Capital Budgeting (Managerial Accounting) (M43)

Question 1

There are ___ stages to capital budgeting

Answer 1

6

Question 2

During this stage, management determines the type of capital projects that are necessary to achieve management’s objectives and strategies

Answer 2

Identification Stage

Question 3

During this stage, management attempts to identify alternative capital investments that will achieve management’s objectives

Answer 3

Search Stage

Question 4

During this stage, management attempts to revaluate the various investments in terms of their costs and benefits

Answer 4

Information-Acquisition Stage

Question 5

Management chooses the project that best meets the criteria established

Answer 5

Selection Stage

Question 6

During this stage, management decides on the best source of funding for the project

Answer 6

Financing Stage

Question 7

During this stage, management undertakes the project and monitors the performance of the investment

Answer 7

Implementation & Control Stage

Question 8

At what stage of the capital budgeting process would management most likely apply present value techniques?

Answer 8

Selection

Question 9

These are committed costs that are not avoidable and are therefore irrelevant to the decision process

Answer 9

Sunk, Past, or Unavoidable Costs

Question 10

These are costs that will not continue to be incurred if a department or product is terminated

Answer 10

Avoidable Costs

Question 11

These costs arise from a company’s basic commitment to open its doors and engage in business. Examples include: depreciation, property taxes, and management salaries

Answer 11

Committed Costs

Question 12

These costs are fixed costs whose level is set by current management decisions. Examples include: Advertising, R&D

Answer 12

Discretionary Costs

Question 13

These are future costs that will change as a result of a specific decision

Answer 13

Relevant Costs

Question 14

This is the difference in cost between two alternatives

Answer 14

Differential (Incremental) Cost

Question 15

This is the maximum income or savings (benefit) forgone by rejecting an alternative

Answer 15

Opportunity Cost

Question 16

This is the number of years to recoup the investment in cash

Answer 16

Payback Period

Question 17

What are two limitations of the payback period?

Answer 17

1) Ignores total project profitability

2) Doesn’t take into account TVM

Question 18

This method is essentially the same as the payback method, except that in calculating the payback period cash flows are first discounted to their present value

Answer 18

Discounted Payback

Question 19

What is a strength of the Payback Period Method?

Answer 19

It is easy to understand

Question 20

ow is the discounted payback method an improvement over the payback method in evaluating investment projects?

Answer 20

It considers the TVM

Question 21

T/F

The discounted payback method involves a better estimates of cash flows than the payback period method

Answer 21

FALSE

Question 22

T/F

The discounted payback method considers the variability of the return better than the payback period method

Answer 22

FALSE

Question 23

This method computes an approximate rate of return which ignores the TVM

Answer 23

Accounting Rate of Return

Question 24

T/F

An advantage of the accounting rate of return method of evaluating investment returns is that the technique considers the TVM

Answer 24

FALSE

Biggest disadvantage

Question 25

T/F

An advantage of the accounting rate of return method of evaluating investment returns is that the technique corresponds to the measure that is often used to evaluate performance

Answer 25

TRUE

Question 26

T/F

An advantage of the accounting rate of return method of evaluating investment returns is that the technique considers the risk of the investment

Answer 26

FALSE

Question 27

If an investment project has a profitability index of 1.15, then the …

a) Project’s internal rate of return is 15%
b) Project’s cost of capital is greater than its internal rate of return
c) Project’s internal rate of return exceeds its net present value
d) Net present value of the project is positive

Answer 27

D

Question 28

The net present value (NPV) method of investment project analysis assumes that the project’s cash flows are reinvested at the

a) Computed internal rate of return
b) Risk-Free Interest Rate
c) Discount rate used in the NPV Calculation
d) Firm’s accounting rate of return

Answer 28

C

Question 29

This method of discounted cash flows determines the rate of discount at which the PV of the future cash flows will exactly equal the investment outlay

Answer 29

Internal Time-Adjusted Rate of Return

Question 30

he internal rate of return is the …

a) Rate of interest that equates the PV of cash outflows & the PV of cash inflows
b) Minimum acceptable rate of return for a proposed investment
c) Risk-adjusted rate of return
d) Required rate of return

Answer 30

A

Question 31

Generally the ____ larger/smaller) the standard deviation, the greater the risk

Answer 31

larger

Question 32

How do you calculate the payback period?

Answer 32

Investment / Annual Cash Inflow

Question 33

How do you calculate the Annual Cash Inflow?

Answer 33

Annual Cash Inflow Before Depr/Amort & Taxes
- Depr / Amort Expense
= NIBT
- Taxes
= NIAT
\+ Depr / Amort Ex[ense
= Annual Cash Inflow (Net of Taxes)

Question 34

How do you calculate the Accounting Rate of Return?

Answer 34

Net Income / (Initial or Average) Investment

Question 35

T/F

Amortization is NOT a cash outflow and is thus excluded from the calculation of after-tax NPV

Answer 35

TRUE

Question 36

T/F

In calculating the Accounting Rate of Return you may need to use the PV of 1 factors

Answer 36

FALSE

The Accounting Rate of Return IGNORES TVM!!!

Question 37

If an investment is expected to reduce costs by X amount in the first two years and then by Y amount in year three, how would you you determine the PV of these future savings?

Answer 37

Multiply the X amount by the PV Factor for 2 Periods

Multiply the Y amount by the PV Factor for Pd 3 - Pd 2

Question 38

The NPV Method uses the firm’s _________

Answer 38

Cost of Capital

Question 39

How do you calculate the internal rate of return?

Answer 39

1) What are the cash inflows?
2) What are the cash outflows?
3) What is the period of time?
4) What PV Factor will make the cash inflows = cash outflows?

Question 40

How do you calculate the Net Present Value?

Answer 40

PV of Future After-Tax Cash Flows - Initial Investment