Ch 12 - Capital Budgeting

Question 1

What are the two kinds of expenses for acct?

Answer 1

1. current expenses

2. capital expenses

Question 2

What does MACRS stand for?

Answer 2

Modified Accelerated Cost Recovery System

Question 3

Which depreciation method is preferred in capital budgeting?

Answer 3

MACRS

Question 4

What is the standard convention for accounting for net working capital?

Answer 4

In the beginning of the project (time 0) we invest in additional working capital resulting in cash outflow

In the end of the project we decrease working capital to previous level thereby liquidating net working capital and recouping our original investment

Question 5

What is the rule of accounting for net working capital

Answer 5

Regardless of how the working capital is accumulated, any net working capital related to the project is liquidated at the end of the project’s life, resulting in cash inflow.

There are now tax effects associated w/ working capital build-up or liquidation.

Question 6

What are the two situations in capital budgeting in which we need to worry about the impact of taxes?

Answer 6

1. income taxes

2. taxes on the sale of assets

Question 7

What are the three steps to the the process of capital budgeting

Answer 7

1. evaluate cash flows
2. assess project risk
3. accept or reject the project

Question 8

what are the three types of incremental cash flows for most projects?

Answer 8

1. initial outlay
2. annual or differential cash flows
3. terminal cash flows