Chapter 7

Question 1

It is the process of planning and controlling investments for long-term projects

Answer 1

Capital budgeting

Question 2

Decisions of this tend to be relatively inflexible

Answer 2

Capital budgeting

Question 3

It is the long-term aspect of capital budgeting that presents the management accountant with specific challenges

Answer 3

Long-term projects

Question 4

It is concerned with long-range decisions such as whether to add a product line to build new facilities or to lease or buy equipment

Answer 4

Capital budgeting

Question 5

Two types of capital investment decisions

Answer 5

Screening decisions
preference decisions

Question 6

This is whether the capital investment meets the minimum criteria set by the company

Answer 6

Screening decisions

Question 7

This is often used to narrow down a set of projects for further consideration

Answer 7

Screening decisions

Question 8

Evaluate and compare more than one capital investment alternative since companies may have limited capacity to invest in all the project alternatives

Answer 8

Preference decisions

Question 9

Terms to use in the discussion

Answer 9

Net investment
costs or cash outflows
savings or cash inflows
cost of capital

Question 10

Costs or cash outflows less cash inflows or savings incidental to the acquisition of the investment projects

Answer 10

Net investment

Question 11

Initial cash outlay for all expenses on the project up to the time when it is ready for use such as purchase price and incidental project-related cost

Answer 11

Cost or cash outflows

Question 12

Working capital requirement to operate the project at the desired level

Answer 12

Costs or cash outflows

Question 13

Market value of an existing, currently idle asset, which will be transferred to or be utilized in the operations of the proposed capital investment project

Answer 13

Costs or cash outflows

Question 14

Trade-in value of old asset

Answer 14

Savings or cash inflows

Question 15

Proceeds from sale of old asset to be disposed

Answer 15

Savings or cash inflows

Question 16

Avoidable costs of immediate refers an old asset to be replaced, netof tax

Answer 16

Savings or cash inflows

Question 17

The cost of using funds

Answer 17

Cost of capital

Question 18

It is the weighted average rate the company must pay to its long-term creditors for the use of their funds

Answer 18

Cost of capital

Question 19

It is also known as the hurdle rate

Answer 19

Cost of capital

Question 20

It is used to evaluate capital investment alternatives

Answer 20

Capital budgeting methods

Question 21

The capital budgeting methods

Answer 21

Non discounting methods
discounted cash flow methods

Question 22

Non discounting methods and their basis

Answer 22

Accounting rate of return - net income
payback period - cash flow

Question 23

Discounted cash flow methods

Answer 23

Net present value internal rate of return profitability index
all are cash flow

Question 24

Non discounted capital budgeting techniques

Answer 24

Accounting rate of return
payback period and payback bailout period

Question 25

Aka annual rate of return simple rate of return or unadjusted rate of return

Answer 25

Accounting rate of return

Question 26

Tells managers how much net income a potential project is expected to generate as a relative percentage of the investment required

Answer 26

Accounting rate of return

Question 27

ARR is an unsatisfactory means of evaluating capital projects for two major reasons

Answer 27

The ARR uses accrual basis numbers The ARR is an average of all of a firm's capital projects

Question 28

It shows the amount of time it takes for a capital investment to be recovered by the company using the cash inflows from such investment

Answer 28

Payback period and payback bailout period

Question 29

Generally projects with shorter payback periods are safer investments than those with longer payback periods

Answer 29

Payback period and payback bailout

Question 30

formula of ARR based on initial investment

Answer 30

Average net income divided by net investment

Question 31

formula of ARR based on average investment

Answer 31

Average net income divided by average investment

Question 32

Formula of payback period if the cash flow per year is uniform

Answer 32

Not investment / annual cash inflow

Question 33

Formula of payback period when the cash flow per year is not uniform

Answer 33

You have to compute on a year by year basis

Question 34

It is found by dividing one by the payback period

Answer 34

Payback reciprocal

Question 35

It is found by accumulating each years discounted net cash flows until the initial investment is recovered

Answer 35

Discounted payback period for an investment

Question 36

Incorporates the salvage value of the asset into the calculation

Answer 36

Bailout period

Question 37

This requires a year by year analysis

Answer 37

Bailout payback