Flashcards in Chapter 11 Deck (15):

1

## The process of making decisions regarding long-term investments is called what?

### Capital Budgeting

2

## When using the Capital Budgeting Process, what are the two types of decisions you can use.

###
Screening Decisions

"Does the project meet the minimum objectives first?"

Preference Decisions

-where you rank projects

3

## The technique of Capital Budgeting decisions focus on ___

###
Incremental Cash Inflows

and

Incremental Cash Outflows

4

## 3 typical things included in Cash Outflows

###
Initial Investments

Increased Working Capital

Incremental Operating Costs

-repairs and maintenance

5

## 4 typical things included in Cash Inflows

###
Incremental Revenues

Release of Working Capital

Reduction in Costs

Salvage Value

6

## 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

WEAKNESS

-does not consider time value of money

7

## What is ARR? Give its formula.

###
Simple Rate of Return Method (ARR)

(Average Annual Income / Net Initial Investment)

8

## When should a project be acceptable using ARR?

###
Accept Project IF:

ARR >(or equal to) minimum required rate of return

9

## 1 Advantage of using ARR and 1 Disadvantage?

###
Advantage

-easy for managers to understand and calculate

Disadvantage

-does not consider Time Value of Money

10

## What are 2 other names the Discount Rate is called?

###
Cost of Capital

Minimum Acceptable Rate of return

11

## 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

12

## Profitability Index

### NPV / Net Investment Required

13

## What makes the NPV equal 0?

###
Internal Rate of Return (IRR)

-interest rate that makes NPV zero

14

## Is Depreciation included in the Annual Cash Flow when using the Discount Payback Method (meaning depreciation costs decreases the cash flow)

### No

15