Ch. 12

Question 1

Capital Budgeting

Answer 1

• Process of acquiring long-term investments

Question 2

Important

Answer 2

• A good business will require the investment to generate a minimum return

Question 3

Uses of Capital Budgeting

Answer 3

1. Expand Operations
2. Replace - unproductive and worn-out assets
3. Comply with government regulations

Question 4

Capital Budgeting Steps

Answer 4

1. Identify long-term investment alternatives
2. Select an investment
3. Finance the Investment
4. Evaluate the investment results

Question 5

Cost of Capital

Answer 5

• Weighted-average cost of debt and equity for a business

Question 6

NPV

Answer 6

• Investment tool used to estimate an investment’s profitability
• =PV - Net Investment Cost

Question 7

NPV Steps

Answer 7

1. Identify both the timing and amount of both cash in flows and cash outflows
2. Compute the PV of future cash flows
3. COmpute the NPV
4. Accept or reject
   NPV > = 0: Accept
   NPV < : Reject

Question 8

Assumptions Used with Discounted Cash Flows

Answer 8

• All cash flows are known with certainty
• Cash flows are assumed to occur at the end of the time period
• Cash flows can be invested in other investments that can generate the same rate of return (as the current investment)

Question 9

NPV & Taxes

Answer 9

• Government will tax profit

- Tax Formula = (Cash Inflow) x (1 - Tax rate) = After-tax cash flows

Question 10

Depreciation Expense

Answer 10

• Reduces taxable income, shielding a business entity from paying taxes

Question 11

Book Value

Answer 11

= Cost - Appreciated Depreciation