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Accounting > Chapter 18 > Flashcards

Chapter 18 Flashcards

1
Q

Annual rate of return method definition

A

The determination of the profitability of a capital expenditure, computed by dividing the expected annual net income by the average investment

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2
Q

Capital budgeting definition

A

The process of making capital expenditure decisions in business

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3
Q

Cash payback technique definition

A

A capital budgeting technique that identifies the time period required to recover the cost of a capital investment from the net annual cash flow produced by the investment

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4
Q

Cost of capital definition

A

The weighted average rate of return that the firm must pay to obtain funds from creditors and stockholders

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5
Q

Discounted cash flow technique

A

A capital budgeting technique that considers both the estimated net cash flows from the investment and the time value of money

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6
Q

Name the two methods of evaluating capital projects

A
  1. Discounted methods
  2. Non-discounted methods
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7
Q

Name the 2 Discounted methods

A
  1. Net Present Value (NPV)
  2. Internal Rate of Return (IRR)
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8
Q

Name the 2 Non-Discounted Methods

A
  1. Cash payback period
  2. Annual Rate of Return (ARR)
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9
Q

Discount rate definition

A

The interest rate used in discounting the future net cash flows to determine present value

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10
Q

Return on Asset (ROA)

A

Net income/ Average Assets

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11
Q

Decision Rule for NPV

A

Move forward if NPV is equal to or greater than zero

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12
Q

Decision Rule for IRR

A

Move forward if IRR is equal to or greater than the opportunity cost of capital

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13
Q

Decision Rule for Cash Payback

A

Move forward if cash payback is equal to or less than acceptable period

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14
Q

Decision Rule for Annual Rate of Return

A

Move forward if ARR is equal to or greater than the hurdle rate of return

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15
Q

If you have a choice between two positive NPVs

A

Choose the one with the higher Profitability Index

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16
Q

Formula for Profitability Index

A

PVI / PVO

17
Q

Why do we prefer cash flows

A

(Slide 4)

18
Q

Name 4 Cash Outflows

A
  1. Initial investment
  2. Repaird and maintencance
  3. Increased operating costs
  4. Overhaul of equipment
19
Q

Name 4 Cash Inflows

A

(Slide 5)

20
Q

Why do we discount?

A
  1. Time value of money
  2. Uncertainty of future cash flows
  3. Effect
21
Q

What does a higher discount rate imply

A

Greater uncertainty meaning the present value of the…. (Slide 6)

22
Q

Shorter the pay back period then the ____ the investment

A

Better

23
Q

True/False- Cash payback method ignores discounting

A

True

24
Q

Net Present Value Formula

A

Present value of net cash flows - Capital Investment

25
Q

Multiple names for discount rate

A

Slide 23

26
Q

Slide 26- lost

A
27
Q

Slide 27- practice & figure out how to do on calculator

A
28
Q

Internal rate of return (IRR) definition

A

The interest rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected net annual cash flows

29
Q

Internal rate of return (IRR) Method definition

A

A method use in capital budgeting that results in finding the interest yield of the potential investment

30
Q

Net present value (NPV) definition

A

The difference that results when the original capital outlay is subtracted from the discounted net cash flows

31
Q

Net present value (NPV) method definition

A

A method used in capital budgeting in which net cash flows are discounted to their present value and then compared to the capital outlay required by the investment

32
Q

Post-audit definition

A

A thorough evaluation of how well a project’s actual performance matches the original projections

33
Q

Profitability index definition

A

A method of comparing alternative projects that takes into account both the size of the investment and its discounted net cash flows. It is computed by dividing the present value of net cash flows by the initial investment

34
Q

Required Rate of return definition

A

Management’s minimum acceptable rate of return on investments, sometimes called the discount rate or cost of capital

35
Q

Sensitivity analysis definition

A

An approach that uses a number of outcome estimates to get a sense of the variability among potential returns

Accounting (8 decks)

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