Question

Fill in the blanks

F.   Post-Audit of Investment Projects.

1. Describe_______________________________________________

___________________________________________________________.

2.   Performing a post-audit is important for several reasons.

a.     

b.

c.    

3.   A post-audit involves ______________________________________

___________________________________________________________.

G.  Internal Rate of Return (IRR).

1.   The internal rate of return method differs from the net present value method in that it finds the interest yield of the potential investment.

a.     The internal rate of return is the interest rate that will cause  ______

_________________________________________________________

b.     The determination of the internal rate of return involves the use of a financial calculator or computerized spreadsheet to solve for the rate (if the cash flows are uneven).

c.     If the net annual cash flows are equal, an easier approach to solving for the internal rate of return can be used. This approach involves two steps:

(1)   

(2)   

d.     Internal Rate of Return Factor =

e.     Once managers know the internal rate, of return, they compare it to

________________________________________________________

f.    The IRR decision rule is: ________________________________ ________________________________________________________.

2.     The two discounted cash flow methods differ as follows:

a.     Objective:

(1)   

(2)   

b.     Decision rule:

(1)   

(2)   

H.    Annual Rate of Return Method.

1.   The annual rate of return method is based directly on accounting data rather than on cash flows.

a.     

b.     

c.     

d.     

e.     

f.      

g.     

Answer 1

1.Post audit refers to an analysis of the outcome of a capital budgeting investment. This analysis is conducted to see if the assumptions incorporated into the original capital proposal turned out to be accurate, and whether the project outcome was as expected. The results of this audit are then incorporated into future capital budgeting decisions, thereby improving the decision-making process.

2)

a) It helps to keep managers honest in their particular investment proposals.

b)It provides an opportunity to reinforce and possibly expand successful projects also to cut losses on floundering initiatives.

c)The post -audit procedure consists of comparing actual cash flows from an accepted project with projected cash flows that were estimated when the project was adopted.

3) comparing actual results with those predicted by the decision-maker and explaining why any differences occurred.

G)

1) a)the present value of the estimated cash inflow equal to the present value of the cash outflow required by the investment.

c) 1) take another guess

2) Try Again

d)The first step in finding out the internal rate of return is to compute a discount factor

e)hurdle rate were the IRR is far from the estimated required rate of return, the manager can safely make the decision on either side. Also, he can maintain room for estimation errors.

f)It is a guideline for deciding whether to proceed with a project or investment. The rule states that a project should be pursued if the internal rate of return is greater than the minimum required rate of return. That is, the project looks profitable.

2) a)

1) Net Present Value may be defined as the excess of present value of project cash inflows over that of outflows . The cash flows of a project are discounted at some desired rate of return, which is mostly equivalent to the cost of capital whereas The Internal Rate of Return may be defined as that rate of interest when used to discount the cash flows of an investment, reduce its NPV to zero. Or it is the rate of discount, which equates the aggregate discounted benefits with aggregate discounted costs.

2)The salient feature of NPV technique is that it indicates the value added to the total assets of the firm by taking up the proposed investment at a particular rate of discount whereas Like NPV method, IRR method also recognizes the time value of money and considers cash flows over the entire life of the project.

b)

1)The decision rule for NPV is to accept the project if the NPV is positive and reject the project if the NPV is NPV is negative. ... If a conflict in ranking occurs, the decision rule is to accept the project with the highest positive NPV instead of the project with the highest IRR that is greater than the hurdle rate.

2)The internal rate of return (IRR) rule is a guideline for deciding whether to proceed with a project or investment. The rule states that a project should be pursued if the internal rate of return is greater than the minimum required rate of return. That is, the project looks profitable.

H) 1)

  a)it is the average net income an asset is expected to generate divided by its average capital cost, expressed as an annual percentage

b)The ARR is a formula used to make capital budgeting decisions.

c)They typically include situations where companies are deciding on whether or not to proceed with a specific investment (a project, an acquisition, etc.) based on the future net earnings expected compared to the capital cost.

d)ARR = Average Annual Profit / Average Investment

e)In terms of decision making, if the ARR is equal to or greater than the required rate of return, the project is acceptable because the company will earn at least the required rate of return.

f)If the ARR is less than the required rate of return, the project should be rejected. Therefore, the higher the ARR, the more profitable the investment.