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Financial Analysis and Reporting > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

It is the process of planning and controlling investments for long-term projects

A

Capital budgeting

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2
Q

Decisions of this tend to be relatively inflexible

A

Capital budgeting

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3
Q

It is the long-term aspect of capital budgeting that presents the management accountant with specific challenges

A

Long-term projects

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4
Q

It is concerned with long-range decisions such as whether to add a product line to build new facilities or to lease or buy equipment

A

Capital budgeting

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5
Q

Two types of capital investment decisions

A

Screening decisions
preference decisions

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6
Q

This is whether the capital investment meets the minimum criteria set by the company

A

Screening decisions

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7
Q

This is often used to narrow down a set of projects for further consideration

A

Screening decisions

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8
Q

Evaluate and compare more than one capital investment alternative since companies may have limited capacity to invest in all the project alternatives

A

Preference decisions

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9
Q

Terms to use in the discussion

A

Net investment
costs or cash outflows
savings or cash inflows
cost of capital

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10
Q

Costs or cash outflows less cash inflows or savings incidental to the acquisition of the investment projects

A

Net investment

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11
Q

Initial cash outlay for all expenses on the project up to the time when it is ready for use such as purchase price and incidental project-related cost

A

Cost or cash outflows

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12
Q

Working capital requirement to operate the project at the desired level

A

Costs or cash outflows

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13
Q

Market value of an existing, currently idle asset, which will be transferred to or be utilized in the operations of the proposed capital investment project

A

Costs or cash outflows

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14
Q

Trade-in value of old asset

A

Savings or cash inflows

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15
Q

Proceeds from sale of old asset to be disposed

A

Savings or cash inflows

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16
Q

Avoidable costs of immediate refers an old asset to be replaced, netof tax

A

Savings or cash inflows

17
Q

The cost of using funds

A

Cost of capital

18
Q

It is the weighted average rate the company must pay to its long-term creditors for the use of their funds

A

Cost of capital

19
Q

It is also known as the hurdle rate

A

Cost of capital

20
Q

It is used to evaluate capital investment alternatives

A

Capital budgeting methods

21
Q

The capital budgeting methods

A

Non discounting methods
discounted cash flow methods

22
Q

Non discounting methods and their basis

A

Accounting rate of return - net income
payback period - cash flow

23
Q

Discounted cash flow methods

A

Net present value internal rate of return profitability index
all are cash flow

24
Q

Non discounted capital budgeting techniques

A

Accounting rate of return
payback period and payback bailout period

25
Q

Aka annual rate of return simple rate of return or unadjusted rate of return

A

Accounting rate of return

26
Q

Tells managers how much net income a potential project is expected to generate as a relative percentage of the investment required

A

Accounting rate of return

27
Q

ARR is an unsatisfactory means of evaluating capital projects for two major reasons

A

The ARR uses accrual basis numbers
The ARR is an average of all of a firm’s capital projects

28
Q

It shows the amount of time it takes for a capital investment to be recovered by the company using the cash inflows from such investment

A

Payback period and payback bailout period

29
Q

Generally projects with shorter payback periods are safer investments than those with longer payback periods

A

Payback period and payback bailout

30
Q

formula of ARR based on initial investment

A

Average net income divided by net investment

31
Q

formula of ARR based on average investment

A

Average net income divided by average investment

32
Q

Formula of payback period if the cash flow per year is uniform

A

Not investment / annual cash inflow

33
Q

Formula of payback period when the cash flow per year is not uniform

A

You have to compute on a year by year basis

34
Q

It is found by dividing one by the payback period

A

Payback reciprocal

35
Q

It is found by accumulating each years discounted net cash flows until the initial investment is recovered

A

Discounted payback period for an investment

36
Q

Incorporates the salvage value of the asset into the calculation

A

Bailout period

37
Q

This requires a year by year analysis

A

Bailout payback

Financial Analysis and Reporting (7 decks)

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