BEC Homework 3.1 Flashcards
In a equipment replacing decision which of the cost does not affect decision making process
Original fair market value of the old equipment
Strength of a pay back method
It is easy to understand. The pay back method takes the total investment in a project and divides by annual cash flows to determine the number of years it will take to gain a return of the initial investment.
Pay back and bailout pay back do not consider the time value of the money. It neglects total project profitablity
If the net present value of a capital budgeting project is positive
It would indicate that the rate of return for the project is greater than the discount percentage rate used in the net present value computation. NPV can be used if there is different hurdle rates for different years of the project. Initial cost is one of the most important caluculations of NPV. The method of funding the project has no effect on NPV model.Adding working capital requirements and salvage value affet cash flow
Internal rate of return formulae
Net incremental investment/Net annual cash flows=Present value factor. The IRR method is less reliable than the NPV technique when there are several alternating period of cash inflows and net cash outflows differ significantly. The IRR is strictly a percentage of return while NPV is an absolute measure.. The higher the present value factor the lower the computed rate of return
The capital budgeting model that’s is generally considered the best model for long range decision making
is the discounted cash flow model
PV cash savings /inflows
PV net cash outflows
If they ask pretax cash flow
Add to net income all non-cash tax expense
In making capital budgeting decisions which ones are the financial or the qualitative factor
Increase in manufacturing flexibility
Improved product delivery and service
Reduction in new product development time
Less scrap and rework are considered as non-qualitative or non-financial factor.
A depreciation tax shield is
reduction in income taxes. Depreciation tax shield is caused by the tax deductibility of the depreciation expense not by the face that depreciation does not affect cash flows
Profitablity index is a variation of
net present value. The profitability index is the ratio of present value of the net future cash inflows to the present value of net initial investment. The profitability index is also referred to as excess present value index or simply the present value index. Companies hope the ratio will be over 1.0 present value of net future cash inflows/ present value of net initial investment. It is used for capital rationing. Ranking and selction of investments is made in decending order. Limited capital resources are applied in the order of index until resources are either exhausted or investment required by the next project exceeds remaining resources
Weighted average capital
Typically a company will use its own weighted average cost of capital as the hurdle rate for computing NPV. A positive NPV would not likely give any indication of the relationship between required rate of return and WACC. The required rate of return and WACC are equal
What input would be most beneficial to consider when management is developing capitol budget
Profit center equipment request. Current product sales prices and costs representing operating data most relevant to operating rather than capital budgeting. Wage trends represent operating data most relevant to operating than capital budgeting
In evaluating costs for decision making the company would consider each costs except
Variable costs. Variable costs change in level of output but may not change purely in response to different select alternatives. Although variable cost are frequently relevant they are not always relevant.
Incremental costs
represent the change in cost associated with different alternatives and are considered synonymous with relevant.
Diiferential costs
represent change in costs associated with two separate course of action and are considerd synonymous with relevant
