Managerial Accounting (5th Edition)
5th Edition
ISBN: 9780134128528
Author: Karen W. Braun, Wendy M. Tietz
Publisher: PEARSON
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Textbook Question
Chapter 12, Problem 12.64ACT
Discussion Questions
- 1. Describe the capital budgeting process in your own words.
- 2. Define capital investment. List at least three examples of capital investments other than the examples provided in the chapter.
- 3. “As the required
rate of return increases, thenet present value of a project also increases.’’ Explain why you agree or disagree with this statement. - 4. Summarize the net present value method for evaluating a capital investment opportunity. Describe the circumstances that create a positive net present value. Describe the circumstances that may cause the net present value of a project to be negative. Describe the advantages and disadvantages of the net present value method.
- 5. Net
cash inflows and netcash outflows are used in the net present value method and in theinternal rate of return method. Explain why accounting net income is not used instead ofcash flows. - 6. Suppose you are a manager and you have three potential capital investment projects from which to choose. Funds are limited, so you can only choose one of the three projects. Describe at least three methods you can use to select the one project in which to invest.
- 7. The net present value method assumes that future cash inflows are immediately reinvested at the required rate of return, while the Internal rate of return method assumes that future cash Inflows are immediately invested at the internal rate of return rate. Which assumption is better? Explain your answer.
- 8. The decision rule for NPV analysis states that the project with the highest NPV should be selected. Describe at least two situations when the project with the highest NPV may not necessarily be the best project to select.
- 9. List and describe the advantages and disadvantages of the internal rate of return method.
- 10. List and describe the advantages and disadvantages of the payback method.
- 11. Oftentimes, investments in sustainability projects do not meet traditional investment selection criteria. Suppose you are a manager and have prepared a proposal to install solar panels to provide lighting for the office. The payback period for the project is longer than the company’s required payback period, and the project’s net present value is slightly negative. What arguments could you offer to the capital budgeting committee for accepting the solar energy project in spite of it not meeting the capital selection criteria?
- 12. Think of a company with which you are familiar. What are some examples of possible sustainable investments that the company may be able to undertake? How might the company management justify these possible investments?
Expert Solution & Answer
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Check out a sample textbook solutionStudents have asked these similar questions
1. Set capital spending
2. Determine potential projects
3. Forecast cash flows
4. Identify cost of capital ang risk
5. Select and implement project.
Discuss which the capital budgeting process listed above you think would be the most challenging. Give reasons for yout answers.
EXPLAIN EACH WITH EXAMPLE
1. EVALUATING CAPITAL INVESTMENT PROJECTS
2. CAPITAL INVESTMENT FACTORS
3.NET INVESTMENT
4.NET RETURNS
Explain how a net present value (NPV) profile is used to compare capital projects. How does this profile compare to that of internal rate of return (IRR)? How does reinvestment affect both NPV and IRR? Support your rationale with at least one citation from the literature.
Chapter 12 Solutions
Managerial Accounting (5th Edition)
Ch. 12 - Prob. 1QCCh. 12 - (Learning Objective 2) After identifying potential...Ch. 12 - Prob. 3QCCh. 12 - Prob. 4QCCh. 12 - Prob. 5QCCh. 12 - Prob. 6QCCh. 12 - Prob. 7QCCh. 12 - Prob. 8QCCh. 12 - Prob. 9QCCh. 12 - (Learning Objective 5) Which of the following...
Ch. 12 - Order the capital budgeting process (Learning...Ch. 12 - Prob. 12.2SECh. 12 - Prob. 12.3SECh. 12 - Prob. 12.4SECh. 12 - Prob. 12.5SECh. 12 - Prob. 12.6SECh. 12 - Prob. 12.7SECh. 12 - Prob. 12.8SECh. 12 - Prob. 12.9SECh. 12 - Prob. 12.10SECh. 12 - Prob. 12.11SECh. 12 - Prob. 12.12SECh. 12 - Prob. 12.13SECh. 12 - Prob. 12.14SECh. 12 - Prob. 12.15SECh. 12 - Identify ethical standards violated (Learning...Ch. 12 - Prob. 12.17AECh. 12 - Compute payback period and analyze changes...Ch. 12 - Prob. 12.19AECh. 12 - Prob. 12.20AECh. 12 - Prob. 12.21AECh. 12 - Prob. 12.22AECh. 12 - Calculate the payback and NPV for a sustainable...Ch. 12 - Prob. 12.24AECh. 12 - Prob. 12.25AECh. 12 - Prob. 12.26AECh. 12 - Prob. 12.27AECh. 12 - Prob. 12.28AECh. 12 - Prob. 12.29AECh. 12 - Prob. 12.30AECh. 12 - Prob. 12.31AECh. 12 - Prob. 12.32AECh. 12 - Prob. 12.33AECh. 12 - Prob. 12.34AECh. 12 - Prob. 12.35AECh. 12 - Prob. 12.36BECh. 12 - Prob. 12.37BECh. 12 - Prob. 12.38BECh. 12 - Prob. 12.39BECh. 12 - Prob. 12.40BECh. 12 - Prob. 12.41BECh. 12 - Prob. 12.42BECh. 12 - Prob. 12.43BECh. 12 - Prob. 12.44BECh. 12 - Prob. 12.45BECh. 12 - Prob. 12.46BECh. 12 - Prob. 12.47BECh. 12 - Prob. 12.48BECh. 12 - Prob. 12.49BECh. 12 - Prob. 12.50BECh. 12 - Prob. 12.51BECh. 12 - Prob. 12.52BECh. 12 - Prob. 12.53BECh. 12 - Prob. 12.54BECh. 12 - Prob. 12.55APCh. 12 - Prob. 12.56APCh. 12 - Prob. 12.57APCh. 12 - Prob. 12.58APCh. 12 - Prob. 12.59BPCh. 12 - Prob. 12.60BPCh. 12 - Evaluate an investment using all four methods...Ch. 12 - Prob. 12.62BPCh. 12 - Prob. 12.63SCCh. 12 - Discussion Questions 1. Describe the capital...Ch. 12 - Prob. 12.65ACTCh. 12 - Prob. 12.66ACTCh. 12 - Prob. 12.67ACT
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- 1. Concepts used in cash flow estimation and risk analysis You can come across different situations in your life where the concepts from capital budgeting will help you in evaluating the situation and making calculated decisions. Consider the following situation: The following table contains five definitions or concepts. Identify the term that best corresponds to the concept or definition given. Concept or Definition Term The specific cash flows that should be considered in a capital budgeting decision A cost that has been incurred and may be related to a project but should not be part of the decision to accept or reject a project The cash flows that the asset or project is expected to generate over its life The effects on other parts of the firm The cost of not choosing another mutually exclusive project by accepting a particular project A successful sushi chain in Hong Kong spent $500,000 to conduct a study on whether to open…arrow_forwardDiscuss 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?arrow_forwardPlease answer with full explaination The capital budgeting decision depends in part on the A. availability of funds. B. relationships among proposed projects C. risk associated with a particular project D. all of these answers are correctarrow_forward
- We learn there are three primary methods used to analyze capital investment proposals. Please compare and contrast these three methods. Be sure to include strengths (benefits) and weaknesses (drawbacks) of each. Three primary methods are: Payback method Internal rate of return Net present value.arrow_forwardPlease answer each of the following questions in detail. Make sure to provide examples for each of the questions below. Describe and explain the significance of each of the following: payback period, internal rate of return (IRR), modified internal rate of return (MIRR), net present value (NPV), and profitability index (PI). Explain. Provide examples for better clarity.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. Kindly answer all the questions and sub-questions.arrow_forwardDefine the most important capital budgeting techniques. Name at least two capital budgeting techniques (e.g., NPV, IRR, Payback Period, etc.) that you used to arrive investment decisions.arrow_forward
- The capital budgeting tools: Net Present Value, Payback Period, and Internal Rate of Return. Which one is the best tool to use when assessing projects in your opinion?arrow_forwardExplain how a net present value (NPV) profile is used to compare capital projects. How does this profile compare to that of internal rate of return (IRR)? How does reinvestment affect both NPV and IRR?arrow_forward1. Of all the methods for evaluating the data (techniques of capital budgeting), which one do you think you would be most likely to use in the future and why? 2. How does depreciation factor into capital investment decisions?arrow_forward
- Questions and Topics for Discussion: 1. Define capital expenditures and provide examples of capital expenditures. 2. Cash flows for a particular project should be measured on an incremental basis. What does that mean? 3. How does the opportunity cost concept affect capital budgeting cash flow determination?arrow_forwardScenario: 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…arrow_forward2. 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. >arrow_forward
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