B3: Capital Budgeting

Question 1

Name 3 Cash Flow effects of Capital Budgeting and give an example

Answer 1

1. Direct EX: Not Accruing; Acquisition Cost
2. Indirect EX: Net Proceeds on sale of old reduces cost of new; Depreciation
3. Net Effect EX: total of direct and indirect

Question 2

Formula for Dollars Saved regarding Depreciation

Answer 2

Depreciation * Tax Rate = Dollars Saved

Question 3

Name the Three Stages of Cash Flows

Answer 3

1. Inception of the project
2. Operations
3. Disposal

Question 4

Working Capital Formula

Answer 4

Current Assets - Current Liabilities

Question 5

The abandoned Asset’s Book Value is considered what

Answer 5

A sunk cost and is not relevant to the decision making process

Question 6

Step 1 of Cash Flow Stages formula

Answer 6

Invoice + Shipp + Install (outflow)
+ increase in WC (Outflow)
- Net proceeds sale old (Inflow)

Question 7

Step 2 of Cash flow stages formula (After Tax Cash Flows)

Answer 7

Pretax CF * (1-T)

+ Depreciation * T

Question 8

Step 3 of Cash flow stages formula

Answer 8

SP (inflow)
+ Decrease WC (Inflow)
- Gain * TR (outflow)
+ Loss * TR (inflow)

Question 9

Profitability Index Formula

Answer 9

PV of net future cash inflow/PV of net initial investment

Question 10

Payback Period formula

Answer 10

Net initial investment/increase in annual net after tax cash flow

Question 11

The discount rate is determined in advance for which capital budget technique:

Answer 11

Net Present Value

Question 12

What is a Tax Shield?

Answer 12

Depreciation tax shield is when depreciation protects income from taxation…thus reducing income taxes

Question 13

Internal Rate of Return

Answer 13

is = to the discount rate at which the investment equals zero

Question 14

The discount rate is determined in advance for which of the following capital budgeting techniques

Answer 14

Net Present Value

Question 15

Formula for Annual OCF

Answer 15

Pretax CF * (1-TR) + Depr * TR