Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Principles of Accounting - Managerial > Chapter 13 - Capital Budgeting Decisions & The Concept of Present Value > Flashcards

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

1
Q

List 5 typical capital budgeting decisions

A
  1. Plant expansion
  2. Equipment selection
  3. Lease or buy
  4. Equipment replacement
  5. Cost reduction
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

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

A
  1. Screening decisions

2. Preference decisions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

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

A
  1. Payback method
  2. Net present value
  3. Internal rate of return
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Which method focuses on incrementing net operating income?

A

The simple rate of return method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

List 4 types of typical cash outflows

A
  1. Repairs and maintenance
  2. Working capital required
  3. Incremental operating costs
  4. Initial investment
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

List 4 types of typical cash inflows

A
  1. Salvage value
  2. Working capital released
  3. Incremental revenues
  4. Reduction of costs
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is repairs and maintenance an example of?

A

Periodic outlays

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

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

A

Capital investments that promise earlier returns are preferred

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

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

A

Discounted cash flows

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What does the payback method focus on?

A

The payback period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

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?

A

The payback period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What does the payback method analyze?

A

Cash flows

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the payback period expressed in?

A

Years

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the formula to find the payback period?

A

Investment / Annual net cash inflow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

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

  1. Costs $140,000 and has a 10-year life.
  2. 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?

A 
PP = Investment / Annual net cash inflow
PP =  $140,000 / $35,000
PP = 4 years
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

When should someone invest in a company?

A

Company payback period < required payback period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What does the net present value method focus on?

A

Cash flows

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Fill in the Blanks:

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

A
  1. Cash inflows

2. Cash outflows

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

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

A

The net present value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

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

A

Net operating income + depreciation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Fill in the Blank:

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

A

Positive

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Is investment on equipment a cash inflow or cash outflow?

A

Cash outflow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Is working capital required a cash inflow or cash outflow?

A

Cash outflow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

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

A

Cash inflow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Is working capital released a cash inflow or cash outflow?

A

Cash inflow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Fill in the Blanks:

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

A
  1. Positive

2. Negative

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

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

A

Total cash flows x discount factor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What does a positive net present value indicate?

A

The project’s return > the discount rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What does a negative net present value indicate?

A

The project’s return < the discount rate

30
Q

What is the discounted rate also known as?

A

The required rate of return

31
Q

Is the project acceptable if the net present value is zero?

A

Yes

32
Q

What does a net present value of 0 indicate?

A

The project return = the discount rate

33
Q

What is the company’s cost of capital usually regarded as?

A

The minimum required rate of return

34
Q

What is the average return the company must pay to its long-term creditors and stockholders?

A

The cost of capital

35
Q

What does the net present value method automatically provide for?

A

Return of the original investment

36
Q

What are the 2 methods for computing the net present value method?

A
  1. The present value of a dollar

2. The present value of an annuity

37
Q

Fill in the Blank: Greatest/Least

In decisions where revenues are not directly involved, managers should choose the alternative that has the ____ total cost from a present value perspective

A

Least

38
Q

What is the formula to find the salvage value?

A

Net present value / Present value

39
Q

Do screening decisions or preference decisions come first?

A

Screening decisions come first

40
Q

What attempts to rank acceptable alternatives from the most to least appealing?

A

Preference decisions

41
Q

What pertains to whether or not some proposed investment is acceptable?

A

Screening decisions

42
Q

When can the net present value of one project be directly compared to the net present value of another project?

A

When their investments are equal

43
Q

What is the formula to find the profit profitability index?

A

Net present value / Investment

44
Q

Is a project more desirable when the profit profitability index is lower or higher?

A

Higher

45
Q

What does the simple rate of return method focus on?

A

Operating income

46
Q

What is the formula to find the simple rate of return?

A

Net operating income / (Investment - salvage value on old equipment)

47
Q

Management of the Daily Grind wants to install an espresso bar in its restaurant that:
Cost $140,000 and has a 10-year life.
Will generate incremental revenues of $100,000 and incremental expenses of $65,000 including depreciation.

What is the simple rate of return on the investment project?

A 
SRoR = (Net operating income - Depreciation) / Investment
SRoR = ($100,000 - $65,000) / $140,000
SRoR = $35,000 / $140,000
SRoR = 25%
48
Q

What is the simple rate of return’s annual incremental net operating income reduced by?

A

Depreciation

49
Q

What is the formula to find depreciation?

A

(Original cost - Salvage value) / Usable Life

50
Q

True or False:

The payback method doesn’t include depreciation while the simple rate of return does

A

True

51
Q

What are 2 disadvantages of the simple rate of return method?

A
  1. It ignores the time value of money

2. The same project may appear desirable in some years and undesirable in other years

52
Q

What might a project’s simple rate of return motivate investment center managers to do when they are evaluated using return on investment?

A

To bypass investment opportunities that earn positive net present values

53
Q

What is a follow-up after the project has been completed to see whether or not expected results were actually realized?

A

A postaudit

54
Q

What is the formula to find the working capital?

A

Current assets - current liabilities

55
Q

What is the layout of the rows in the net present value method?

A

Years
Cash Flows
% Factor
Present Value

56
Q

When should you use the present value of a $ chart?

A

When it is a 1 time event

57
Q

When should you use the present value of an annuity chart?

A

When it is an annual event

58
Q

Which chart do you use to find the present value of annual net cash inflows?

A

The present value of an annuity chart

59
Q

When you have an annual event which year should you look at to find the present value % factor?

A

The last year

60
Q

True or False:

When you are calculating the net present value you have to include working capital released at the end of the period if there is a working capital required

A

True

61
Q

What is working capital released equal to?

A

A positive working capital required

62
Q

What is the formula to find the balance at the end of the period?

A

(Money x %) + Money

63
Q

Assume a bank pays 8% interest on a $100 deposit made today. How much will the $100 be worth in one year?

A

(100 x 8%) + 100 = 108

64
Q

What is the interest that is paid in the second year on the interest earned in the first year?

A

Compound interest

65
Q

What if the $108 was left in the bank for a second year? How much would the original $100 be worth at the end of the second year?

A

(108 x 8%) + 108 = 116.64

66
Q

List 2 ways an investment can be viewed

A
  1. It’s future value

2. It’s present value

67
Q

What is the interest rate used to find the present investment amount?

A

The discount rate

68
Q

What is it called when you use an interest rate to find the present invested amount?

A

Discounting

69
Q

What is an investment that involves a series of identical cash flows at the end of each year?

A

An annuity

70
Q

List 3 disadvantages of the payback method

A
  1. It ignores the time value of money
  2. It ignores cash flows after the payback period
  3. A shorter payback period does not always mean a more desirable investment
71
Q

List 3 advantages of the payback method

A
  1. It serves as screening tool
  2. It identifies products that recoup initial investment quickly
  3. It identifies investments that recoup cash investments quickly

Principles of Accounting - Managerial (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions