B3 - Capital Budgeting Flashcards
In equipment-replacement decisions, which of the following does NOT affect the decision-making process?
a. operating costs of the new equipment
b. current disposal price of the old equipment
c. cost of the new equipment
d. original fair market value of the old equipment
D. Original FMV of the old equipment
Because this is a sunk cost that does not effect replacement decisions
In making capital budgeting decisions, management considers factors that are far broader than costs alone. which one of the following factors is LEAST likely to be considered a non-financial or qualitative factor?
a. improved product delivery and service
b. increase in manufacturing flexibility
c. less scrap and rework
d. reduction in new product development time
C. Less scrap and rework is least likely to be considered a non-financial or qualitative factor because it i the most easily quantifiable of the selections and therefore most likely would be included as a relevant avoidable cost in the capital budgeting analysis
The calculation of depreciation is used in the determination of the net present value of an investment for which of the following reason?
a. depreciation adjust the book value of the investment
b. depreciation increases cash flow by reducing income taxes
c. depreciation represents a cash outflow that must be added back to net income
d. the decline in the value of the investment should be reflected in the determination of the net present value
B. although depreciation is not directly relevant to net present value computations, the depreciation tax shield (reduced income taxes) results in increased cash flows from investment and is used in the determination of net present value
A client wants to know how many years it will take before the accumulated cash flows from an investment exceed the initial investment, without taking the time value of money into account. Which of the following financial models should be used?
Payback period, discounted payback period, net present value, internal rate of return
Payback period
the payback method typically ignores the time value of money and computes the number of years it will take for cash flows to equal (pay back) the initial investment
Which of the following statements is correct regarding the payback method as a capital budgeting technique?
a. the payback method provides the years needed to recoup the investment in a project
b. an advantage of the payback method is that it indicates if an investment will be profitable
c. payback is calculated by dividing the annual cash inflows by the net investment
d. the payback method considers the time value of money
A - the formula is: net initial investment/increase in annual net after-tax cash flow
various methodologies can be used to develop the fair value of common shares. The most objective methodologies are considered to be:
Price sales ratio, price earnings (P/E) methods, price earnings growth (PEG) methods, discounted cash flow (DCF) methods
DCF! DCF are considered the most rigorous and objective of the valuation methods
Under which of the following conditions is the internal rate of return method LESS reliable than the NPV technique?
a. when the NPV of the project is equal to zero
b. when income taxes are considered in the anaylsis
c. when both benefits and costs are included, but each is separately discounted to the present
d. when there are several alternating periods of net cash inflows and net cash outflows
D
A characteristic of the payback method (before taxes) is that it:
a. incorporates the time value of money
b. uses the estimated expected life of the asset in the denominator of the calculation
c. uses accrual accounting inflows in the numerator of the calculation
d. neglects total project profitability
D - the payback method neglects total project profitability. it simply looks at the time required to recover the initial investment; subsequent cash flows are ignored
Which of the following inputs would be most beneficial to consider when management is developing the capital budget?
Supply/demand for the company’s products, wage trends, current product sales prices and costs, profit center equipment requests
profit center equipment requests - in developing its capital budget, management would fin the employee input associated with equipment requests from various profit centers most helpful. Departmental requests, appropriately justified, would provide key insights into the capital requirements of the business that are not otherwise known
Which of the following changes would result in the highest present value for a series of cash flows?
a. a $100 decrease in the cash outflow each year for three years
b. a $100 increase in the disposal value at the end of four years
c. a $100 increase in cash inflow each year for three years
d. a $100 decrease in taxes each year for four years
D - a decrease in taxes for each year for four years causes increases in cash flow over a greater period of time than other alternatives and, therefore, a greater present value than any of the alternatives
