Flashcards in Capital Budgeting 1 Deck (14):

1

## What is Capital Budgeting? How is it used?

###
Managerial Accounting technique used to evaluate different investment options

Helps management make decisions

Uses both accounting and non-accounting information

Internal focus

GAAP is not mandatory

2

## What values are used in Capital Budgeting?

###
Capital Budgeting ONLY uses Present Value tables.

Capital Budgeting NEVER uses Fair Value.

3

## When is the Present Value of $1 table used?

### For ONE payment- ONE time.

4

## When is the Present Value of an Annuity Due used?

### Multiple payments made over time- where the payments are made at the START of the period.

5

## When is the Present Value of an Ordinary Annuity of $1 (PVOA) used?

###
Multiple payments over time- where payments are made at the END of the period.

Think A for Arrears.

6

## What is the calculation for the Present Value of $1?

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1 / (( 1+i )^n)

i : interest rate

n : number of periods

7

## What is Net Present Value (NPV)?

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A preferred method of evaluating profitability.

One of two methods that use the Time Value of Money

: PV of Future Cash Flows - Investment

8

## How is NPV used to calculate future benefit?

###
NPV : PV Future Cash Flows - Investment

If NPV is Negative- Cost is greater than benefits (bad investment)

If NPV is Positive- Cost is less than benefit (good investment)

If NPV : 0- Cost : Benefit (Management is indifferent)

9

## What is the rate of return on an investment called?

### The Discount Rate.

10

## What does the Discount Rate represent?

###
The rate of return on an investment used.

It represents the minimum rate of return required.

11

## What are the strengths of the Net Present Value system?

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Uses the Time Value of Money

Uses all cash flows- not just the cash flows to arrive at Payback

Takes risks into consideration

12

## What are the weaknesses of the Net Present Value system?

### Not as simple as the Accounting Rate of Return.

13

## How do Salvage Value and Depreciation affect Net Present Value?

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NPV includes Salvage Value because it is a future cash inflow.

NPV does NOT include depreciation because it is non-cash.

Exception - If a CPA Exam question says to include tax considerations- then you have to include depreciation because of income tax savings generated by depreciation.

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