Ch 13 - Capital Budgeting

Question 1

Capital budgeting

Answer 1

The process of planning significant investments in projects that have long-term implications such as the purchase of new equipment or the introduction of a new product. (p. 580)

Question 2

Cost of capital

Answer 2

The average rate of return a company must pay to its long-term creditors and shareholders for the use of their funds. (p. 585)

Question 3

Internal rate of return

Answer 3

The discount rate at which the net present value of an investment project is zero; the rate of return of a project over its useful life. (p. 587)

Question 4

Net present value

Answer 4

The difference between the present value of an investment project?s cash inflows and the present value of its cash outflows. (p. 581)

Question 5

Out-of-pocket costs

Answer 5

Actual cash outlays for salaries, advertising, repairs, and similar costs. (p. 586)

Question 6

Payback period

Answer 6

The length of time that it takes for a project to fully recover its initial cost out of the net cash inflows that it generates. (p. 597)

Question 7

Postaudit

Answer 7

The follow-up after a project has been approved and implemented to determine whether expected results were actually realized. (p. 602)

Question 8

Preference decision

Answer 8

A decision in which the alternatives must be ranked. (p. 580)

Question 9

Project profitability index

Answer 9

The ratio of the net present value of a project?s cash flows to the investment required. (p. 596)

Question 10

Screening decision

Answer 10

A decision as to whether a proposed investment project is acceptable. (p. 580)

Question 11

Simple rate of return

Answer 11

The rate of return computed by dividing a project?s annual incremental accounting net operating income by the initial investment required. (p. 601)

Question 12

Working capital

Answer 12

Current assets less current liabilities. (p. 583)