Question

A.    Capital Budgeting Evaluation Process

1.   

2.   

3.   

4.   

5.   

B.    Cash Payback.

1.   Describe __________________________________________________

___________________________________________________________

2.   Net annual cash flow is computed by ___________________________

________________________________________________________.

a.     Cash Payback Period =

b.     The shorter the payback period, the more ___________the investment.

c.     The cash payback technique recognizes that:

(1)

(2)   

d.     In the case of uneven net annual cash flows, the company determines the cash payback period when _____________________________

_____________________________________________________

C.    Net Present Value Method.

1.   

2.   

3.   

4.   The net present value method involves discounting net cash flows to their present value and then comparing that present value with the capital outlay required by the investment. The difference between these two amounts is referred to as net present value (NPV).

a.     

b.     

c.     

D.    Intangible Benefits.

1.   

2.   

3.

E.    Mutually Exclusive Projects.

1.   Proposals are often mutually exclusive if _________________________

___________________________________________________________.

2.   The profitability index is

a.

b.

c.

d.  The higher the profitability index, the more ______________the project.

Answer 1

A.    Capital Budgeting Evaluation Process

1.   Identify and evaluate potential opportunities

2.   Estimate operating and implementation costs

3.   Estimate cash flow or benefit

4.   Assess risk

5.  Implement

B.    Cash Payback.

1.   Describe - It is a method, which is used by manegerial accountants to evaluate a project when there are multiple projects. Since this method estimates how long a project will take to cover its original investment.

2.   Net annual cash flow is computed by subtracting cash outflows from cash inflows.

a.     Cash Payback Period = Cost of investment / Annual net cash flow

b.     The shorter the payback period, the more beneficial the investment.

c.     The cash payback technique recognizes that:

(1) all the cashflows during the life of a project;

(2) cash outflow required for earning those cashflows

d.     In the case of uneven net annual cash flows, the company determines the cash payback period when the cumulative net cash flows are equal to the cost of investment.

C.    Net Present Value Method.

1. It is the formula for analyzing a project basis the cash flows.

2. It is calculated by subtracting present value of cash inflows and the present value of cash outflows over a period of time.

3.   NPV is used in capital budgeting and investment planning to analyze the profitability of projected investment or project.

4.   The net present value method involves discounting net cash flows to their present value and then comparing that present value with the capital outlay required by the investment. The difference between these two amounts is referred to as net present value (NPV).

a.     If the NPV is positive, then the project can be chosen.

b.     If the NPV is negative, then the investment should have been avoided.

c. If NPV is zero then there is no benefit in having that investment since there is no profit and no loss.

D.    Intangible Benefits.

1. Intangible benefits might include increased quality, improved safety, or enhanced employee loyalty.   

2. They should be considered before taking decision on a project

3. We should compare the project without considering intangible benefits and the project after considering intangible benefits.

E.    Mutually Exclusive Projects.

1.   Proposals are often mutually exclusive if the company can choose only one among the available options and this is due to limited resources.

2.   The profitability index is

a. it shows the relationship between cash inflows (benefits) and the cash outflows (costs)

b. Profitability index = Present value of future cash flows / Initial investment

c. It is a useful tool for ranking the projects and shows the value created per unit of investment.

d.  The higher the profitability index, the more attractive the project.