BEC Capital Budgeting

Question 1

What is Capital Budgeting? How is it used?

Answer 1

Managerial Accounting technique used to evaluate different investment options

Helps management make decisions

Uses both accounting and non-accounting information

Internal focus

GAAP is not mandatory

Question 2

What values are used in Capital Budgeting?

Answer 2

“Capital Budgeting ONLY uses Present Value tables.

Capital Budgeting NEVER uses Fair Value.”

Question 3

When is the Present Value of $1 table used?

Answer 3

For ONE payment- ONE time.

Question 4

When is the Present Value of an Annuity Due used?

Answer 4

Multiple payments made over time- where the payments are made at the START of the period.

Question 5

When is the Present Value of an Ordinary Annuity of $1 (PVOA) used?

Answer 5

“Multiple payments over time- where payments are made at the END of the period.

Think A for Arrears.”

Question 6

What is the calculation for the Present Value of $1?

Answer 6

“1 / (( 1+i )^n)

i : interest rate
n : number of periods”