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Accounting for Managers > Exam 2 (Quiz 6) - Chapter 26 > Flashcards

Exam 2 (Quiz 6) - Chapter 26 Flashcards

1
Q

Answer:

Capital budgeting is making a decision on ___(a)___ and doing this (a) is ___(b)___

A

a. capital investment

b. acquiring capital assets

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2
Q

Answer:

Capital budgeting affects ___(a)___ and requires ___(b)___

A

a. operations for many years

b. large sums of money

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3
Q

Examples (list):

Capital Budgeting

A
  1. Purchasing new equipment
  2. Building new facilities
  3. Automating production
  4. Developing websites
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4
Q

List:

4 Methods of Analyzing Potential Capital Investments

A
  1. Payback Period
  2. Rate of Return (ROR)
  3. Net Present Value (NPV)
  4. Internal Rate of Return
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5
Q

Answer (list):

Which methods of analyzing potential capital contribution are quick and good for investments with a short life?

A
  1. Payback Period

2. Rate of Return (ROR)

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6
Q

Answer (list):

Which methods of analyzing potential capital contribution factor the time value of money?

A
  1. Net present value (NPV)

2. Internal rate of return (IRR)

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7
Q

Answer:

What does ROR stand for?

A

Rate of Return

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8
Q

Answer:

What does NPV stand for?

A

Net Present Value

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9
Q

Answer:

What does IRR stand for?

A

Internal Rate of Return

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10
Q

Define:

Payback Period

A

Length of time it takes to recover the cost of the capital outlay

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11
Q

Answer:

The payback period measures ___(a)___. The ___(b)___ the payback period, the ___(c)___

A

a. how quickly managers expect to recover investment
b. shorter
c. more attractive the asset

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12
Q

Equation:

Payback Period

A

Amount Invested

/

Expected Annual Net Cash Inflow

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13
Q

Answer:

What does equal annual net cash inflows mean for the payback period?

A

Return in savings or cash flows are equal from year to year

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14
Q

Answer:

What does unequal annual net cash inflows mean for the payback period?

A

Total net cash inflows until the amount invested is recovered

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15
Q

List:

Criticisms of the Payback Period Method

A
  1. Focuses only on time, not profitability

2. Ignores cash flows after the payback period

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16
Q

Answer:

For the payback period method, the investments with ___(a)___ are more desirable

A

a. shorter payback periods

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17
Q

Answer:

What does ARR stand for?

A

Accounting Rate of Return

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18
Q

Define:

Average Annual Operating Income

A

The asset’s total operating income over the course of its operating life divided by its lifespan

19
Q

Define:

Average Amount Invested

A

Net book value at the beginning of the asset’s useful life plus the net book value at the end of the assets life divided by 2

20
Q

Answer:

According to the decision rule regarding ARR to decide about investing in capital assets, if the ___(a)___, you should invest, and if the ___(b)___ you should not invest

A

a. Expected rate of return exceeds the required rate of return
b. Expected rate of return is less than the required rate of return

21
Q

Answer:

Payback and ARR do not recognize ___(a)___

A

a. time value of money

22
Q

Answer:

NPV and IRR do recognize ___(a)___

A

a. time value of money

23
Q

Define:

Net Present Value (NPV)

A

The present value of the investment’s net cash flow minus the present value of investment’s cost (cash outflow)

24
Q

Define:

Discount Rate of NPV

A

The interest rate that discounts or reduces future amounts to their lesser value in the present

25
Q

Answer:

If present value of the investment’s net cash inflows ___(a)___ the initial cost of the investment, then it is a good investment

A

a. exceeds

26
Q

Answer:

If the investment is expected to bring in even cash flows, use ___(a)___ table

A

a. Present Value of Annuity

27
Q

Answer:

If cash flow amounts are unequal, ___(a)___ is computed and you use ___(b)___ table

A

a. present value of each individual cash flow

b. Present Value of $1 (PV)

28
Q

Answer:

NPV is higher if ___(a)___, if ___(b)___, or if ___(c)___

A

a. cash inflows are larger
b. they come sooner
c. the discount rate is lower

29
Q

Answer:

Using NPV method, the present value factor is selected using ___(a)___ or ___(b)___

A

a. the company’s required rate of return

b. discount rate

30
Q

Define:

NPV > 0

A

The actual rate of return > the required rate of return

However, you do not know the actual rate of return, only that it is greater than the required rate of return

31
Q

Define:

NPV = 0

A

actual rate of return = required rate of return

32
Q

Answer:

With the NPV method, the actual rate of return is called the ___(a)___. In other words, the ___(b)___ is the ___(c)___ that makes ___(d)___

A

a. internal rate of return (IRR)
b. internal rate of return
c. interest rate
d. NPV = 0

33
Q

Define:

Internal Rate of Return (IRR)

A

Rate of return a company can expect to earn by investing in the project

34
Q

Answer:

The internal rate of return is the interest rate that will cause ___(a)___

A

a. NPV to equal 0

35
Q

Answer:

The higher the IRR, the better ___(a)___

A

a. the chance of strong growth

36
Q

Answer:

The decision rule for IRR says that if ___(a)___ you should invest and if ___(b)___ you should not invest

A

a. the IRR exceeds the required rate of return

b. the IRR is less than the required rate of return

37
Q

List:

Steps for Computing IRR of and Investment with EQUAL Periodic Cash Flows

A
  1. IRR is the interest rate that makes the cost of the investment = the present value of the investment’s net cash flows
  2. Plug into the equation any information we do know
  3. Rearrange the equation and solve for the annuity PV factor (I=?, n=5)
  4. Find the interest rate that corresponds to this annuity PV factor
38
Q

Equation:

IRR for Equal Cash Flows

A 
Investment's Cost 
=
Amount of each equal net cash inflow
*
Ordinary Annuity PV Factor
39
Q

Answer:

If the IRR exceeds Required Rate of Return (RRR), then the project has ___(a)___ (___(b)___)

A

a. positive NPV

b. favoring acceptance

40
Q

Answer:

If IRR equals RRR, ___(a)___, so ___(b)___ and ___(c)___ yield ___(d)___

A

a. NPV = 0
b. project acceptance
c. rejection
d. the same value

41
Q

Answer:

If IRR is less than RRR, ___(a)___ (___(b)___)

A

a. NPV is negative

b. favoring rejection

42
Q

Answer:

NPV is generally regarded as the ___(a)___ compared to IRR

A

a. preferred method

43
Q

Answer:

NPV expresses the computations in ___(a)___, not in ___(b)___

A

a. dollars

b. percentages

44
Q

Answer:

NPV method can be used when the discount rate ___(a)___

A

a. varies over the life of the product

Accounting for Managers (15 decks)

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