Flashcards in BEC Homework 3.1 Deck (26):

1

## In a equipment replacing decision which of the cost does not affect decision making process

### Original fair market value of the old equipment

2

## Strength of a pay back method

###
It is easy to understand. The pay back method takes the total investment in a project and divides by annual cash flows to determine the number of years it will take to gain a return of the initial investment.

Pay back and bailout pay back do not consider the time value of the money. It neglects total project profitablity

3

## If the net present value of a capital budgeting project is positive

### It would indicate that the rate of return for the project is greater than the discount percentage rate used in the net present value computation. NPV can be used if there is different hurdle rates for different years of the project. Initial cost is one of the most important caluculations of NPV. The method of funding the project has no effect on NPV model.Adding working capital requirements and salvage value affet cash flow

4

## Internal rate of return formulae

### Net incremental investment/Net annual cash flows=Present value factor. The IRR method is less reliable than the NPV technique when there are several alternating period of cash inflows and net cash outflows differ significantly. The IRR is strictly a percentage of return while NPV is an absolute measure.. The higher the present value factor the lower the computed rate of return

5

## The capital budgeting model that's is generally considered the best model for long range decision making

### is the discounted cash flow model

6

## PV cash savings /inflows

### PV net cash outflows

7

## If they ask pretax cash flow

### Add to net income all non-cash tax expense

8

## In making capital budgeting decisions which ones are the financial or the qualitative factor

###
Increase in manufacturing flexibility

Improved product delivery and service

Reduction in new product development time

Less scrap and rework are considered as non-qualitative or non-financial factor.

9

## A depreciation tax shield is

### reduction in income taxes. Depreciation tax shield is caused by the tax deductibility of the depreciation expense not by the face that depreciation does not affect cash flows

10

## Profitablity index is a variation of

### net present value. The profitability index is the ratio of present value of the net future cash inflows to the present value of net initial investment. The profitability index is also referred to as excess present value index or simply the present value index. Companies hope the ratio will be over 1.0 present value of net future cash inflows/ present value of net initial investment. It is used for capital rationing. Ranking and selction of investments is made in decending order. Limited capital resources are applied in the order of index until resources are either exhausted or investment required by the next project exceeds remaining resources

11

## Weighted average capital

### Typically a company will use its own weighted average cost of capital as the hurdle rate for computing NPV. A positive NPV would not likely give any indication of the relationship between required rate of return and WACC. The required rate of return and WACC are equal

12

## What input would be most beneficial to consider when management is developing capitol budget

### Profit center equipment request. Current product sales prices and costs representing operating data most relevant to operating rather than capital budgeting. Wage trends represent operating data most relevant to operating than capital budgeting

13

## In evaluating costs for decision making the company would consider each costs except

### Variable costs. Variable costs change in level of output but may not change purely in response to different select alternatives. Although variable cost are frequently relevant they are not always relevant.

14

## Incremental costs

### represent the change in cost associated with different alternatives and are considered synonymous with relevant.

15

## Diiferential costs

### represent change in costs associated with two separate course of action and are considerd synonymous with relevant

16

## NPV

###
Discounted cash flows -Initial investment. It assumes that positive cash flows are reinvested at hurdle rates thereby considering compounding. It uses cash basis not accrual basis. NPV measures dollars not years. . The discount rate or hurdle rate is determined in advance for the NPV. Advanced determination of management required return is integral .

If in the question it is given in the question cash inflow from the project will be $4000 a year for the next six years. The present value factor to be taken from all of the choices below

present value of $1 to be received after 6 years

Present value of an ordinary annuity of $1 per period for six periods

Present value of an ordinary annuity due of $1 per period of six periods

Future value of $1 at the end of six periods is

Present value of an ordinary annuity of $1 per period for six periods. Take the one without dollar sign

17

## The IRR

### The internal rate of return is equal to the discount rate at which Cash flows discounted at what percent. It is the rate that provides a zero to the net present value. It is a time adjusted rate of return from investment

18

## Pay pack period

### Initial cost / Increase in Annual net after tax cash inflow. It doesn't take into calculation depreciation or salvage value. The pay back method typically ignores the time value of the money and computes the number of years it will take take for the investment to pay back

19

## the common disadvantage of all capital budgeting models

### is they rely on forecasting future data. Capital financing relates to longer periods of time that are subject to greater level of uncertainty than other short term budgeting decisions

20

## Accounting rate of return

### ARR is based on GAAP rate of return and is based on GAAP income and not cash flows and does not considers time value of money

21

## Discounted pay back period don't take into account

### salvage value

22

## What methodology used to develop fair value of common shares

### Discounted cash flow method

23

## Price earning methods

### require future earnings

24

## Price sales methods

### require estimation of future sales

25

## Economic value added

### is a residual income measure that compares income with requested return on investment. Positive amount indicates that objectives have been met and negative indicates it has not

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