F23 Chapter 12 Practice Problems

be appropriate? Explain. 8.4 Average Accounting Return Concerning AAR: LO 2 Describe how the average accounting return is usually calculated and describe the information this measure provides about a sequence of cash flows. What is the AAR criterion decision rule? a. b. What are the problems associated with using the AAR as a means of evaluating a project's cash flows? What underlying feature of AAR is most troubling to you from a financial perspective? Does the AAR have any redeeming qualities?

No AI What is the primary purpose of a company's capital budgeting process?A) To manage day-to-day operationsB) To evaluate long-term investment projectsC) To determine short-term borrowing needsD) To forecast cash flow help me

he difference between a firm’s future cash flows with a project and without the project is called Blank______ cash flows. Multiple choice question. investing discounted incremental operating

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In considering the payback period, ____.   a. it considers the time value of money in determining the maximum allowable time period   b. it is based on cash flows both during and after the payback period   c. it gives some indication of a project’s desirability from a liquidity viewpoint   d. the maximum period allowed by a firm is a specific time period based on objective criteria

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2. Match each of the following terms with the appropriate definition. The time expected to recover the cash initially invested in a project. A minimum acceptable rate of return on a potential investment. 1. Discounting A return on investment which results in a zero net present value. 2. Net Present Value A comparison of the cost of 3. Capital Budgeting an investment to its projected cash flows at a single point in time. 4. Accounting Rate of Return 5. Net Cash Flow A capital budgeting method focused on the rate of return on a project's average investment. 6. Internal Rate of Return 7. Payback Period The process of restating future cash flows in terms 8. Hurdle Rate of present time value. Cash inflows minus cash outflows for the period. A process of analyzing alternative long-term investments. >

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The payback period method

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…

This is a multiple choice question.

A decrease in accounts payable constitutes a/an _________ in net working capital and is considered a/an __________ to a project. Select one: a. increase; cash inflow b. increase; cash outflow c. decrease; cash inflow d. decrease; cash outflow e. increase; opportunity cost

Which of the following statements is FALSE? A. When evaluating a capital budgeting decision, we generally include interest expense. B. Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project. C. Many projects use a resource that the company already owns. O D. As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.

Which decision rule assumes that project cash flows are reinvested at the firm's weighted average cost of capital (WACC)?   Question 8 options:   NPV   IRR   PB

This method solves for the interest rate that equates the equivalent worth of a project's cash outflows (expenditures) to the equivalent worth of cash inflows (receipts or savings). O A. Payback Period O B. Profitability Index O C. Rate of Return O D. MARR

Discuss the notions of conventional and nonconventional cash flows in capital budgeting. Which investment evaluation criteria would you use for unconventional cash flows and why? Provide a fictitious unconventional cash flow example and apply the payback period, NPV, IRR, MIRR, and PI methods to your example. Interpret the results.

29. Which one of the following statements is correct regarding capital Investment appraisal methods?a) The Payback period takes into account all the cash flows accruing to the projectb) The Net Present value method does not take the time value of money into accountc) The Accounting Rate of Return takes the time value of cash flows into consideration and is the one most often used in practice by business organisationsd) The Internal Rate of Return is the discount rate at which the net present value is zero