CAPITAL BUDGETING Flashcards
The first step in the decision-making process is to?
identify the problem and assign responsibility.
Strategic planning is the process of deciding on an organization’
major programs and the approximate resources to be devoted to them
The long-term planning process for making and financing investments that affect a company’s
financial results over a number of years is referred to as
capital budgeting
Capital budgeting is the process
of making capital expenditure decisions
A capital investment decision is essentially a decision to:
exchange current cash outflows for the promise of receiving future cash inflows
The higher the risk element in a project, the
higher the discount rate is.
Cost of capital is the
cost the company must incur to obtain its capital resources.
How should the following projects be listed in order of increasing risk?
Replacement, expansion, new venture.
Problems associated with justifying investments in high-tech projects often include discount
rates that are too
high and time horizons that are too short
In evaluating high-tech projects,
both tangible and intangible benefits should be considered.
A project that when accepted or rejected will not affect the cash flows of another project.
Independent projects
The normal methods of analyzing investments
require forecasts of cash flows expected from the project.
When disposing of an old asset and replacing it with a new one, tax effect on
gain on sale of the old asset increases the basis of the new asset
loss on sale of the old asset reduces the basis of the new asset
A major difference between an investment in working capital and one in depreciable assets is
that
an investment in working capital is not tax-deductible when made, nor taxable when
returned, while an investment in depreciable assets does allow tax deductions.
The proper treatment of an investment in receivables and inventory is to
add it to the investment in fixed assets and add the present value of the recovery to the
present value of the annual cash flows
In connection with a capital budgeting project, an investment in working capital is normally
recovered
at the end of the project’s life
XYZ Co. is adopting just-in-time principles. When evaluating an investment project that would
reduce inventory, how should XYZ treat the reduction?
Decrease the cost of the investment.
Which of the following represents the biggest challenge in the decision to purchase new
equipment?
Estimating cash flows for the future.
When a firm has the opportunity to add a project that will utilize factory capacity that is currently
not being used, which costs should be used to determine if the added project should be
undertaken?
Incremental costs
The only future costs that are relevant to deciding whether to accept an investment are those
that will
be different if the project is accepted rather than rejected.
Which of the following is not a typical cash inflow in capital investment decisions
Additional working capital
Which of the following is a cost that requires a future outlay of cash that is which relevant for
future decision-making?
Out-of-pocket cost
If there were no income taxes,
depreciation would be ignored in capital budgeting.
Relevant cash flows for net present value (NPV) models include all of the following except
depreciation expense on the newly acquired piece of equipment
