Capital Budgeting Decision Measurement MethodsPrior to deciding on which long-term project/investment is mostsuitable, a company is going to analyze different options byconsidering various capital budgeting decision measurementmethods. Some of these measurement methods include but notlimited to payback period, discounted payment period, net presentvalue, and internal rate of return. If you have a business and wouldlike to invest in equipment that costs $1,000,000, whichmeasurement method would you choose and why?

The capital budgeting is considered to be important decision for business in order to identify the…

suitable, a company is going to analyze different options by considering various capital budgeting decision measurement ethods. Some of these measurement methods include but n ited to payback period, discounted payment period, net pres ue, and internal rate of return. If you have a business and wo like to invest in equipment that costs $1,000,000, which measurement method would you choose and why?

suitable, a company is going to analyze different options by considering various capital budgeting decision measurement ethods. Some of these measurement methods include but n ited to payback period, discounted payment period, net pres ue, and internal rate of return. If you have a business and wo like to invest in equipment that costs $1,000,000, which measurement method would you choose and why?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Discuss the payback period, NPV (net present value), and IRR (internal rate of return) methods for capital budgeting analysis. What result does each method provide the user? What are the limitations of each of these methods? Which method would you find most useful in making the best investment decisions for your business and why?
Imagine that you have been tasked with evaluating the future investment of equipment for a company. To make an effective decision you will likely consider various capital budgeting techniques such as the cash payback technique, internal rate of return (IRR), annual rate of return (ARR), and the net present value (NPR) methods. Which method are you most likely to use to evaluate future investments and which are you least likely to use?
The capital budgeting decision that requires a choice between two decisions is a(n) _______ project. Independent Dependent Mutually exclusive Inclusive The actual value that a firm loses when it makes a capital budgeting decision is a(n) ______ cost Fixed Opportunity Sample Unknown The number of years required for an investment to return the monies invested is known as a projects Economic life Usage rate Capital decision Payback period The future benefits received from investing in a project are the projects Net cash flows Net investment Net cost Net return The capital components included in a firms weighted cost of capital are Common stock Debt Retained earnings All of the above Weaknesses in using solely the payback method as a measure of a projects risk include Not accounting for the time value of money There is no objective criterion for deciding what is an acceptable payback period Cash flows that occur after the payback period have no impact on the…
Marginal analysis and capital budgeting decisions. A company faces the following schedule of potential investment projects (all assumed to be equal risk). Use marginal analysis to decide which projects should NOT be undertaken? Expected Rate of Return (%) Project alm|0|n|u|u A B с D E F CH G 1 Investment Required ($ million) 25 15 40 35 12 20 18 13 7 OF and G OH and I OF, G, H, and I 01 OG, H, I 27 24 21 18 15 14 13 11 8 Cumulative Investment The following is the cost of acquiring the funds needed to finance these investment projects. Cost of Capital (%) Block of funds ($ million) First 50 10 Next 25 10.5 11 Next 40 Next 50 12.2 Next 20 14.5 25 40 80 115 127 147 165 178 185 50 75 115 165 185 Cumulative Funds Raised
Internal Rate of Return Method The internal rate of return (IRR) method uses present value concepts to compute the rate of return from a capital investment proposal based on its expected net cash flows. This method, sometimes called the time-adjusted rate of return method, starts with the proposal's net cash flows and works backward to estimate the proposal's expected rate of return. Let's look at an example of internal rate of return calculation with even cash flows. A company has a project with a 4-year life, requiring an initial investment of $189,700, and is expected to yield annual cash flows of $56,000. What is the internal rate of return? IRR Investmentb Factor Annual cash flows PIRR Factor: This is the factor which Investment: This is the present you'll use on the table for the value of cash outflows associated CAnnual Cash Flows: present value of an annuity of $1 with a project. If all of the This is the amount of dollar in order to find the investment is up front at the cash…
Please describe NPV, IRR and their relationship. How do you evaluate each for making an investment decision? That is, what is a favorable NPV and IRR for making an investment decision. If you were developing a capital budgeting process at your employer, how would you prioritize your projects? What is the NPV when IRR = WACC, IRR>WACC, and IRR<WACC? There is a duplex for sale in Absecon for $700,000 at this time. It has 2 units that generate a total of $25,000 in gross rent. The property taxes are $4,000, commercial property insurance is $2,000, flood insurance is $1,000, and annual maintenance is $2,000. You expect to sell it in one year at a price growth of 0%. What is the NPV with a WACC of 10%. Is the IRR greater or less than the WACC? Would you invest in this project and why?
The duration of time within which the investment made for the project will be recovered by the net returns of the project is known as а. Accounting rate of return method b. Payback period С. Net present value method d. Period of return Capital budgeting is the process of evaluating and selecting short-term investments that are consistent with the firm's goal of maximizing owners' wealth. Select one: True False
Using accounting rate of return to make capital investment decisions Carter Company is considering three investment opportunities with the following accounting rates of return: Use the decision rule for ARR to rank the projects from most desirable to least desirable. Carter Company’s required rate of return is 8%.
now estimation Capital budgeting analysis not only requires the evaluation of cash flows but also requires the understanding of the origin of those cash flows. Based on your understanding of cash flows in a firm, answer the following questions: The present value of v can be used to determine the basis of a firm's value. Ideally, capital budgeting analysis should take cash flows into account Understanding the nature of projects Capital budgeting analysis often involves decisions related to expansion projects and/or replacement projects. Based on your understanding of expansion and replacement projects, answer the following: If a clothing store opens a second retail location on the other side of town, this project would be considered project. What are sunk costs? Alexander Industries owns a warehouse that it is not currently using. It could sell the warehouse for $300,000 or use the warehouse in a new project. Should Alexander Industries include the value of the warehouse as part of the…
Scenario: Capital budgeting is utilized to determine if a project is worthwhile. The net present value (NPV), payback period, and internal rate of return (IRR) methods are used to rank and select which project to undertake. The following video outlines the NPV and IRR method of capital budgeting: Explain how to calculate the NPV, IRR, and payback period for each project. Utilizing the capital budgeting calculations, you will need to select the best investment for the company. These calculations will be based on the following scenario: Hunter Shipyard Industries has 3 potential projects to consider, all with an initial cost of $1,250,000. The company prefers to reject any project with a 4-year cut-off period for recapturing initial cash outflow. Given the cost of capital rates and the future cash flow for each project, determine which project the company should accept. Cash Flow Project A Project I Project U Year 1 250,000 450,000 250,000 Year 2 250,000…
How is the payback period used in capital budgeting? Multiple Choice As a measure of a project's risk To determine the amount of funds that will be required in the future To measure the relationship between the project's return and the company's cost of capital None of the above
Using capital rationing to make capital investment decisions Mountain Manufacturing is considering the following capital investment proposals. Mountains requirement criteria include a maximum payback period of five years and a required rate of return of 12.5%. Determine if each investment is acceptable or should be rejected (ignore qualitative factors). Rank the acceptable investments in order from most desirable to least desirable.