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Exam 11: Capital Budgeting

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Question 101

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Initial cash outflows for capital projects usually include the net working capital and non-current _________________________.

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verified

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Question 102

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When managers examine a modernization project, the ____________________ are usually considered the cash inflows and compared to the initial cash disbursement.

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Question 103

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Which of the following is an example of a cash outflow in capital budgeting?

Match the words with the term. -PI

An entrepreneur wants to modernize his plant. The initial cost in non-current assets is estimated $700,000. The modernization would improve the company's yearly profit for the year by $20,000 during the next 20 years. The cost accountant estimated the annual depreciation to be $60,000 and the cost of capital for raising funds to be 10%. -The net present value is ________________________.

Match the words with the term. -time risk

Two key reasons can prevent a business from proceeding with a large number of capital projects: cash insufficiency and hurdle rate.

Match the words with the term. -accounting methods

The payback reciprocal can be defined as "the number of years required for a capital project to generate enough discounted cash inflow to cover the initial cash outflow".

Match the words with the term. -financial desirability

Which of the following is a typical opportunity investment?

One of the main arguments against the accounting methods is that the returns focus only on one specific year while a project usually has a longer physical life span.

What does the internal rate of return compare?

Management of a manufacturing business is considering an investment of $ 375,000 in a capital project and $ 200,000 in working capital during the first year of operation. The project will generate $ 90,000 in cash inflow each year over the next twelve years. At the end of the project, the company will sell the assets for $ 200,000 and recover the entire working capital. The company's weighted average cost of capital is 12%. -The approximate internal rate of return is ________________________ .

Several entrepreneurs are contemplating investing in a retail business. The cost of the initial investment in non-current assets is estimated at $2 million. Included in the business plan was the following projected statement of income: During the first year of operations, inventories and trade receivables are estimated to be $500,000 and $300,000 respectively and trade and other payables are estimated at $200,000. During the second year of operations, inventories are expected to increase by additional $100,000, and trade receivables by an additional $50,000. Trades and other payables are expected to reach $250,000. Although the company's cost of capital is expected to be 12%, management would like to secure a 20% return. The project's life span is expected to be 20 years at which time they hope to sell their non-current assets including goodwill for $13 million and secure 50% of their working capital. -The cash inflow from the sale of the business is _______________________.

Match the words with the term. -ration

What does the discounted payback method calculate?

Match the words with the term. -end of project

DMT Business is considering an investment of $ 250,000 in a capital project. The project will generate $ 50,000 in cash inflow each year over the next ten years. The company's weighted average cost of capital is 10%. -The approximate internal rate of return is ________________________ .

Match the words with the term. -cash outflow