New Horizon II Flashcards
WHAT changes in costs are most likely to cause a switch from a traditional inventory system to a just-in-time ordering system?
AN increase in Carrying Costs and a Decrease in Ordering Costs
WHY? - Because JIT is meant to minimize inventory, and if you are able to decrease costs per purchase order this incentivizes using JIT
HOW do you determine the relevance for a particular cost to a decision?
By determining the potential effect on the decision
i.e. Relevance is the capacity of information to make different decisions that help users predict the outcomes of events
WHAT is the Accounting Rate of Return?
A Capital Budgeting Technique that ignores the time value of money
How do you calculate the Accounting Rate of Return?
BY dividing the annual increase in accounting net income by the required investment
i.e. [(annual cash inflow – depreciation) ÷ initial investment]
WHAT metric equates present value of a projects expected cash inflows to the present value of the project’s expected cost?
THE Internal Rate of Return
i.e. IT is the discount rate at which the investment’s net present value equals zero
WHAT is the Accounting Rate of Return?
A technique that measure the estimated performance of a capital investment by dividing the project’s annual after-tax net income by the average investment cost
HOW can you determine the Internal Rate of Return?
By finding the discount rate that yields a net present value of zero for the project
i.e. IT is the interest rate that will discount the future cash flows to an amount equal to the initial cost of the project
The higher the IRR, the more favorable the ranking of the project
WHAT happens when the hurdle rate of an investment increases?
THE net present value decreases
For example at a hurdle rate of 12%, this investment is generating a return greater than $0
To reduce the project’s return to exactly $0, the investment must have an internal rate of return greater than 12%
WHAT is a convenient tool for assessing capital budgeting projects that involves determining the rate of return at which net present value of the net cash flows equals 0?
THE Internal Rate of Return
How have assets been acquired If a company uses off-balance sheet financing?
WITH Operating Leases
WHY? - Because No liability is reported on the balance sheet for an operating lease other than for the next rental payment
WHAT are the criteria for a lease to be considered a Capital Lease?
(1) Title passes to the lessee at the end of the lease
(2) Lease contains a bargain purchase option
(3) Present value payments during the term of the lease equal 90% or more of fair value of the lease property
(4) The lease term is 75% or more of the useful economic life of the property
WHEN should a project be accepted with regard to the net present value (NPV)?
If the net present value (NPV) of an investment is positive, the project should be accepted (unless projects are mutually exclusive)
If the NPV is negative, the investment should be rejected
WHAT are examples of investment techniques that use discounted figures?
(1) Internal Rate of Return
(2) Net Present Value
i. e. Both IRR and NPV, therefore, require the use of discounted cash flows unlike average rate of return and payback methods
Both of which use accrual-basis figures and thus are not DCF methods
WHAT is the net present value of an investment project?
IT is the excess of the discounted cash inflows over the discounted cash outflows
WHEN is the discount rate determined?
IN advance of the Net Present Value Capital Budgeting Technique
i.e. the discount rate must be determined before these calculations can be made
