Flashcards in Chapter 11 Deck (15):
The process of making decisions regarding long-term investments is called what?
When using the Capital Budgeting Process, what are the two types of decisions you can use.
"Does the project meet the minimum objectives first?"
-where you rank projects
The technique of Capital Budgeting decisions focus on ___
Incremental Cash Inflows
Incremental Cash Outflows
3 typical things included in Cash Outflows
Increased Working Capital
Incremental Operating Costs
-repairs and maintenance
4 typical things included in Cash Inflows
Release of Working Capital
Reduction in Costs
Payback Period formula? What is its weakness?
Net Initial Investment / Annual Cash Flow
*ONLY use if "annual cash flows" are equal
*Depreciation excluded from cash flows
-does not consider time value of money
What is ARR? Give its formula.
Simple Rate of Return Method (ARR)
(Average Annual Income / Net Initial Investment)
When should a project be acceptable using ARR?
Accept Project IF:
ARR >(or equal to) minimum required rate of return
1 Advantage of using ARR and 1 Disadvantage?
-easy for managers to understand and calculate
-does not consider Time Value of Money
What are 2 other names the Discount Rate is called?
Cost of Capital
Minimum Acceptable Rate of return
2 Assumptions of NPV
-Cash Flows immediately reinvested at Discount Rate/Cost of Capital/Minimum Acceptable Rate of Return
-cash flows occur at year end
NPV / Net Investment Required
What makes the NPV equal 0?
Internal Rate of Return (IRR)
-interest rate that makes NPV zero
Is Depreciation included in the Annual Cash Flow when using the Discount Payback Method (meaning depreciation costs decreases the cash flow)