# Chapter 13 - Capital Budgeting Decisions & The Concept of Present Value Flashcards

List 5 typical capital budgeting decisions

- Plant expansion
- Equipment selection
- Lease or buy
- Equipment replacement
- Cost reduction

What are the two broad categories that capital budgeting tends to fall into?

- Screening decisions

2. Preference decisions

What 3 methods focus on analyzing the cash flows associated with capital investment projects?

- Payback method
- Net present value
- Internal rate of return

Which method focuses on incrementing net operating income?

The simple rate of return method

List 4 types of typical cash outflows

- Repairs and maintenance
- Working capital required
- Incremental operating costs
- Initial investment

List 4 types of typical cash inflows

- Salvage value
- Working capital released
- Incremental revenues
- Reduction of costs

What is repairs and maintenance an example of?

Periodic outlays

Are capital investments that promise earlier returns or later returns preferred?

Capital investments that promise earlier returns are preferred

What do capital budgeting techniques that best recognize the time value of money involve?

Discounted cash flows

What does the payback method focus on?

The payback period

What is the length of time that it takes for a project to recoup its initial cost out of the cash receipts that it generates?

The payback period

What does the payback method analyze?

Cash flows

What is the payback period expressed in?

Years

What is the formula to find the payback period?

Investment / Annual net cash inflow

Management at the Daily Grind wants to install an espresso bar in its restaurant that:

- Costs $140,000 and has a 10-year life.
- Will generate annual net cash inflows of $35,000.

Management requires a payback period of 5 years or less on all investments.

What is the payback period for the espresso bar?

PP = Investment / Annual net cash inflow PP = $140,000 / $35,000 PP = 4 years

When should someone invest in a company?

Company payback period < required payback period

What does the net present value method focus on?

Cash flows

Fill in the Blanks:

The net present value method compares the present value of a project’s _________ with the present value of its _________.

- Cash inflows

2. Cash outflows

What is the difference between the streams of cash inflows and cash outflows?

The net present value

What is the formula to find the annual net cash inflow?

Net operating income + depreciation

Fill in the Blank:

You should accept a contract when the project has a ______ net present value

Positive

Is investment on equipment a cash inflow or cash outflow?

Cash outflow

Is working capital required a cash inflow or cash outflow?

Cash outflow

Is the salvage value of equipment a cash inflow or cash outflow?

Cash inflow

Is working capital released a cash inflow or cash outflow?

Cash inflow

Fill in the Blanks:

A cash inflow has a _______ net present value whereas a cash outflow has a _______ net present value

- Positive

2. Negative

What is the formula used in the net present value method to find the future cash flow’s present value?

Total cash flows x discount factor

What does a positive net present value indicate?

The project’s return > the discount rate