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Which of the following capital budgeting techniques uses cash flows in the analysis as opposed to accrual accounting income?
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| net present value |
| internal rate of return |
| payback |
| all of the above |
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If a firm is considering replacing a piece of equipment, which of the following cash flows would NOT be considered relevant in making that capital budgeting decision?
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| cost of new equipment |
| salvage value of old equipment |
| book value of on old equipment |
| cost of having the new equipment delivered and installed |
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The initial investment cash flows do NOT include which of the following?
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| cost of new asset |
| disposal cost of old asset |
| gain or loss net of tax on sale of old asset |
| overhead costs incurred with old asset |
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Cash flows from operations include which of the following?
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| Differences in overhead costs between the new and the old projects |
| the increase in working capital needs at the beginning of the projects life cycle |
| differences in the useful life of the projects. |
| disposal cost of new machine at the end of its usefulness |
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In which of the three major categories of cash flows is depreciation recognized?
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| net initial investment |
| cash flow from operations |
| relevant cash flows |
| terminal cash flows |
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An increase in working capital needed for a new project is considered
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| cash inflow. |
| cash outflow. |
| unnecessary in capital budgeting techniques. |
| none of the above. |
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Accountants generally participate in all the following stages of the capital budgeting process except
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| information-acquisition. |
| financing. |
| selection |
| control |
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When a capital budgeting project requires an increase in working capital, why is this considered a cash outflow initially and a cash inflow at termination of the project?
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| When working capital is increased then cash is consumed and the company forgoes any interest on the cash until the end of the project when the working capital is no longer needed. |
| Working capital is initially an outflow because it requires the company to hold cash in reserve. Once the project is terminated the cash reserves are released. |
| Working capital is initially a cash outflow because it is used to acquire the fixed asset. If the asset is sold at the end of the project, cash is increased, thus a cash inflow. |
| This statement is incorrect. An increase in working capital is initially a cash inflow and a cash outflow upon termination. |
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Capital budgeting decisions should consider which of the following?
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| the numerical analysis using a capital budget method |
| effects of extraneous events such as union strikes |
| accounting income generated by a project |
| choices a and b |
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If the net present value (NPV) is equal to zero then the return on the project is
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| zero, the firm is breaking even. |
| equal to the company's required rate of return on the project. |
| negative. |
| unknown without computing the internal rate of return. |
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If NPV is zero than the internal rate of return for a project with a normal cash flow stream is
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| equal to the company's required rate of return. |
| greater than the required rate of return used in computing the NPV. |
| less than the required rate of return used in computing the NPV. |
| There is no way to know the IRR based on the solution to NPV method. |
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Discounted cash flow (DCF) methods of capital budgeting are considered better methods for selecting among projects than the payback method because
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| the DCFs consider cash flows while the payback considers net income. |
| accounting rate-of-return is the best method because it considers the actual accounting income from the project. |
| DCF methods are better methods for making capital budgeting decisions than the payback method because payback does not consider the time value of money or cash flows after the payback period. |
| DCF methods consider the initial investments, whereas the payback method does not take the initial costs into account. |
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Sensitivity analysis capital budgeting techniques allow managers to consider
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| all known cash flows. |
| "what if" situations when the cash flow streams are not certain. |
| different life cycles of a project. |
| "what if" situations when the accrual accounting methods may change. |
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GAH Company is considering replacing an old machine with a new, more efficient model. The old machine was purchased 3 years ago for $160,000 and was being depreciated over 8 years using the straight-line method with no salvage value at the end of its useful life. The old machine can be sold today for $100,000. To acquire the new machine and install it in the plant will cost $130,000. The useful life of the new machine is 5 years and will be depreciated using the straight-line method and has an estimate salvage value of $20,000. The new machine will reduce costs of operations by $25,000 per year. The company's tax rate is 30%. The required rate of return on this project is 10%. The company believes that a 5-year payback is appropriate for capital projects. Use the NPV method to decide if GAH Company should replace the old machine.
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| NPV is $44,612.20; therefore, replace the old machine. |
| NPV is ($44,612.20); therefore, do not replace the machine. |
| NPV is $ 22,805; therefore, replace the old machine. |
| NPV is $5,000; therefore, replace the old machine. |
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GAH Company is considering the following project. The maximum payback period the company allows is 4 years. Using the payback method would this project be acceptable? | PROJECT C | | Year | Cash flow | | 0 | $(120,000) | | 1 | 35,000 | | 2 | 35,000 | | 3 | 35,000 | | 4 | 35,000 | | 5 | 20,000 |
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| Payback is over 4 years; therefore, reject the project. |
| Correct. Payback is between 3 and 4 years; accept the project. |
| The project has cash flows for 4 years; therefore, accept the project. |
| Payback is between 4-5 years; do not accept the project. |
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Determine the IRR for the following project. Based on a required rate of return of 8% is this project acceptable? | PROJECT J | | Year | Cash flow | | 0 | $(100,000) | | 1 | 35,000 | | 2 | 35,000 | | 3 | 35,000 | | 4 | 35,000 |
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| IRR is 10% so reject the project. |
| IRR is 10% so accept the project. |
| NPV equals IRR so accept the project. |
| IRR does not equal the 8% required rate of return. Therefore, the project should not be accepted. |
