ACCT Essay

619 WordsOct 20, 20143 Pages
1. What is capital budgeting? 2. What are some characteristics that make capital budgeting different from other types of budgets (like a sales budget or cash budget)? It is the process by which management plans, evaluates, and controls investments in fixed assets. 3. Why is the concept of present value relevant to capital budgeting, but not so relevant to other types of budgeting? An investment in fixed assets may be viewed as purchasing a series of net cash flows over a period of time. 4. Describe the Payback Period in your own words. Under what circumstances would Payback be an effective method to use in evaluating competing investment alternatives? The expected period of time that will elapse between the date of a capital…show more content…
Does this mean that the investment is unacceptable? What does it mean? The investment is unacceptable, because there will be no profit at discount rate of 10%. 12. Suppose Johnson calculated the NPV and found that the NPV was $3,400 using a discount rate of 6%. Do you think the internal rate of return in this case would be a. less than 6% or b. greater than 6% or c. exactly equal to 6%? B 13. Describe what is meant by the following terms: a. cost of capital The cost of funds used for financing a business. Cost of capital depends on the mode of financing used b. hurdle rate The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, the riskier the project, the higher the hurdle rate. c. the time value of money The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. 14. What is capital rationing? The act of placing restrictions on the amount of new investments or projects undertaken by a company. This is accomplished by imposing a higher cost of capital for investment consideration or by setting a ceiling on the specific sections of the budget. 15. Do you have questions about this chapter?

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