Managerial Accounting (5th Edition)
5th Edition
ISBN: 9780134067254
Author: Braun
Publisher: PEARSON
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Textbook Question
Chapter 12, Problem 12.64ACT
Discussion Questions
- 1. Describe the capital budgeting process in your own words.
- 2. Define capital investment. List at least three examples of capital investments other than the examples provided in the chapter.
- 3. “As the required
rate of return increases, thenet present value of a project also increases.’’ Explain why you agree or disagree with this statement. - 4. Summarize the net present value method for evaluating a capital investment opportunity. Describe the circumstances that create a positive net present value. Describe the circumstances that may cause the net present value of a project to be negative. Describe the advantages and disadvantages of the net present value method.
- 5. Net
cash inflows and netcash outflows are used in the net present value method and in theinternal rate of return method. Explain why accounting net income is not used instead of cash flows. - 6. Suppose you are a manager and you have three potential capital investment projects from which to choose. Funds are limited, so you can only choose one of the three projects. Describe at least three methods you can use to select the one project in which to invest.
- 7. The net present value method assumes that future cash inflows are immediately reinvested at the required rate of return, while the Internal rate of return method assumes that future cash Inflows are immediately invested at the internal rate of return rate. Which assumption is better? Explain your answer.
- 8. The decision rule for NPV analysis states that the project with the highest NPV should be selected. Describe at least two situations when the project with the highest NPV may not necessarily be the best project to select.
- 9. List and describe the advantages and disadvantages of the internal rate of return method.
- 10. List and describe the advantages and disadvantages of the payback method.
- 11. Oftentimes, investments in sustainability projects do not meet traditional investment selection criteria. Suppose you are a manager and have prepared a proposal to install solar panels to provide lighting for the office. The payback period for the project is longer than the company’s required payback period, and the project’s net present value is slightly negative. What arguments could you offer to the capital budgeting committee for accepting the solar energy project in spite of it not meeting the capital selection criteria?
- 12. Think of a company with which you are familiar. What are some examples of possible sustainable investments that the company may be able to undertake? How might the company management justify these possible investments?
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Check out a sample textbook solutionStudents have asked these similar questions
1. Taking into consideration all the information given, determinethe Net Present Value of the project and advice the company onwhether to invest in the new line of product.
2. Why should the cost of capital used in capital budgeting becalculated as a weighted average of the capital component ratherthan the cost of the specific financing used to fund a particularproject?
1- What are the payback and discounted payback methods? What are their main weaknesses?
2- What are the five stages of capital budgeting?
3- What are strengths and weaknesses of the accrual accounting rate-of-return (AARR) method for evaluating long-term projects?
4- What are the relevant cash inflows and outflows for capital budgeting decisions?
5- What strategic considerations arise in the capital budgeting process?
Defining capital investments and the capital budgeting process
Match each definition with its capital budgeting method.
Methods
1. Accounting rate of return
2. Internal rate of return
3. Net present value
4. Payback
Definitions
a. Is only concerned with the time it takes to get cash outflows returned.
b. Considers operating income but not the time value of money in its analyses.
c. Compares the present value of cash outflows to the present value of cash inflows to determine investment worthiness.
d. The true rate of return an investment earns.
Chapter 12 Solutions
Managerial Accounting (5th Edition)
Ch. 12 - Prob. 1QCCh. 12 - (Learning Objective 2) After identifying potential...Ch. 12 - Prob. 3QCCh. 12 - Prob. 4QCCh. 12 - Prob. 5QCCh. 12 - Prob. 6QCCh. 12 - Prob. 7QCCh. 12 - Prob. 8QCCh. 12 - Prob. 9QCCh. 12 - (Learning Objective 5) Which of the following...
Ch. 12 - Order the capital budgeting process (Learning...Ch. 12 - Prob. 12.2SECh. 12 - Prob. 12.3SECh. 12 - Prob. 12.4SECh. 12 - Prob. 12.5SECh. 12 - Prob. 12.6SECh. 12 - Prob. 12.7SECh. 12 - Prob. 12.8SECh. 12 - Prob. 12.9SECh. 12 - Prob. 12.10SECh. 12 - Prob. 12.11SECh. 12 - Prob. 12.12SECh. 12 - Prob. 12.13SECh. 12 - Prob. 12.14SECh. 12 - Prob. 12.15SECh. 12 - Identify ethical standards violated (Learning...Ch. 12 - Prob. 12.17AECh. 12 - Compute payback period and analyze changes...Ch. 12 - Prob. 12.19AECh. 12 - Prob. 12.20AECh. 12 - Prob. 12.21AECh. 12 - Prob. 12.22AECh. 12 - Calculate the payback and NPV for a sustainable...Ch. 12 - Prob. 12.24AECh. 12 - Prob. 12.25AECh. 12 - Prob. 12.26AECh. 12 - Prob. 12.27AECh. 12 - Prob. 12.28AECh. 12 - Prob. 12.29AECh. 12 - Prob. 12.30AECh. 12 - Prob. 12.31AECh. 12 - Prob. 12.32AECh. 12 - Prob. 12.33AECh. 12 - Prob. 12.34AECh. 12 - Prob. 12.35AECh. 12 - Prob. 12.36BECh. 12 - Prob. 12.37BECh. 12 - Prob. 12.38BECh. 12 - Prob. 12.39BECh. 12 - Prob. 12.40BECh. 12 - Prob. 12.41BECh. 12 - Prob. 12.42BECh. 12 - Prob. 12.43BECh. 12 - Prob. 12.44BECh. 12 - Prob. 12.45BECh. 12 - Prob. 12.46BECh. 12 - Prob. 12.47BECh. 12 - Prob. 12.48BECh. 12 - Prob. 12.49BECh. 12 - Prob. 12.50BECh. 12 - Prob. 12.51BECh. 12 - Prob. 12.52BECh. 12 - Prob. 12.53BECh. 12 - Prob. 12.54BECh. 12 - Prob. 12.55APCh. 12 - Prob. 12.56APCh. 12 - Prob. 12.57APCh. 12 - Prob. 12.58APCh. 12 - Prob. 12.59BPCh. 12 - Prob. 12.60BPCh. 12 - Evaluate an investment using all four methods...Ch. 12 - Prob. 12.62BPCh. 12 - Prob. 12.63SCCh. 12 - Discussion Questions 1. Describe the capital...Ch. 12 - Prob. 12.65ACTCh. 12 - Prob. 12.66ACTCh. 12 - Prob. 12.67ACT
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Average rate of return The following data are accumulated by Watershed Inc. in evaluating two competing capital investment proposals: Determine the expected average rate of return for each project.arrow_forwardThe following questions refer to a capital budgeting problem with six projects represented by binary variables x1, x2, x3, x4, x5, and x6. a. Write a constraint modeling a situation in which two of the projects 1, 3, 5, and 6 must be undertaken. b. Write a constraint modeling a situation in which, if project 3 or 5 is undertaken, they must both be undertaken. c. Write a constraint modeling a situation in which project 1 or 4 must be undertaken, but not both. d. Write constraints modeling a situation in which project 4 cannot be undertaken unless projects 1 and 3 also are undertaken. e. Revise the requirement in part (d) to accommodate the case in which, when projects 1 and 3 are undertaken, project 4 also must be undertaken.arrow_forwardTo make a capital investment decision, a manager must a. estimate the quantity and timing of cash flows. b. assess the risk of the investment. c. consider the impact of the investment on the firms profits. d. choose a decision criterion to assess viability of the investment (such as payback period or NPV). e. All of these.arrow_forward
- Net present value method, present value index, and analysis for a service company First United Bank Inc. is evaluating three capital investment projects by using the net present value method. Relevant data related to the projects are summarized as follows: Instructions 1. Assuming that the desired rate of return is 15%, prepare a net present value analysis for each project. Use the present value table appearing in Exhibit 2 of this chapter. 2. Determine a present value index for each project. (Round to two decimal places.) 3. Which project offers the largest amount of present value per dollar of investment? Explain.arrow_forward(1) What are the three types of risk that are relevant in capital budgeting? (2) How is each of these risk types measured, and how do they relate to one another? (3) How is each type of risk used in the capital budgeting process?arrow_forward1. Concepts used in cash flow estimation and risk analysis You can come across different situations in your life where the concepts from capital budgeting will help you in evaluating the situation and making calculated decisions. Consider the following situation: The following table contains five definitions or concepts. Identify the term that best corresponds to the concept or definition given. Concept or Definition Term The specific cash flows that should be considered in a capital budgeting decision A cost that has been incurred and may be related to a project but should not be part of the decision to accept or reject a project The cash flows that the asset or project is expected to generate over its life The effects on other parts of the firm The cost of not choosing another mutually exclusive project by accepting a particular project A successful sushi chain in Hong Kong spent $500,000 to conduct a study on whether to open…arrow_forward
- Please answer with full explaination The capital budgeting decision depends in part on the A. availability of funds. B. relationships among proposed projects C. risk associated with a particular project D. all of these answers are correctarrow_forward8. Conclusions about capital budgeting The decision process Before making capital budgeting decisions, finance professionals often generate, review, analyze, select, and implement long-term investment proposals that meet firm-specific criteria and are consistent with the firm’s strategic goals. Companies often use several methods to evaluate the project’s cash flows and each of them has its benefits and disadvantages. A. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. Because the MIRR and NPV use the same reinvestment rate assumption, they always lead to the same accept/reject decision for mutually exclusive projects. The discounted payback period improves on the regular payback period by accounting for the time value of money. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR.…arrow_forward
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