Chapter 12: Capital Budgeting Decisions Flashcards
How managers plan significant investments in projects that have long term implications such as purchasing new equipment or introducing new products is called _____
capital budgeting
Typical capital budgeting decisions include ______ decisions.
- lease or buy
- cost reduction
- equipment selection
Current assets minus current liabilities is called _____ _____
working capital
In the context of the time value of money, one dollar today is worth ______ a dollar a year from now.
more than
Instead of focusing on a project’s profitability, the _____ period focuses on the time it takes for an investment to pay for itself.
payback
The term capital budgeting is used to describe how managers plan significant investments in projects that have ______ implications.
long-term
Identify capital budgeting decisions.
- Expansion decisions
- Equipment replacement decisions
Working capital _____
often increases when a company takes on a new project
The concept of the time value of money is based on the notion that a dollar today is worth (more/less) _____ than a dollar a year from now.
more
The length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates is the _____ period.
payback
The term _____ _____ is used to describe how managers plan significant investments in projects that have long-term implications such as the purchase of new equipment or the introduction of new products.
capital budgeting
Capital budgeting decisions include _____
- acquiring a new facility to increase capacity
- choosing to lease or buy new equipment
- purchasing new equipment to reduce cost
- deciding to replace old equipment
The concept that a dollar today is worth more than a dollar a year from now is called the _____ _____ of money.
time value
A capital investment project’s payback period is the _____
length of time it takes for the project to recover its initial cost from the net cash inflows generated
When a capital investment decision is being made between two or more alternatives, the project with the shortest payback period is always the most desirable investment.
false
When computing the payback period for a new piece of equipment, the salvage value of the equipment being replaced is _____
deducted from the cost of the new equipment
Sandy’s Soda Co. is planning to purchase new equipment that costs $56,000 and will save on operating costs for the next 5 years as follows: $21,500 in year 1; $23,100 in year 2; $19,000 in year 3; $13,900 in year 4; and $15,200 in year 5. The payback period for the cooling equipment is ______ years.
2.6
The net present value of a project is _____
- the difference between the present value of cash inflows and present value of cash outflows
- used in determining whether or not a project is an acceptable capital investment
The payback method _____
- is not a true measure of investment profitability
- does not consider the time value of money
- ignores all cash flows that occur after the payback period
When calculating the payback period, any depreciation deducted in arriving at the project’s net operating income must be added back to obtain the project’s expected annual net cash inflow.
true
Which of the following statements are true?
- The net present value method automatically provides for return of the original investment.
- A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds.
Capri Industries is considering an investment that has an initial cost of $26,500 and the following expected cash inflows:
Year
Cash Inflow
1
$6,000
2
$8,000
3
$10,000
4
$5,000
5
$3,000
The expected payback period is ______ years.
3.5
The net present value of a project is the _____
difference between the present value of cash inflows and the present value of cash outflows
If the original investment in a capital project has been recovered, the net present value will be _____
positive or zero
