Managerial ACCT: Chapter 26 – Flashcards
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Estimated cash inflows and outflows are the preferred inputs for capital budgeting decisions.
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true
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Cash outflows include sale of old equipment.
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false
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What is the order of involvement of the following parties in the capital budgeting authorization process?
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Plant managers, capital budget committee, officers, board of directors
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The process of making capital expenditure decisions in business is known as
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capital budgeting
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Which of the following is not a cash inflow used as an input in capital budgeting decisions?
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Increased operating costs.
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The rate of return that management expects to pay on all borrowed and equity funds is the:
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cost of capital
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When the payback period is longer, the investment is more attractive to management.
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false
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Cash payback method assumes equal net annual cash flows.
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true
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The cash payback period is computed by dividing the:
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cost of the investment by the net annual cash inflow.
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Which of the following is the formula for computing the cash payback period?
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Cost of capital investment ÷ Net annual cash flow.
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One of the assumptions of the net present value method is that all cash flows can be predicted with certainty.
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true
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Discounted cash flow techniques are generally recognized as the best conceptual approaches to making capital budgeting decisions.
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true
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Which is a true statement regarding using a higher discount rate to calculate the net present value of a project?
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It will make it less likely that the project will be accepted.
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A positive net present value means that the:
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project's rate of return exceeds the required rate of return.
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A positive net present value indicates that:
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the rate of return on the investment is greater than the discount rate.
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When calculating an investment's net present value, which table is used when the annual cash flows are even or equal?
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Present value of an annuity table.
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When applying the net present value method with unequal cash flows,
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the present value of a single future amount must be applied to each annual cash flow.
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The rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected annual cash inflows is the:
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internal rate of return.
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Which of the following is not one of the ways intangible benefits can be included in capital budgeting?
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Ignore intangible benefits altogether.
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Intangible benefits should be ignored in NPV techniques.
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false
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Intangible benefits in capital budgeting:
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might include increased product quality and improved safety.
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How should intangible benefits be included in the net present value calculation of an investment?
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At their discounted cash flow amount.
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The profitability index used to compare alternative projects is computed by dividing the
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present value of net cash flows by the initial investment.
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A post-audit of an investment project should be performed:
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on all significant capital expenditure projects.
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Post-audit evaluations of investment projects are not necessary in well-run organizations.
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false
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An evaluation of investment projects after their completion is called:
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a post-audit.
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The formula used to calculate the internal rate of return is similar to the formula used to calculate the:
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cash payback period.
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A project should be accepted if its internal rate of return exceeds:
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the company's required rate of return.
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Which of the following is based directly on accrual accounting data?
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Annual rate of return.
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Which of the following is incorrect about the annual rate of return technique?
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The time value of money is considered.
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A company's cost of capital refers to the
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rate the company must pay to obtain funds from creditors and stockholders.
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Net annual cash flow can be estimated by
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adding depreciation expense to net income.
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The cash payback period is computed by dividing the cost of the capital investment by the net annual cash inflow.
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true
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The profitability index allows comparison of the relative desirability of projects that require differing initial investments.
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true
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If a company's required rate of return is 9%, and in using the profitability index method, a project's index is greater than 1, this indicates that the project's rate of return is
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greater than 9%.
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Which of the following is not a typical cash flow related to equipment purchase and replacement decisions?
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Depreciation expense
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The discount rate is referred to by all of the following alternative names except the
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accounting rate of return.
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Capital budgeting decisions usually involve large investments and often have a significant impact on a company's future profitability.
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true
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A negative net present value indicates that the
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present value of the cash inflows was less than the present value of the cash out flows.
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If a company's required rate of return is 10% and, in using the net present value method, a project's net present value is zero, this indicates that the
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project earns a rate of return of 10%.
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The net present value method can only be used in capital budgeting if the expected cash flows from a project are an equal amount each year.
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false
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Which of the following will increase the net present value of a project?
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A decrease in the discount rate
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When using the cash payback technique, the payback period is expressed in terms of
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years
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The capital budgeting decision depends in part on the
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all of these answers are correct.
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If a project has a salvage value greater than zero, the salvage value will
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increase the net present value.
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Giraldi Company has identified that the cost of a new computer will be $48,000, but with the use of the new computer, net income will increase by $5,000 a year. If depreciation expense is $3,000 a year, the cash payback period is:
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6 years
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Bradshaw Inc. is contemplating a capital investment of $88,000. The cash flows over the project's four years are: Expected Annual Expected Annual Year Cash Inflows Cash Outflows 1 $30,000 $12,000 2 45,000 20,000 3 60,000 25,000 4 50,000 30,000
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3.50 years
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Cleaners, Inc. is considering purchasing equipment costing $60,000 with a 6-year useful life. The equipment will provide cost savings of $14,600 and will be depreciated straight-line over its useful life with no salvage value. Cleaners requires a 10% rate of return. Present Value of an Annuity of 1 Period 8% 9% 10% 11% 12% 15% 6 4.623 4.486 4.355 4.231 4.111 3.784
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12%
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Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below: Project Soup Project Nuts Initial investment $400,000 $600,000 Annual net income 30,000 46,000 Net annual cash inflow 110,000 146,000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3.890 3.791 3.696 3.605 6 4.486 4.355 4.231 4.111
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12%
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Mini Inc. is contemplating a capital project costing $47,019. The project will provide annual cost savings of $18,000 for 3 years and have a salvage value of $3,000. The company's required rate of return is 10%. The company uses straight-line depreciation. Present Value PV of an Annuity Year of 1 at 10% of 1 at 10% 1 .909 .909 2 .826 1.736 3 .751 2.487
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acceptable because it has a zero NPV.
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Rihanna Company is considering purchasing new equipment for $315,000. It is expected that the equipment will produce net annual cash flows of $45,000 over its 10-year useful life. Annual depreciation will be $31,500. Compute the cash payback period.
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7 years
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Swift Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $122,000 and will increase annual expenses by $83,000 including depreciation. The oil well will cost $471,000 and will have a $9,000 salvage value at the end of its 10-year useful life. Calculate the annual rate of return.
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16.25
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Pierre's Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $285,000. A new salon will normally generate annual revenues of $61,145, with annual expenses (including depreciation) of $41,400. At the end of 15 years the salon will have a salvage value of $74,000. Calculate the annual rate of return on the project.
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11
