ch 13 pt1

when

Beyond defining a capital project's cash outflows and inflows, it is also important to consider _________________those cash flows occur.

Annual net cash inflow

Factor of the internal rate of return = Investment required / ________________________

Investment required

Factor of the internal rate of return = _______________________ / Annual net cash inflow

rate of return

If a project's _______________________ is less than the cost of capital, the company does not earn enough to compensate its creditors and shareholders.

deducted from the cost of the new equipment

If new equipment is replacing old equipment, then any salvage value to be received when disposing of the old equipment should be _________________________________________, and only the incremental investment should be used in the payback computation.

initial investment

Most projects have at least three types of cash outflows. First, they often require an immediate cash outflow in the form of an ____________________ in equipment, other assets, and installation costs.

repairs and maintenance

Most projects have at least three types of cash outflows. Third, many projects require periodic outlays for __________________________________ and additional operating costs.

net present value

The difference between the present value of these cash flows, called the ________________________, determines whether or not a project is an acceptable investment

cash flows

The first three capital budgeting methods discussed in the chapter—the payback method, the net present value method, and internal rate of return method: all focus on analyzing the _____________________ associated with capital investment projects

payback period

The payback method of evaluating capital budgeting projects focuses on the _______________________

identical cash flows

This section compares the net present value and internal rate of return methods in three ways. Second, the net present value method is often simpler to use than the internal rate of return method, particularly when a project does not have ________________________ every year.

rate of return that is earned on those cash flows

This section compares the net present value and internal rate of return methods in three ways. Third, the internal rate of return method makes a questionable assumption. Both methods assume that cash flows generated by a project during its useful life are immediately reinvested elsewhere. However, the two methods make different assumptions concerning the ____________________________________________.

Cost reduction

Typical capital budgeting decisions include: ____________________ decisions. Should new equipment be purchased to reduce costs?

Equipment replacement

Typical capital budgeting decisions include: _______________________ decisions. Should old equipment be replaced now or later?

Equipment selection

Typical capital budgeting decisions include: ____________________________ decisions. Which of several available machines should be purchased?

Lease or buy

Typical capital budgeting decisions include: _____________________decisions. Should new equipment be leased or purchased?

Expansion

Typical capital budgeting decisions include: __________________decisions. Should a new plant, warehouse, or other facility be acquired to increase capacity and sales?

cash poor

When a company is __________________, a project with a short payback period but a low rate of return might be preferred over another project with a high rate of return but a long payback period.

end of periods

When performing net present value analysis, managers usually make two important assumptions. First, they assume that all cash flows other than the initial investment occur at the _________________________

discount rate

When performing net present value analysis, managers usually make two important assumptions. Second, managers assume that all cash flows generated by an investment project are immediately reinvested at a rate of return equal to the rate used to discount the future cash flows, also known as the _______________________

cost of capital

When the internal rate of return method is used, the ___________________ is used as the hurdle rate that a project must clear for acceptance. If the internal rate of return of a project is not high enough to clear the cost of capital hurdle, then the project is ordinarily rejected.

minimum required rate of return

A company's cost of capital is usually regarded as its ________________________________

exceeds

A positive net present value indicates that the project's return ___________________the discount rate

payback method

Although the _______________________ focuses on cash flows, it does not recognize the time value of money

capital budgeting

Any decision that involves a cash outlay now to obtain a future return is a ___________________________ decision

reduction in the initial investment

Any salvage value realized from the sale of old equipment can be recognized as a _______________________________ or as a cash inflow

preferable

Because of the time value of money, capital investments that promise earlier cash flows are ____________________to those that promise later cash flows.

screening and preference decisions

Capital budgeting decisions fall into two broad categories—______________________________________________

throughout a period

First, they assume that all cash flows other than the initial investment occur at the end of periods. This assumption is somewhat unrealistic because cash flows typically occur ___________________________ rather than just at its end; however, it simplifies the computations considerably

initial investment

For example, opening a new Nordstrom's department store requires additional cash in sales registers and more inventory. These additional working capital needs are treated as part of the ______________________________ in a project

financial health

How well managers make these capital budgeting decisions is a critical factor in the long-run _____________________ of the organization

increase revenues or reduce costs

Most projects also have at least three types of cash inflows. First, a project will normally __________________________________. Either way, the amount involved should be treated as a cash inflow for capital budgeting purposes.

salvage value

Most projects also have at least three types of cash inflows. Second, cash inflows are also frequently realized from selling equipment for its _______________________ when a project ends, although the company actually may have to pay to dispose of some low-value or hazardous items.

working capital

Most projects also have at least three types of cash inflows. Third, any ___________________ that was tied up in the project can be released for use elsewhere at the end of the project and should be treated as a cash inflow at that time

expand its working capital

Most projects have at least three types of cash outflows. Second, some projects require a company to ______________________________

increase in revenues

Notice that from a cash flow standpoint, a reduction in costs is equivalent to an ___________________________

Annual net cash inflow

Payback period = Investment required / ____________________________

Investment required

Payback period = _______________________ / Annual net cash inflow

rejected

Therefore, any project with a rate of return less than the cost of capital should be ____________________

pay for itself

This payback period is sometimes referred to as "the time that it takes for an investment to ______________________."

cost of capital

This section compares the net present value and internal rate of return methods in three ways. First, both methods use the ______________________ to screen out undesirable investment projects.

discount rate

When the net present value method is used, the cost of capital is the ___________________ used to compute the net present value of a proposed project. Any project yielding a negative net present value is rejected unless other factors are significant enough to warrant its acceptance

positive

Whenever the net present value of a project is __________________, the project will recover the original cost of the investment plus sufficient excess cash inflows to compensate the organization for tying up funds in the project

Payback period

___________________ = Investment required / Annual net cash inflow

net present value

______________________ method compares the present value of a project's cash inflows to the present value of its cash outflows

Factor of the internal rate of return

____________________________ = Investment required / Annual net cash inflow

depreciation

any ____________________deducted in arriving at the project's net operating income must be added back to obtain the project's expected annual net cash inflow

annual net cash inflow

any depreciation deducted in arriving at the project's net operating income must be added back to obtain the project's expected ________________________________

Out-of-pocket costs

are actual cash outlays for salaries, advertising, and other operating expenses.

desirable

basic premise of the payback method is that the more quickly the cost of an investment can be recovered, the more ____________________is the investment.

screening tool

certain conditions the payback method can be very useful For one thing, it can help identify which investment proposals are in the "ballpark." That is, it can be used as a _________________________ to help answer the question, "Should I consider this proposal further?"

screening device

cost of capital serves as a ______________________

payback, net present value, internal rate of return, simple rate of return

four methods for making capital budgeting decisions—the ______________method, the __________________________ method, the __________________________ method, and the _____________________ method.

positive net present value

if the company's minimum required rate of return is used as the discount rate, a project with a _________________________________has a return that exceeds the minimum required rate of return and is acceptable

rate of return equal to the discount rate

if the internal rate of return of the project is high, this assumption may not be realistic. It is generally more realistic to assume that cash inflows can be reinvested at a ______________________________________________—particularly if the discount rate is the company's cost of capital or an opportunity rate of return.

working capital

is current assets (e.g., cash, accounts receivable, and inventory) less current liabilities

discounting cash flows

net present value and internal rate of return methods use a technique called ________________________________ to translate the value of future cash flows to their present value

discount rate

net present value method assumes the rate of return is the _________________, whereas the internal rate of return method assumes the rate of return earned on cash flows is the internal rate of return on the project

how many years

payback method is not a true measure of the profitability of an investment. Rather, it simply tells a manager _____________________________ are required to recover the original investment.

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 that same dollar a year from now (investing it)

Preference decision

relate to selecting from among several acceptable alternatives. To illustrate, a company may be considering several different machines to replace an existing machine on the assembly line. The choice of which machine to purchase is a preference decision.

Screening decisions

relate to whether a proposed project is acceptable—whether it passes a preset hurdle

more desirable

shorter payback period does not always mean that one investment is ____________________ than another.

net present value and internal rate of return

the _________________________________________ methods not only focus on cash flows, but they also recognize the time value of those cash flows.

cost of capital

the average rate of return that the company must pay to its long-term creditors and its shareholders for the use of their funds.

payback period

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

internal rate of return

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

incremental net operating income

the simple rate of return method focuses on _____________________________________

capital budgeting

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.

net present value method

when the net present value method and the internal rate of return method do not agree concerning the attractiveness of a project, it is best to go with the _______________________________.