Chapter 9 - Capital Budgeting

Question 0

Screening Decision

Answer 0

Comparing Investment to Benchmark

Question 1

Two types of Capital Budgeting decisions..

Answer 1

Screening and Preference

Question 2

Preference Decision

Answer 2

Comparing investment to other products

Question 3

Discounted Cash Flow Models

Answer 3

Illustrate the process of taking future money cash flows (FMCF) and discounting the values back to present value by using PV charts.

Question 4

Net Present Value

Answer 4

The total present value of future cash flows, less the initial investment. NPV = PV - Investment*

*When sale of current equipment occurs (different than salvage value) subtract from initial investment after PV has been calculated.

Question 5

Annuity

Answer 5

A future cash flow that remains constant over consecutive periods of time. (Use Annuity Table in conjunction with Cost of Capital/Required Rate of Return/ Hurdle Rate)

Question 6

Single Sum

Answer 6

A future cash flow that occurs in an isolated time period that requires the use of the single sum discount chart.

Question 7

Internal Rate of Return

Answer 7

Rate of Return on project being considered*

• If IRR > CoC (Discount Rate) then proceed with project
• If IRR < CoC (Discount Rate) then do not undertake project

Question 8

Payback Period

Answer 8

Discusses the amount of time to payback the initial investment.

Investment/Net Annual Cash Inflows

*Assumes equal cash inflows, average inflows if not.

Question 9

Accounting Rate of Return

Answer 9

Measures the average return over the life of the asset

Savings of Asset / # years - Cost of Asset / # of years
over
Initial Required Investment