Capital Budgeting Flashcards
What are the steps of the capital budgeting process?
- Strategize
- ID
- Assess
- Decide
- Fund
- Implement
Net Working Capital goes _______ as cash flow goes ______
UP, DOWN
Equation of Real Value
Real Value = Nominal Value ÷ Price Index
What is Hurdle rate?
Minimum acceptable rate of return
Scenario Analysis
Uses different scenarios to analyze how cash flow would behave in: best, worst, and most likely outcomes
Sensitivity Analysis
Uses changes in variables that can affect cash flows of project or investment
Risk goes ______ as discount rate goes _____
UP, UP
TRUE/FALSE: Estimates are static after NPV is calculated and don’t account for changes to project/investment
True!
Post-audit
Final step in capital budgeting process and optional; typically used for very large/expensive projects
What are the effects of switching from straight-line deprecation method to accelerated depreciation method?
- Depreciation expense increases in early years
- income taxes are deferred from early years to be paid in later years
- because of the deferred taxes, cash flows will increase in early years
- because cash inflows increase, this causes profitability index to go UP
In Capital Budgeting Process, Net working capital upon occurrence is a cash _____
Cash OUTlay
In Capital Budgeting Process, Net working capital upon being released is a cash _
Inflow
