Capital Budgeting

Question 1

Capital Budgeting

Answer 1

Process for evaluating and selecting the long-term investment projects of the firm

Question 2

Cash Flow Effects: Direct effect

Answer 2

Pays out cash & receives cash

Question 3

Cash Flow effect: Indirect effect

Answer 3

Net proceeds on sale of old reduces cost of new

Question 4

Cash Flow: Depreciation

Answer 4

Depreciation reduces the amount of taxable income.

Depr. X Tax Rate= $ that you are saving

Question 5

Buying Working Capital

Answer 5

Treated as a cash outflow, you are practically buying assets

Question 6

Reduced Working Capital requirements

Answer 6

You are selling an asset. that is cash in flow

Question 7

Disposal of a replaced asset

Answer 7

Offsets the cost of the new asset.
Selling Price- Net Book Value= Gain or Loss
If you sell at a gain. You have to subtract the tax out of the gain.
-Gain X T out
+ Loss X T In

Question 8

Net Initial cost of an asset

Answer 8

Invoice+ Shipping+ Install = Out
+ Increase in Working Capital= Out
-Net Proceeds sale of old asset= Inflow
= Net Inflow

Question 9

What is a limitation of the profitability Index?

Answer 9

It requires detailed long-term forecasts of the project’s cash flows.

Question 10

The basic objective of the residual income approach of performance measurement and evaluation is to have a division maximize its

Answer 10

Income in excess of a desired minimum amount