9 - capital investment decision

Question 1

capital investment decisions

Answer 1

Business decisions involving which longterm assets (e.g., land, buildings, equipment) to buy. Such decisions often are referred to as capital budgeting decisions.

Question 2

Cash flow estimation.

Answer 2

Estimate the project’s cash flows. Usually, this estimation consists of the initial cost, the cash flows that arise from operating the project, and the cash flows associated with closing down the project at the end of its useful life. 2. Project risk assessment. Assess the riskiness of the cash flows.

Question 3

Cost of capital estimation.

Answer 3

Estimate the project cost of capital. As discussed in chapter 8, a business’s corporate cost of capital reflects the aggregate risk of the business’s assets—that is, the riskiness inherent in the average project. If the project being evaluated does not have average risk, the corporate cost of capital must be adjusted to obtain the project cost of capital. 4. Financial impact assessment. Assess the project’s financial merit. Several measures can be used for this purpose; we discuss three in this chapter.

Question 4

project liquidity

Answer 4

The ability of a project to pay for itself from the cash flows that it generates

Question 5

discounted cash flow (DCF) analysis

Answer 5

The use of time value of money techniques to estimate the value of an investment. That is discounted cash flow analysis.

Question 6

compounding

Answer 6

The process of finding the future value of a current (starting) amount or series of cash flows.

Question 7

discounting

Answer 7

process of finding the present value of an amount or series of cash flows expected to be received in the future

Question 8

Discounted payback

Answer 8

discounted payback takes into consideration the time value of money

Question 9

net present value

Answer 9

ROI measures to assess financial impact. NPV is the most common measure. ROI also includes IRR.
Net present value (NPV) measures the dollar value of an investment on the basis of its opportunity cost of capital.

Question 10

internal rate of return

Answer 10

IRR gives some information about the safety margin inherent in the project. measures the expected rate of return on an investment.

Question 11

accounting rate of return (ARR

Answer 11

uses accounting information to measure the profitability of an investment

Question 12

Project scoring

Answer 12

technique for incorporating both financial and nonfinancial factors into capital investment decisions