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Managerial Accounting > Ch 11 - Capital Budgeting & Investment Analysis > Flashcards

Ch 11 - Capital Budgeting & Investment Analysis Flashcards

1
Q

what is the capital expenditures budget?

A

managements plan for acquiring and selling plant assets

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2
Q

define capital budgeting

A

process of analyzing long-term investments an deciding which assets to acquire or sell

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3
Q

what are four reasons why many of capital budgeting decisions are risky

A
  1. outcome is uncertain
  2. large amounts of money are usually involved
  3. investment involves a long-term commitment
  4. decision could be difficult or impossible to reverse, no matter how poor turns out to be
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4
Q

what do nearly all of the methods to evaluate capital budgeting decisions include?

A
  1. predicting inflow/outflows of cash for proposed investments
  2. assessing risk of and returns on the cash flows
  3. choosing investments to make
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5
Q

Is a dollar tomorrow worth more or less than a dollar today?

A

dollar tomorrow is worth less than a dollar today

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6
Q

define discounting

A

process of restating future cash flows in terms of their present value

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7
Q

define net cash flow

A

cash inflows minus cash outflows

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8
Q

what are the two most common methods of analyzing financial feasibility of investments net cash flow w/out using time value of money

A
  1. payback period

2. accounting rate of return

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9
Q

define payback period (PBP)

A

expected time period to recover initial investment amount

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10
Q

define even cash flows

A

cash flows that are same each and every year

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11
Q

define uneven cash flows

A

cash flows that are not all equal in amount year to year

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12
Q

What are the three factors ignored by payback period analysis?

A
  1. doesn’t recognize differences in timing of net cash flows w/in payback period
  2. ignores all cash flows after point in which costs are fully recovered
  3. ignores time value of money
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13
Q

When accounting rate of return is used to choose between investments, what three factors point to the best investment?

A
  1. one with least payback period
  2. one w/highest return for longest time period
  3. one w/least risk
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14
Q

What are the limitations of account rate of return analysis?

A
  1. bases amount invested on book values, not market values in future periods
  2. fails to recognize different levels of income variability
  3. fails to distinguish between two investments w/same average annual net income in early years vs later years
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15
Q

When a company is considering two investment projects, one with even cash flows, the other with uneven, what is the best evaluation method?

A

net present value

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16
Q

define net present value (NPV)

A
  1. dollar estimate of asset’s value that is used to evaluayte acceptability of an investment
  2. applies time value of money to future cash inflows and outflows to mgmt can evaluate project’s benefits and consts at one point in time
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17
Q

define cost of capital or hurdle rate

A
  1. rate company must pay to long-term creditors and shareholders
  2. company’s required return on the investment
18
Q

What is the measurement basis for payback period?

A

cash flows

19
Q

What is the measurement unit for payback period

A

years

20
Q

what are the two strengths of payback period

A
  1. easy to understand

2. allos comparison of projects

21
Q

what is the measurement basis of accounting rate of return?

A

accrual income

22
Q

what is the measurement unit of accounting rate of return

A

percent

23
Q

what are the two strengths of accounting rate of return

A
  1. easy to understand

2. allows comparison of projects

24
Q

what are the two limitations of accounting rate of return

A
  1. ignores time value of money

2. ignores annual rates over life of project

25
Q

what are the two measurements basis of net present value

A
  1. cash flows

2. profitability

26
Q

what is the measurement unit of net present value

A

dollars

27
Q

what are the two strengths of net present value

A
  1. reflects time value of money

2. reflects varying risks over project’s life

28
Q

what is a limitation of net present value

A

difficult to compare dissimilar projects

29
Q

what are the two measurement basises for internal rate of return

A
  1. cash flows

2. profitability

30
Q

what is the measurement unit for internal rate of return

A

percent

31
Q

what are two strenths of internal rate of return

A
  1. reflects time value of money

2. allows comparison of dissimilar projects

32
Q

what is a limitation of internal rate of return

A

ignores varying risks over life of project

33
Q

What is typically teh most popular method for evaluating capital investments?

A
  1. internal rate of return
  2. payback period
  3. net present value
  4. few companies use accounting rate of return
34
Q

what is a profitability index?

A
  1. measure of relation between expected benefits of a project and its investment
35
Q

How do you interpret profitability index?

A
  1. higher value indicates more desirable investment, value

2. value below 1 indicates unacceptable project

36
Q

when is it appropriate to use different discount rates for different projects

A

when risk levels are different

37
Q

define internal rate of return

A
  1. rate used to evaluate the acceptability of an investment
  2. this rate will result in a net present value (NPV) of 0 for the investment
  3. if we compute total present value of project’s net cash flows using IRR as the discount rate, and then subtract inital investment from total present value, result is 0 NPV
38
Q

break-even time (BET)

A
  1. time based measurement used to evaluate the accessibility of an investments
  2. equal the time expected to pass before the present value of the net cash flows from an investment equals its initial cost
  3. computed by restating future cash flows in terms of present values and then determining the payback period using these present values
39
Q

Which cash flow is not considered when using the net present value method?

A

past cash outflows

40
Q

Which cash flows are considered when using the net present value method?

A
  1. future cash inflows
  2. future cash outflows
  3. non-uniform cash inflows
  4. cash inflow from sale of asset
41
Q

In business decision-making, managers typically examine the two fundamental factors of:

A

Risk and rate of return.

42
Q

what are the four perspectives the balances scorecard requires managers to think of?

A
  1. customer (what does customer think of us)
  2. internal processes: which of our operations are critical to meeting customer needs?
  3. innovation & learning: how can we improve
  4. financial: what do our owner sthink of us?

Managerial Accounting (13 decks)

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