eight years. These cash flows suggests, we effecitvely have an eight year annuity of 20,000-14,000=6,000 per year with a single lump-sum inflow of 2,000 in 8 years. Total present value is

6000*(1-1/1.15⁸)/.15+2,000/1.15⁸--->6,000*4.4873+2,000/3.0590 --->26,924+654=27,578

True or false: The depreciation tax shield is the depreciation deduction divided by the tax rate.

False

PAYBACK RULE:when is an investment is acceptable

Based on the payback rule, an investment is acceptable if its calculated payback period is less than some prespicified number of years

Once cash flows have been estimated, which of the following investment criteria can be applied to them?

IRR NPV payback period

The 30,000 estimated cost minus present value is -30,000+27,578=-2,422. IS THIS GOOD INVESTMENT?

No bevause the number is negative. An investment should be accepted if net present value is positive and rejected if negative.

Which of the following is the equation for estimating operating cash flows using the tax-shield approach?

OCF = (Sales - Costs) × (1 − Tax rate) + Depreciation × Tax rate