ACC Ch. 12 SB

Capital budgeting decisions include ______.

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

Conducting a postaudit ______.

-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

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

Identify capital budgeting decisions.

Equipment replacement decisions Expansion decisions

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. (Enter only one word per blank.)

capital budgeting

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.

Which of the following statements are true?

-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.

Which of the following statements are true?

-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. -When using the internal rate of return method, the cost of capital is used as the hurdle rate.

The payback method ______.

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

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

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.

The internal rate of return is the discount rate that results in a net present value of ___ for the investment. (Enter only one word per blank.)

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 $266,700 ÷ $210,000 = 1.27

Capri Industries is considering an investment that has an initial cost of $26,500 and the following expected cash inflows: Y1: $6,000 Y2: $8,000 Y3: $10,000 Y4: $5,000 Y5: $3,000 The expected payback period is ______ years.

4 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.

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 $ ___

42,000 35,000x1.2

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

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

The simple rate of return is also referred to as the ___ or ___ rate of return. (Enter only one word per blank.)

accounting; unadjusted

The simple rate of return equals the ______.

annual incremental net operating income ÷ initial investment

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

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

A series of equal cash flows is a(n) ___ . (Enter only one word per blank.)

annuity

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

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

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. (Enter only one word per blank.)

compound

Typical capital budgeting decisions include ______ decisions.

cost reduction lease or buy equipment selection

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

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

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 internal rate of return ______.

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

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

A net present value decision that does not involve any revenues is known as a(n) ___ - ___ decision. (Enter only one word per blank.)

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

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

In the context of the time value of money, one dollar today is worth ______ a dollar a year from now.

more than

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

Instead of focusing on a project's profitability, the ___ period focuses on the time it takes for an investment to pay for itself. (Enter only one word per blank.)

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

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

positive or zero

The purpose of a(n) ___ is to see if capital budgeting expectations were actually realized. (Enter only one word per blank.)

postaudit

Preference decisions are also called ______ decisions.

rationing ranking

Preference decisions are sometimes called ___ decisions or ___ decisions. (Enter only one word per blank.)

rationing; ranking

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

The internal rate of return is ______.

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

The concept that a dollar today is worth more than a dollar a year from now is called the of ___ ___ money. (Enter only one word per blank.)

time value

All cash flows are included, and a net present value is computed for each alternative when using the ___ - ___ approach. (Enter only one word per blank.)

total cost

Current assets minus current liabilities is called ___ ___ .

working capital