Sec-E: - Investment Decisions

SEC- E:- INVESTMENT DECISIONS.
1. Net proceeds from the sale of old assets would be examined during
project initiation. Following the initial cash outflows necessary to begin a
project, a firm hopes to benefit from the other cash flows generated
during subsequent periods.
2. Long-term capital budget expenditures are often grouped in one of the
following categories: new machines and equipment intended for
expansion, replacement of existing equipment, some allocations for
research and development for new products and/or the expansion of
existing products, mandatory projects required by law for safety, and
other long-term exploratory expenditures for buildings, land, patents,
and so on.
3. The tax shield associated with a capital budget project is related to
depreciation, not the investment.
4. Incremental cash operating expenses are used in the calculation of
the incremental operating cash flows, not the initial investment stage.
5. A capital budgeting project consists of a logical progression of
activities. The first stage in capital budgeting is to identify which type of
capital budget expenditures are necessary and in line with
organizational strategies, objectives, and goals.
6. A capital budget is a long-term budget of investments in property,
plant, and equipment and of the future cash inflows and outflows
related to the investments.
7. Capital investment projects include many possibilities; including
proposals for the acquisition of equipment, the expansion of existing
product offerings, and additional research and development facilities.
Refinancing is not a capital budgeting decision. It is a financing
decision.
8. The after-tax proceeds from the sale of the old asset are included in the
calculation of the initial investment stage in capital budgeting.
9. The installation cost of the old machinery is a sunk cost and would not
be included in the initial investment stage of the capital budgeting
process.
10. Most decision models include quantitative and qualitative analyses
and take the following steps: (1) obtain information, (2) identify
alternative courses of action, (3) make predictions about future costs
and revenues, (4) choose and justify an alternative, (5) implement a
decision, and (6) evaluate performance to provide feedback. The
motives for holding cash should already be identified as part of the
firm's risk analysis strategy.
stages undertaken in developing a capital budget
11. Initial investment > increase in working capital > incremental
operating cash flows > release of working capital > terminal cash flow
12. A conventional cash flow pattern for capital investment projects
typically begins with cash outflows (e.g., initial purchase, commitment
of working capital, etc.) followed by a series of net cash inflows
(increase in cash revenues, decrease in cash expenses, salvage value
of old equipment, etc.) over the life of the asset.
13. Businesses are allowed to deduct all interest paid on debt
obligations as a business expense.
14. Annual cash flow = (net income + depreciation + interest expense
15. Initial cash outflow = (cost of machine) + (installation costs) +
(freight and insurance) − (proceeds from sale of existing machine) +
(tax from sale of machine) 2. Tax from sale of machine = (tax rate)
(proceeds from sale − net book value) 3. Net book value, end of year 7
= (original cost)(% of life remaining)
16. In capital budgeting analysis, many items should be incorporated in
the initial net cash investment; some items that can be included are
capitalized expenditures, changes in net working capital, proceeds
from the sale of assets, and changes in liabilities. The initial net cash
investment is the net cash flow at the inception of the project (time 0).
17. Internal rate of return generates the actual rate of return on the
project (the rate of return where net present value equals zero), so it is
not dependent upon an estimation of the discount rate, or hurdle rate.
18. capital rationing is also known as internal capital rationing because
it relates project acceptance with the internal policies of a company.
For example, fiscally conservative companies may require a short
payback period or high required rate of return.
19. NPV is the present value of a project's future cash flows less the
initial investment in the project. It discounts all expected future cash
inflows and outflows to the present.
20. The IRR is the discount rate used in the calculation of NPV that
causes the NPV to equal zero. Since NPV is inversely related to the
discount rate, the higher the discount rate, the lower the NPV.
Therefore, if the NPV is negative, then the discount rate is greater than
the IRR.
21. The IRR is the discount rate used in the calculation of net present
value (NPV) that causes the NPV to equal zero. NPV = Present value
(PV) of the project's annual cash flows (calculated at the appropriate
discount rate less the project's net incremental investment).
22. The NPV of a project is calculated by taking the initial investment
((I) and netting it against the present value (PV) of the project's cash
flows calculated at the appropriate discount rate. The NPV is inversely
related to the discount rate; an increase in the discount rate would
decrease the PV and the NPV. The formula to calculate PV of $1 for
one year, for example is: 1/(1 ÷ Discount Rate). So, since the discount
rate is part of the denominator of this formula, it has an inverse
relationship to PV and NPV.
23. IRR is easier to visualize and interpret than NPV. NPV is actually
easier to visualize and interpret than IRR. NPV provides a dollar value
of return, whereas IRR has the three shortcomings noted.
24. tb.cash.flows.020_1809 / 2E2-CQ03/tb.npv.irr.c.001_1712

Sec-E: - Investment Decisions

Uploaded by

Copyright:

Available Formats

Sec-E: - Investment Decisions

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Sec-E: - Investment Decisions

Uploaded by

Copyright:

Available Formats

SEC- E:- INVESTMENT DECISIONS.

24. tb.cash.flows.020_1809 / 2E2-CQ03/tb.npv.irr.c.001_1712

You might also like