Capital Budgeting
1. List the four steps involved in the capital budgeting evaluation process:
a.
b.
c.
d.
Cash Payback
2. The cash payback technique identifies the time period required to recover the cost of the capital investment from the net annual cash flow produced by the investment. The formula for computing the cash payback period is:
a. _________________________________
3. The evaluation of the payback period is often related to the expected useful life of the asset.
a. With this technique, the ___________ the payback period, the more attractive the investment.
b. This technique ignores both the expected ____________of the investment and the ______ ______ of money.
Net Present Value Method
4. The net present value (NPV) method involves discounting cash flows to their _______ __________ and then compares that present value with the capital outlay required by the investment. The difference between these two amounts is the __________ present value (NPV).
a. The _________ ____________ used in discounting the future net cash flows is the required rate of return.
b. A proposal is acceptable when NPV is _________ or __________.
c. The ____________ the positive NPV, the more attractive the investment.
5. When there are equal annual cash inflows, the table that should be used for discounting is:
__________________________.
6. When there are unequal annual cash inflows, the table that should be used for discounting the cash flow is the ___________________________.
7. The discount rate (required rate of return) used by most companies is its ________ ____ __________, that is, the rate that the company must pay to obtain funds from creditors and stockholders.
8. The net present value method demonstrated in the text requires the following three assumptions:
a.
b.
c.
Internal Rate of Return Method
9. The interest rate that causes the present value of a proposed capital expenditure to equal the present value of the expected net annual cash inflows is called ______________________________.
10. The IRR decision rule is: Accept the project when the internal rate of return is __________ to or ____________ than the required rate of return, and reject the project when the internal rate of return is less than the required rate.