Flashcards in Capital Budgeting (Managerial Accounting) (M43) Deck (40):

1

## There are ___ stages to capital budgeting

### 6

2

## During this stage, management determines the type of capital projects that are necessary to achieve management's objectives and strategies

### Identification Stage

3

## During this stage, management attempts to identify alternative capital investments that will achieve management's objectives

### Search Stage

4

## During this stage, management attempts to revaluate the various investments in terms of their costs and benefits

### Information-Acquisition Stage

5

## Management chooses the project that best meets the criteria established

### Selection Stage

6

## During this stage, management decides on the best source of funding for the project

### Financing Stage

7

## During this stage, management undertakes the project and monitors the performance of the investment

### Implementation & Control Stage

8

## At what stage of the capital budgeting process would management most likely apply present value techniques?

### Selection

9

## These are committed costs that are not avoidable and are therefore irrelevant to the decision process

### Sunk, Past, or Unavoidable Costs

10

## These are costs that will not continue to be incurred if a department or product is terminated

### Avoidable Costs

11

## These costs arise from a company's basic commitment to open its doors and engage in business. Examples include: depreciation, property taxes, and management salaries

### Committed Costs

12

## These costs are fixed costs whose level is set by current management decisions. Examples include: Advertising, R&D

### Discretionary Costs

13

## These are future costs that will change as a result of a specific decision

### Relevant Costs

14

## This is the difference in cost between two alternatives

### Differential (Incremental) Cost

15

## This is the maximum income or savings (benefit) forgone by rejecting an alternative

### Opportunity Cost

16

## This is the number of years to recoup the investment in cash

### Payback Period

17

## What are two limitations of the payback period?

###
1) Ignores total project profitability

2) Doesn't take into account TVM

18

## This method is essentially the same as the payback method, except that in calculating the payback period cash flows are first discounted to their present value

### Discounted Payback

19

## What is a strength of the Payback Period Method?

### It is easy to understand

20

## ow is the discounted payback method an improvement over the payback method in evaluating investment projects?

### It considers the TVM

21

##
T/F

The discounted payback method involves a better estimates of cash flows than the payback period method

### FALSE

22

##
T/F

The discounted payback method considers the variability of the return better than the payback period method

### FALSE

23

## This method computes an approximate rate of return which ignores the TVM

### Accounting Rate of Return

24

##
T/F

An advantage of the accounting rate of return method of evaluating investment returns is that the technique considers the TVM

###
FALSE

Biggest disadvantage

25

##
T/F

An advantage of the accounting rate of return method of evaluating investment returns is that the technique corresponds to the measure that is often used to evaluate performance

### TRUE

26

##
T/F

An advantage of the accounting rate of return method of evaluating investment returns is that the technique considers the risk of the investment

### FALSE

27

##
If an investment project has a profitability index of 1.15, then the ...

a) Project's internal rate of return is 15%

b) Project's cost of capital is greater than its internal rate of return

c) Project's internal rate of return exceeds its net present value

d) Net present value of the project is positive

### D

28

##
The net present value (NPV) method of investment project analysis assumes that the project’s cash flows are reinvested at the

a) Computed internal rate of return

b) Risk-Free Interest Rate

c) Discount rate used in the NPV Calculation

d) Firm's accounting rate of return

###
C

29

## This method of discounted cash flows determines the rate of discount at which the PV of the future cash flows will exactly equal the investment outlay

### Internal Time-Adjusted Rate of Return

30

##
he internal rate of return is the ...

a) Rate of interest that equates the PV of cash outflows & the PV of cash inflows

b) Minimum acceptable rate of return for a proposed investment

c) Risk-adjusted rate of return

d) Required rate of return

### A

31

## Generally the ____ larger/smaller) the standard deviation, the greater the risk

### larger

32

## How do you calculate the payback period?

### Investment / Annual Cash Inflow

33

## How do you calculate the Annual Cash Inflow?

###
Annual Cash Inflow Before Depr/Amort & Taxes

- Depr / Amort Expense

= NIBT

- Taxes

= NIAT

+ Depr / Amort Ex[ense

= Annual Cash Inflow (Net of Taxes)

34

## How do you calculate the Accounting Rate of Return?

### Net Income / (Initial or Average) Investment

35

##
T/F

Amortization is NOT a cash outflow and is thus excluded from the calculation of after-tax NPV

### TRUE

36

##
T/F

In calculating the Accounting Rate of Return you may need to use the PV of 1 factors

###
FALSE

The Accounting Rate of Return IGNORES TVM!!!

37

## If an investment is expected to reduce costs by X amount in the first two years and then by Y amount in year three, how would you you determine the PV of these future savings?

###
Multiply the X amount by the PV Factor for 2 Periods

Multiply the Y amount by the PV Factor for Pd 3 - Pd 2

38

## The NPV Method uses the firm's _________

### Cost of Capital

39

## How do you calculate the internal rate of return?

###
1) What are the cash inflows?

2) What are the cash outflows?

3) What is the period of time?

4) What PV Factor will make the cash inflows = cash outflows?

40