Boundless Lecture Slides
Available on the Boundless Teaching Platform
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless Teaching
Platform
Boundless empowers educators to engage their students
with affordable, customizable textbooks and intuitive
teaching tools. The free Boundless Teaching Platform
gives educators the ability to customize textbooks in
more than 20 subjects that align to hundreds of popular
titles. Get started by using high quality Boundless books,
or make switching to our platform easier by building from
Boundless content pre-organized to match the assigned
textbook. This platform gives educators the tools they
need to assign readings and assessments, monitor
student activity, and lead their classes with pre-made
teaching resources.
Using Boundless Presentations
The Appendix
The appendix is for you to use to add depth and
breadth to your lectures. You can simply drag and
drop slides from the appendix into the main
presentation to make for a richer lecture
experience.
Get started now at:
http://boundless.com/teaching-platform
Free to edit, share, and copy
Feel free to edit, share, and make as many copies
of the Boundless presentations as you like. We
encourage you to take these presentations and
make them your own.
If you have any questions or problems please email:
educators@boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
About Boundless
Boundless is an innovative technology company making education more affordable and
accessible for students everywhere. The company creates the world’s best open educational
content in 20+ subjects that align to more than 1,000 popular college textbooks. Boundless
integrates learning technology into all its premium books to help students study more efficiently
at a fraction of the cost of traditional textbooks. The company also empowers educators to
engage their students more effectively through customizable books and intuitive teaching tools
as part of the Boundless Teaching Platform. More than 2 million learners access Boundless free
and premium content each month across the company’s wide distribution platforms, including its
website, iOS apps, Kindle books, and iBooks. To get started learning or teaching with
Boundless, visit boundless.com.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Introduction to Capital Budgeting
The Payback Method
Internal Rate of Return
Net Present Value
Cash Flow Analysis and Other Factors
Boundless.com/finance?campaign_content=book_192_ch
apter_11&campaign_term=Finance&utm_campaign=powe
rpoint&utm_medium=direct&utm_source=boundless
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting > Introduction to Capital Budgeting
Introduction to Capital Budgeting
• Defining Capital Budgeting
• The Goals of Capital Budgeting
• Accounting Flows and Cash Flows
• Ranking Investment Proposals
• Reinvestment Assumptions
• Long-Term vs. Short-Term Financing
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance?campaign_content=book_192_chapter_11&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir
ect&utm_source=boundless
Capital Budgeting > Introduction to Capital Budgeting
Defining Capital Budgeting
• Capital budgeting, which is also called investment appraisal, is the planning
process used to determine whether an organization's long term investments,
major capital, or expenditures are worth pursuing.
• Major methods for capital budgeting include Net present value, Internal rate of
return, Payback period, Profitability index, Equivalent annuity and Real options
analysis.
• The IRR method will result in the same decision as the NPV method for nonmutually exclusive projects in an unconstrained environment; Nevertheless, for
mutually exclusive projects, the decision rule of taking the project with the highest
IRR may select a project with a lower NPV.
Capital Budeting
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/introduction-to-capital-budgeting-91/defining-capitalbudgeting-390-
Capital Budgeting > Introduction to Capital Budgeting
The Goals of Capital Budgeting
• Basically, the purpose of budgeting is to provide a forecast of revenues and
expenditures and construct a model of how business might perform financially.
• Capital Budgeting is most involved in ranking projects and raising funds when
long-term investment is taken into account.
• Capital budgeting is an important task as large sums of money are involved and a
long-term investment, once made, can not be reversed without significant loss of
invested capital.
Private Equity
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/introduction-to-capital-budgeting-91/the-goals-of-capitalbudgeting-391-
Capital Budgeting > Introduction to Capital Budgeting
Accounting Flows and Cash Flows
• Accounting flows involve Journal entries, Ledger accounts and Balancing to
present a business's financial position in an Income statement, a Balance sheet
and a Cash flow statement.
• Cash flow is the movement of money into or out of a business, project or financial
product.
• Statement of cash flows includes three parts: Operational cash flows, Investment
cash flows and Financing cash flows.
Accounting cycle
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/introduction-to-capital-budgeting-91/accounting-flowsand-cash-flows-392-
Capital Budgeting > Introduction to Capital Budgeting
Ranking Investment Proposals
• The higher the NPV, the more attractive the investment proposal.
• The higher a project's IRR, the more desirable it is to undertake the project.
• As the value of the profitability index increases, so does the financial
attractiveness of the proposed project.
• Shorter payback periods are preferable to longer payback periods.
• The higher the ARR, the more attractive the investment.
Investment Proposal
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/introduction-to-capital-budgeting-91/ranking-investmentproposals-393-
Capital Budgeting > Introduction to Capital Budgeting
Reinvestment Assumptions
• If trying to decide between alternative investments in order to maximize the value
of the firm, the reinvestment rate would be a better choice.
• NPV and PI assume reinvestment at the discount rate.
• IRR assumes reinvestment at the internal rate of return.
Reinvestment
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/introduction-to-capital-budgeting-91/reinvestmentassumptions-394-
Capital Budgeting > Introduction to Capital Budgeting
Long-Term vs. Short-Term Financing
• Management must match long-term financing or short-term financing mix to the
assets being financed in terms of both timing and cash flow.
• Long-term financing includes equity issued, Corporate bond, Capital notes and so
on.
• Short-term financing includes Commercial papers, Promissory notes, Asset-based
loans, Repurchase agreements, letters of credit and so on.
Financing
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/introduction-to-capital-budgeting-91/long-term-vs-shortterm-financing-395-
Capital Budgeting > The Payback Method
The Payback Method
• Defining the Payback Method
• Calculating the Payback Period
• Discounted Payback
• Advantages of the Payback Method
• Disadvantages of the Payback Method
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance?campaign_content=book_192_chapter_11&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir
ect&utm_source=boundless
Capital Budgeting > The Payback Method
Defining the Payback Method
• The payback period is the number of months or years it takes to return the initial
investment.
• To calculate a more exact payback period: payback period = amount to be
invested / estimated annual net cash flow.
• The payback method also ignores the cash flows beyond the payback period;
thus, it ignores the long-term profitability of a project.
Capital Investment in Plant and Property
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/the-payback-method-92/defining-the-payback-method396-
Capital Budgeting > The Payback Method
Calculating the Payback Period
• Payback period is usually expressed in years. Start by calculating Net Cash Flow
for each year, then accumulate by year until Cumulative Cash Flow is a positive
number: that year is the payback year.
• Some businesses modified this method by adding the time value of money to get
the discounted payback period. They discount the cash inflows of the project by
the cost of capital, and then follow usual steps of calculating the payback period.
• Additional complexity arises when the cash flow changes sign several times (i.e.,
it contains outflows in the midst or at the end of the project lifetime). The modified
payback period algorithm may be applied.
Discount rate
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/the-payback-method-92/calculating-the-payback-period397-
Capital Budgeting > The Payback Method
Discounted Payback
• The payback period is considered a method of analysis with serious limitations
and qualifications for its use, because it does not account for the time value of
money.
• The discounted payback period takes the time value of money into consideration.
• Whilst the time value of money can be rectified by applying a weighted average
cost of capital discount, it is generally agreed that this tool for investment
decisions should not be used in isolation.
Discount rates
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/the-payback-method-92/discounted-payback-3986825?campaign_content=book_192_chapter_11&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound
Capital Budgeting > The Payback Method
Advantages of the Payback Method
• Payback period, as a tool of analysis, is often used because it is easy to apply
and easy to understand for most individuals, regardless of academic training or
field of endeavor.
• The payback period is an effective measure of investment risk. It is widely used
when liquidity is an important criteria to choose a project.
• Payback period method is suitable for projects of small investments. It not worth
spending much time and effort in sophisticated economic analysis in such
projects.
Monthly liquidity of an organic vegetable
business
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/the-payback-method-92/advantages-of-the-paybackmethod-399-
Capital Budgeting > The Payback Method
Disadvantages of the Payback Method
• Payback ignores the time value of money.
• Payback ignores cash flows beyond the payback period, thereby ignoring the
"profitability" of a project.
• To calculate a more exact payback period: Payback Period = Amount to be
Invested/Estimated Annual Net Cash Flow.
Zhuhai sea front development
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/the-payback-method-92/disadvantages-of-the-paybackmethod-400-
Capital Budgeting > Internal Rate of Return
Internal Rate of Return
• Defining the IRR
• Calculating the IRR
• Advantages of the IRR Method
• Disadvantages of the IRR Method
• Multiple IRRs
• Modified IRR
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance?campaign_content=book_192_chapter_11&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir
ect&utm_source=boundless
Capital Budgeting > Internal Rate of Return
Defining the IRR
• The IRR of an investment is the discount rate at which the net present value of
costs (negative cash flows) of the investment equals the net present value of the
benefits (positive cash flows) of the investment.
• The higher a project's IRR, the more desirable it is to undertake the project.
• A firm (or individual) should, in theory, undertake all projects or investments
available with IRRs that exceed the cost of capital. Investment may be limited by
availability of funds to the firm and/or by the firm's capacity or ability to manage
numerous projects.
IRR
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/internal-rate-of-return-93/defining-the-irr-4014888?campaign_content=book_192_chapter_11&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound
Capital Budgeting > Internal Rate of Return
Calculating the IRR
• Given the (period, cash flow) pairs (n, Cn) where n is a positive integer, the total
number of periods N, and the net present value NPV, the internal rate of return is
given by the function in which NPV = 0.
• Any fixed time can be used in place of the present (e.g., the end of one interval of
an annuity); the value obtained is zero if and only if the NPV is zero.
• If the IRR is greater than the cost of capital, accept the project. If the IRR is less
than the cost of capital, reject the project.
Calculating IRR
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/internal-rate-of-return-93/calculating-the-irr-4026409?campaign_content=book_192_chapter_11&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound
Capital Budgeting > Internal Rate of Return
Advantages of the IRR Method
• The IRR method is very clear and easy to understand. An investment is
considered acceptable if its internal rate of return is greater than an established
minimum acceptable rate of return or cost of capital.
• The IRR method also uses cash flows and recognizes the time value of money.
• The internal rate of return is a rate quantity, an indicator of the efficiency, quality,
or yield of an investment.
Internal rate of return
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/internal-rate-of-return-93/advantages-of-the-irr-method403-
Capital Budgeting > Internal Rate of Return
Disadvantages of the IRR Method
• The first disadvantage of IRR method is that IRR, as an investment decision tool,
should not be used to rate mutually exclusive projects, but only to decide whether
a single project is worth investing in.
• IRR overstates the annual equivalent rate of return for a project whose interim
cash flows are reinvested at a rate lower than the calculated IRR.
• IRR does not consider cost of capital; it should not be used to compare projects of
different duration.
• In the case of positive cash flows followed by negative ones and then by positive
ones, the IRR may have multiple values.
Disadvantage of IRR
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/internal-rate-of-return-93/disadvantages-of-the-irrmethod-404-
Capital Budgeting > Internal Rate of Return
Multiple IRRs
• In the case of positive cash flows followed by negative ones and then by positive
ones, the IRR may have multiple values.
• It has been shown that with multiple internal rates of return, the IRR approach can
still be interpreted in a way that is consistent with the present value approach
provided that the underlying investment stream is correctly identified as net
investment or net borrowing.
• NPV remains the "more accurate" reflection of value to the business. IRR, as a
measure of investment efficiency may give better insights in capital constrained
situations. However, when comparing mutually exclusive projects, NPV is the
appropriate measure.
Multiple internal rates of return
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/internal-rate-of-return-93/multiple-irrs-4054847?campaign_content=book_192_chapter_11&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound
Capital Budgeting > Internal Rate of Return
Modified IRR
• MIRR is a modification of the internal rate of return (IRR) and as such aims to
resolve some problems with the IRR.
• More than one IRR can be found for projects with alternating positive and
negative cash flows, which leads to confusion and ambiguity. MIRR finds only one
value.
• MIRR = {[FV(positive cash flows, reinvestment rate)/-PV(negative cash flows,
finance rate)]^(1/n)}-1.
MIRR
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/internal-rate-of-return-93/modified-irr-4064850?campaign_content=book_192_chapter_11&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound
Capital Budgeting > Net Present Value
Net Present Value
• Defining NPV
• Calculating the NPV
• Interpreting the NPV
• Advantages of the NPV method
• Disadvantages of the NPV method
• NPV Profiles
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance?campaign_content=book_192_chapter_11&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir
ect&utm_source=boundless
Capital Budgeting > Net Present Value
Defining NPV
• Because of the time value of money, cash inflows and outflows only can be
compared at the same point in time.
• NPV discounts each inflow and outflow to the present, and then sums them to see
how the value of the inflows compares to the other.
• A positive NPV means the investment is worthwhile, an NPV of 0 means the
inflows equal the outflows, and a negative NPV means the investment is not good
for the investor.
Airplane
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/net-present-value-94/defining-npv-4073860?campaign_content=book_192_chapter_11&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound
Capital Budgeting > Net Present Value
Calculating the NPV
• Cash inflows have a positive sign, while cash outflows are negative.
• To find the NPV accurately, the investor must know the exact size and time of
occurrence of each cash flow. This is easy to find for some investments (like
bonds), but more difficult for others (like industrial machinery).
• Investors use different rates for their discount rate such as using the weighted
average cost of capital, variable rates, and reinvestment rate.
Net Present Value (NPV) Formula
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/net-present-value-94/calculating-the-npv-4083861?campaign_content=book_192_chapter_11&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound
Capital Budgeting > Net Present Value
Interpreting the NPV
• When inflows exceed outflows and they are discounted to the present, the NPV is
positive. The investment adds value for the investor. The opposite is true when
NPV is negative.
• A NPV of 0 means there is no change in value from the investment.
• In theory, investors should invest when the NPV is positive and it has the highest
NPV of all available investment options.
• In practice, determining NPV depends on being able to accurately determine the
inputs, which is difficult.
Machinery
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/net-present-value-94/interpreting-the-npv-4097074?campaign_content=book_192_chapter_11&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound
Capital Budgeting > Net Present Value
Advantages of the NPV method
• When NPV is positive, it adds value to the firm. When it is negative, it subtracts
value. An investor should never undertake a negative NPV project.
• As long as all options are discounted to the same point in time, NPV allows for
easy comparison between investment options. The investor should undertake the
investment with the highest NPV, provided it is possible.
• An advantage of NPV is that the discount rate can be customized to reflect a
number of factors, such as risk in the market.
NPV Decision Table
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/net-present-value-94/advantages-of-the-npv-method410-
Capital Budgeting > Net Present Value
Disadvantages of the NPV method
• NPV is based on future cash flows and the discount rate, both of which are hard
to estimate with 100% accuracy.
• There is an opportunity cost to making an investment which is not built into the
NPV calculation.
• Other metrics, such as internal rate of return, are needed to fully determine the
gain or loss of an investment.
Medicine
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/net-present-value-94/disadvantages-of-the-npv-method411-
Capital Budgeting > Net Present Value
NPV Profiles
• The NPV Profile is a graph with the discount rate on the x-axis and the NPV of the
investment on the y-axis.
• Higher discount rates mean cash flows that occur sooner are more influential to
NPV. Since the earlier payments tend to be the outflows, the NPV profile
generally shows an inverse relationship between the discount rate and NPV.
• The discount rate at which the NPV equals 0 is called the internal rate of return
(IRR).
NPV Profile
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/net-present-value-94/npv-profiles-4123862?campaign_content=book_192_chapter_11&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound
Capital Budgeting > Cash Flow Analysis and Other Factors
Cash Flow Analysis and Other Factors
• Cash Flow Factors
• Replacement Projects
• Sunk Costs
• Opportunity Costs
• Externalities
• Tax Rate
• Depreciation
• Elective Expensing
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance?campaign_content=book_192_chapter_11&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir
ect&utm_source=boundless
Capital Budgeting > Cash Flow Analysis and Other Factors
Cash Flow Factors
• Cash flow factors can be used to calculate parameters to measure organizational
performance.
• Operational cash flows are those originating from the organization's internal
business.
• Financing cash flows are those originating from the issuance of debt or equity.
• Investment cash flows are those originating from assets and capital expenditures.
Cash
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/cash-flow-analysis-and-other-factors-95/cash-flowfactors-413-
Capital Budgeting > Cash Flow Analysis and Other Factors
Replacement Projects
• The cash flow analysis must take all cash flow components into account, such as
opportunity costs and depreciation and maintenance expense.
• The replacement project's cash flows are the additional inflows and outflows to be
provided by the prospective replacement project.
• The comparison between the replacement and the current project informs the
decision whether to undertake the replacement and, if applicable, at what point
replacement should occur.
Replacing a window sill vs. keeping the old one
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/cash-flow-analysis-and-other-factors-95/replacementprojects-414-
Capital Budgeting > Cash Flow Analysis and Other Factors
Sunk Costs
• Only prospective costs should impact an investment decision. Therefore, sunk
costs are not to be considered when deciding whether to undertake a project.
• A sunk cost is distinct from an economic loss. A loss may be caused by a sunk
cost, however.
• Sunk costs are irrecoverable.
Sunk
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/cash-flow-analysis-and-other-factors-95/sunk-costs-4157248?campaign_content=book_192_chapter_11&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound
Capital Budgeting > Cash Flow Analysis and Other Factors
Opportunity Costs
• Opportunity cost can be seen as the second-best choice available to an economic
actor.
• Opportunity cost can be measured monetarily, or more subjectively in terms of
pleasure or utility.
• Opportunity cost shows not only that resources are scarce, but also that
economic choices are limited.
Alternative choices
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/cash-flow-analysis-and-other-factors-95/opportunitycosts-416-
Capital Budgeting > Cash Flow Analysis and Other Factors
Externalities
• An externality that is a cost is a negative externality, while one that is a benefit is
a positive externality.
• Prices do not reflect externalities because they affect people outside the
economic transaction.
• Negative externalities can lead to over-production, while positive externalities can
lead to under-production. The former case occurs because the producer does not
pay the external cost, while the latter occurs because the benefit is generated
without profit.
Pollution
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/cash-flow-analysis-and-other-factors-95/externalities417-
Capital Budgeting > Cash Flow Analysis and Other Factors
Tax Rate
• The methods used to present a tax rate include: statutory, average, marginal, and
effective rates.
• Statutory tax rates are those imposed by law.
• Average tax rate is the total tax liability divided by taxable income.
• Marginal tax rate is the rate at a specific level of spending or income. It is also
known as tax "on the last dollar," earned or spent.
• Effective tax rate describes when varying measures of tax are divided by varying
measures of the tax base. It is inconsistently defined in practice.
Tax Rate
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/cash-flow-analysis-and-other-factors-95/tax-rate-418697?campaign_content=book_192_chapter_11&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl
Capital Budgeting > Cash Flow Analysis and Other Factors
Depreciation
• Fair value depreciation is an estimate of the market value of an asset.
• The cost of an asset that is to be allocated by depreciation is the amount paid for
it minus any salvage value it will have at the end of its useful life.
• Methods used for apportioning the cost over a period of time include fixed
percentage, straight-line, and declining balance.
Depreciated value
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/cash-flow-analysis-and-other-factors-95/depreciation419-
Capital Budgeting > Cash Flow Analysis and Other Factors
Elective Expensing
• Usually this provision applies to small businesses because there are limitations on
what and how much property can be expensed.
• Though buildings were not originally eligible, a 2010 law included them.
• The total deduction for a year cannot exceed the person's income for that year.
Truck
View on Boundless.com
Free to share, print, make copies and changes. Get yours at www.boundless.com
www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-11/cash-flow-analysis-and-other-factors-95/electiveexpensing-420-
Appendix
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Key terms
• accounts receivable Accounts receivable also known as Debtors, is money owed to a business by its clients (customers) and
shown on its balance sheet as an asset.
• allocate To distribute according to a plan.
• APT In finance, arbitrage pricing theory (APT) is a general theory of asset pricing that holds, which holds that the expected
return of a financial asset can be modeled as a linear function of various macro-economic factors or theoretical market indices,
where sensitivity to changes in each factor is represented by a factor-specific beta coefficient.
• benefit An advantage, help, or aid from something.
• Call option A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this
type of option. [1] The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular
commodity or financial instrument (the underlying) from the seller of the option at a certain time (the expiration date) for a
certain price (the strike price)
• capital budgeting The budgeting process in which a company plans its capital expenditure (the spending on assets of long-term
value).
• capital budgeting The budgeting process in which a company plans its capital expenditure (the spending on assets of long-term
value).
• cash flow The sum of cash revenues and expenditures over a period of time.
• cash flow The sum of cash revenues and expenditures over a period of time.
• cash inflow Cash that is received by the investor. For example, dividends paid on a stock owned by the investor is a cash
inflow.
• cash outflow Any cash that is spent or invested by the investor.
• Common stock Common stock is a form of corporate equity ownership, a type of security.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
• cost of capital the rate of return that capital could be expected to earn in an alternative investment of equivalent risk
• cost of capital the rate of return that capital could be expected to earn in an alternative investment of equivalent risk
• cost of capital the rate of return that capital could be expected to earn in an alternative investment of equivalent risk
• cost of capital the rate of return that capital could be expected to earn in an alternative investment of equivalent risk
• cost of capital the rate of return that capital could be expected to earn in an alternative investment of equivalent risk
• cost of capital the rate of return that capital could be expected to earn in an alternative investment of equivalent risk
• cumulative having priority rights to receive a dividend that accrue until paid
• deduction A sum that can be removed from tax calculations; something that is written off.
• Default risk Default risk, also known as credit risk, refers to the risk that a borrower will default on any type of debt by failing to
make the obligatory payments.
• discount rate The interest rate used to discount future cash flows of a financial instrument; the annual interest rate used to
decrease the amounts of future cash flow to yield their present value.
• discount rate The interest rate used to discount future cash flows of a financial instrument; the annual interest rate used to
decrease the amounts of future cash flow to yield their present value.
• discounted cash flow In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using
the concepts of the time value of money.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
• discounted payback period The discounted payback period is the amount of time that it takes to cover the cost of a project, by
adding positive discounted cash flow coming from the profits of the project.
• duration A measure of the sensitivity of the price of a financial asset to changes in interest rates, computed for a simple bond
as a weighted average of the maturities of the interest and principal payments associated with it
• effective interest rate The effective interest rate, effective annual interest rate, annual equivalent rate (AER), or simply effective
rate is the interest rate on a loan or financial product restated from the nominal interest rate as an interest rate with annual
compound interest payable in arrears.
• explicit costs a direct payment made to others in the course of running a business, such as wage, rent and materials
• gain (or loss) If an investment earns more value than it costs, the difference is the gain. If it costs more than it earns, the
difference is a loss.
• implicit costs The opportunity cost equal to what a firm must give up in order to use factors which it neither purchases nor hires.
• internal rate of return IRR. The rate of return on an investment which causes the net present value of all future cash flows to be
zero.
• liquidity Availability of cash over short term: ability to service short-term debt.
• margin Collateral that the holder of a financial instrument has to deposit to cover some or all of the credit risk of their
counterparty.
• Modified Internal Rate of Return The modified internal rate of return (MIRR) is a financial measure of an investment's
attractiveness. It is used in capital budgeting to rank alternative investments of equal size. As the name implies, MIRR is a
modification of the internal rate of return (IRR) and, as such, aims to resolve some problems with the IRR.
• Modified Internal Rate of Return The modified internal rate of return (MIRR) is a financial measure of an investment's
attractiveness. It is used in capital budgeting to rank alternative investments of equal size. As the name implies, MIRR is a
modification of the internal rate of return (IRR) and, as such, aims to resolve some problems with the IRR.
• mutually exclusive Describing multiple events or states of being such that the occurrence of any one implies the nonoccurrence of all the others.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
• mutually exclusive Describing multiple events or states of being such that the occurrence of any one implies the nonoccurrence of all the others.
• net present value profile a graph of the sum of all cash inflows and outflows adjusted for the time value of money at different
discount rates
• Opportunity cost The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity);
the most valuable forgone alternative.
• Opportunity cost The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity);
the most valuable forgone alternative.
• Opportunity cost The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity);
the most valuable forgone alternative.
• Opportunity cost The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity);
the most valuable forgone alternative.
• Opportunity cost The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity);
the most valuable forgone alternative.
• parameter A variable kept constant during an experiment, calculation, or similar.
• payback period the amount of time required for the return on an investment to return the sum of the original investment
• Preferred Stock Preferred stock (also called preferred shares, preference shares or simply preferreds) is an equity security with
properties of both an equity and a debt instrument, and is generally considered a hybrid instrument.
• reinvestment rate The annual yield at which cash flows from an investment can be reinvested.
• retrospective Affecting or influencing past things; retroactive.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
• return Gain or loss from an investment.
• sunk cost A cost that has already been incurred and which cannot be recovered to any significant degree.
• Swap In finance, a swap is a derivative in which counterparties exchange cash flows of one party's financial instrument for
those of the other party's financial instrument.
• time value of money The time value of money is the value of money, figuring in a given amount of interest earned over a given
amount of time.
• time value of money The value of money, figuring in a given amount of interest, earned over a given amount of time.
• time value of money The value of money, figuring in a given amount of interest, earned over a given amount of time.
• variable something whose value may be dictated or discovered.
• Weighted average cost of capital The weighted average cost of capital (WACC) is the rate that a company is expected to pay
on average to all its security holders to finance its assets. The WACC is the minimum return that a company must earn on an
existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere.
• Weighted average cost of capital The weighted average cost of capital (WACC) is the rate that a company is expected to pay
on average to all its security holders to finance its assets.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
NPV Profile
The NPV Profile graphs how NPV changes as the discount rate used changes.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Internal rate of return." Public domain http://en.wikipedia.org/wiki/Internal_rate_of_return View on Boundless.com
Capital Budgeting
Zhuhai sea front development
Payback is the amount of time it takes to return an initial investment; however, it does not account for the time value of money, risk, financing, or other
important considerations, such as the opportunity cost.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Zhuhai sea front." CC BY-SA http://commons.wikimedia.org/wiki/File%253AZhuhai_sea_front.JPG View on Boundless.com
Capital Budgeting
Calculating IRR
Cash flows and time
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Internal rate of return." GNU FDL http://en.wikipedia.org/wiki/Internal_rate_of_return View on Boundless.com
Capital Budgeting
Replacing a window sill vs. keeping the old one
Replacement project analysis tells a company whether the costs of a replacement project provide a suitable return on investment.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "All sizes | Replacement Window Installation | Flickr - Photo Sharing!." CC BY
http://www.flickr.com/photos/andersenwindows/5738170170/sizes/m/in/photostream/ View on Boundless.com
Capital Budgeting
Net Present Value (NPV) Formula
NPV is the sum of of the present values of all cash flows associated with a project. The business will receive regular payments, represented by variable
R, for a period of time. This period of time is expressed in variable t. The payments are discounted using a selected interest rate, signified by the i
variable.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Net present value." GNU FDL http://en.wikipedia.org/wiki/Net_present_value View on Boundless.com
Capital Budgeting
Disadvantage of IRR
NPV vs discount rate comparison for two mutually exclusive projects. Project A has a higher NPV (for certain discount rates), even though its IRR (= xaxis intercept) is lower than for project B
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Internal rate of return." GNU FDL http://en.wikipedia.org/wiki/Internal_rate_of_return View on Boundless.com
Capital Budgeting
Capital Budeting
Windows of opportunity come into play when budgeting for capital because they can provide opportunities for firms to maximize returns on investment.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Google. "Google Images." CC BY
http://www.google.com/imgres?hl=en&biw=1271&bih=595&tbs=sur:fmc&tbm=isch&tbnid=Xchtfc_R83QNEM:&imgrefurl=http://www.fotopedia.com/items/flickr-
Capital Budgeting
Discount rates
Bundesbank discount interest rates from 1948 to 1998. The vertical scale shows the interest rate in percent and the horizontal scale shows years.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Bundesbank discount rate 1948 to 1998 no titles." CC BY-SA
http://commons.wikimedia.org/wiki/File:Bundesbank_discount_rate_1948_to_1998_no_titles.svg View on Boundless.com
Capital Budgeting
Private Equity
Private equity firms, such as NBGI, provide funds for companies unable or uninterested in obtaining funds publicly.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "NBGI Private Equity logo." Public domain http://commons.wikimedia.org/wiki/File%253ANBGI_Private_Equity_logo.png View on Boundless.com
Capital Budgeting
Calculating IRR
IRR is the rate at which NPV = 0.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Internal rate of return." GNU FDL http://en.wikipedia.org/wiki/Internal_rate_of_return View on Boundless.com
Capital Budgeting
Reinvestment
Reinvestment to expand business
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "All sizes | 100416-A8647R-001 | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/armyengineersnorfolk/4535262178/sizes/o/in/photostream/
View on Boundless.com
Capital Budgeting
Reinvestment Factor
Describe how the reinvestment factors related to total return.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Rate of return." GNU FDL http://en.wikipedia.org/wiki/Rate_of_return View on Boundless.com
Capital Budgeting
Financing
To manage business often requires long-term and short-term financing.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Fotopedia. "Financing - Search for Photos." CC BY http://www.fotopedia.com/search?q=Financing&human_license=reuse_commercial_modify View on
Boundless.com
Capital Budgeting
Truck
Expensing is applied to property used in a business, such as trucks.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "All sizes | Truck load of ponderosa pine, Edward Hines Lumber Co.operations in Malheur National Forest, Grant County, Oregon (LOC) | Flickr - Photo
Sharing!." CC BY http://www.flickr.com/photos/library_of_congress/2178329189/sizes/m/in/photostream/ View on Boundless.com
Capital Budgeting
Pollution
Pollution is an example of a negative externality.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "All sizes | Smoke stacks (LOC) | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/library_of_congress/2179929940/sizes/m/in/photostream/
View on Boundless.com
Capital Budgeting
Airplane
Before purchasing a new airplane, airlines evaluate the NPV of the plan by calculating the PV of the revenue it can earn from it and the PV of its cost
(e.g., purchase cost, maintenance, fuel, etc. ).
Free to share, print, make copies and changes. Get yours at www.boundless.com
Viewology. "Pictures: AirAsia 9M-AFY Airbus A320-216 Airplane Arriving/Departing at Penang Airport – Viewology.Net." CC BY-SA http://viewology.net/picturesairasia-9m-afy-airbus-a320-216-airplane-arrivingdeparting-at-penang-airport/768/ View on Boundless.com
Capital Budgeting
Internal rate of return
Internal rate of return is the rate at which the NPV of an investment equals 0.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Klk-IR1a." CC BY-SA http://commons.wikimedia.org/wiki/File:Klk-IR1a.png View on Boundless.com
Capital Budgeting
Capital Investment in Plant and Property
The payback method is a simple way to evaluate the number of years or months it takes to return the initial investment.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Bruce A Turbine Hall December 2002." CC BY http://commons.wikimedia.org/wiki/File%253ABruce_A_Turbine_Hall_December_2002.JPG View on
Boundless.com
Capital Budgeting
Tax Rate
The tax rate is a percentage of the taxable base.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "All sizes | Tax | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/68751915@N05/6629120915/sizes/m/in/photostream/ View on Boundless.com
Capital Budgeting
Depreciated value
Depreciation measures how much of an asset is used up in a certain amount of time.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "All sizes | In-n-Out-burger---eating | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/lifeontheedge/458706241/sizes/m/in/photostream/ View on
Boundless.com
Capital Budgeting
Cash flow
The movement of money into and out of a business, project or financial product.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "All sizes | Cash Flow | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/23024164@N06/7222346312/sizes/o/in/photostream/ View on
Boundless.com
Capital Budgeting
Medicine
Drug developers must try to calculate the future revenues of a drug in order to find the NPV to determine if it is worth the cost of development.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "Pills.| Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/59334544@N00/2322167178/ View on Boundless.com
Capital Budgeting
Discount rate
Discount rate set by Central Bank of Russia in 1992-2009.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "CBR Discount Rate 1992-2009." CC BY-SA http://commons.wikimedia.org/wiki/File:CBR_Discount_Rate_1992-2009.png View on Boundless.com
Capital Budgeting
Alternative choices
Choosing one alternative means another is foregone.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "All sizes | Scales Of Justice | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/vaxzine/485424742/sizes/o/in/photostream/ View on
Boundless.com
Capital Budgeting
Machinery
Being able to accurately find the NPV of a piece of machinery means having a good idea when all costs are going to occur (when it will need fixing) and
when it will generate revenue (when it will be used on a job).
Free to share, print, make copies and changes. Get yours at www.boundless.com
Fotopedia. "Liebherr R 317 by Alexandre Prévot in Heavy equipment, Hydraulic machinery, Liebherr Group on Fotopedia - Images for Humanity." CC BY-SA
http://www.fotopedia.com/items/flickr-6836303340 View on Boundless.com
Capital Budgeting
Monthly liquidity of an organic vegetable business
Cash demand is high from April to August. The business is more likely to use payback period to choose a project.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Monthly-liquidity." CC BY-SA http://commons.wikimedia.org/wiki/File:Monthly-liquidity.png View on Boundless.com
Capital Budgeting
NPV formula
Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore, NPV is the sum of all terms.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Net present value." GNU FDL http://en.wikipedia.org/wiki/Net_present_value View on Boundless.com
Capital Budgeting
Calculation of the MIRR
MIRR is calculated as follows:
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Modified internal rate of return." GNU FDL http://en.wikipedia.org/wiki/Modified_internal_rate_of_return View on Boundless.com
Capital Budgeting
Multiple internal rates of return
As cash flows of a project change sign more than once, there will be multiple IRRs. NPV is a preferable metric in these cases.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Klk-IR3l." CC BY-SA http://commons.wikimedia.org/wiki/File:Klk-IR3l.png View on Boundless.com
Capital Budgeting
IRR
Showing the position of the IRR on the graph of NPV(r) (r is labelled 'i' in the graph).
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Internal rate of return." GNU FDL http://en.wikipedia.org/wiki/Internal_rate_of_return View on Boundless.com
Capital Budgeting
Capital Investment in Plant and Property
The payback method is a simple way to evaluate the number of years or months it takes to return the initial investment.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Bruce A Turbine Hall December 2002." CC BY http://commons.wikimedia.org/wiki/File%253ABruce_A_Turbine_Hall_December_2002.JPG View on
Boundless.com
Capital Budgeting
Goals of capital budgeting
The main goal of capital budgeting is to rank projects.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Budget ESA 2010." Public domain http://commons.wikimedia.org/wiki/File:Budget_ESA_2010.png View on Boundless.com
Capital Budgeting
Calculating IRR
NPV formula with r as IRR
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Internal rate of return." GNU FDL http://en.wikipedia.org/wiki/Internal_rate_of_return View on Boundless.com
Capital Budgeting
Investment Proposal
Choosing the best investment proposal for business
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. CC BY http://www.flickr.com/photos/fatguyinalittlecoat/3038563145/sizes/o/in/photostream/ View on Boundless.com
Capital Budgeting
Accounting cycle
The basic cycle from open period to close period.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikimedia. "Accounting cycle." CC BY-SA http://commons.wikimedia.org/wiki/File:Accounting_cycle.gif View on Boundless.com
Capital Budgeting
Sunk
Sunk costs are irrecoverable.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "All sizes | Sunk Boat | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/janeladeimagens/262555625/sizes/m/in/photostream/ View on
Boundless.com
Capital Budgeting
NPV Decision Table
NPV simply and clearly shows whether a project adds value to the firm or not. It's easy of use in decision making is one of its advantages.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Net present value." GNU FDL http://en.wikipedia.org/wiki/Net_present_value View on Boundless.com
Capital Budgeting
Cash
Cash flows reflect cash entering or leaving the organization.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Flickr. "All sizes | Cash | Flickr - Photo Sharing!." CC BY http://www.flickr.com/photos/blatantworld/4149529614/sizes/m/in/photostream/ View on Boundless.com
Capital Budgeting
MIRR
The formula for calculating MIRR.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Wikipedia. "Modified internal rate of return." GNU FDL http://en.wikipedia.org/wiki/Modified_internal_rate_of_return View on Boundless.com
Capital Budgeting
Which of the following is a correct definition of a capital budgeting
method?
A) Equivalent annuity method essentially value projects as if they were
risk bonds.
B) Real option analysis is the ratio of payoff to investment of a proposed
project.
C) The profitability index is the time required for an investment to "repay"
the original investment.
D) The internal rate of return is the discount rate that gives a net present
value of zero.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following is a correct definition of a capital budgeting
method?
A) Equivalent annuity method essentially value projects as if they were
risk bonds.
B) Real option analysis is the ratio of payoff to investment of a proposed
project.
C) The profitability index is the time required for an investment to "repay"
the original investment.
D) The internal rate of return is the discount rate that gives a net present
value of zero.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following is a function of corporate capital
budgeting?
A) To rank projects by profitability.
B) To evaluate the performance of managers.
C) All of these answers.
D) To encourage managers to consider problems before they arise.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following is a function of corporate capital
budgeting?
A) To rank projects by profitability.
B) To evaluate the performance of managers.
C) All of these answers.
D) To encourage managers to consider problems before they arise.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following is the correct order of steps in a basic
accounting flow?
A) Analyze the transactions, make journal entries, prepare statements,
make adjusting entries.
B) Analyze the transactions, make journal entries, make adjusting entries,
prepare statements.
C) Make journal entries, analyze the transactions, make adjusting entries,
prepare statements.
D) Make journal entries, prepare statements, analyze the transactions,
make adjusting entries.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following is the correct order of steps in a basic
accounting flow?
A) Analyze the transactions, make journal entries, prepare statements,
make adjusting entries.
B) Analyze the transactions, make journal entries, make adjusting entries,
prepare statements.
C) Make journal entries, analyze the transactions, make adjusting entries,
prepare statements.
D) Make journal entries, prepare statements, analyze the transactions,
make adjusting entries.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
A company is analyzing a variety of potential investments using
different capital budgeting methods. Which of the following
represents the most profitable choice based on the information
provided?
A) The company picks a project with profitability index of 1.25 over a
project with a PI of -.25.
B) The company picks a project with an accounting rate of return 5% over
one with an ARR of 3%.
C) The company picks a project with a 5 year payback period over one
with a 3 year payback period.
D) The company picks a project with an NPV of $250,000 over one with
an NPV of $300,000.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
A company is analyzing a variety of potential investments using
different capital budgeting methods. Which of the following
represents the most profitable choice based on the information
provided?
A) The company picks a project with profitability index of 1.25 over a
project with a PI of -.25.
B) The company picks a project with an accounting rate of return 5% over
one with an ARR of 3%.
C) The company picks a project with a 5 year payback period over one
with a 3 year payback period.
D) The company picks a project with an NPV of $250,000 over one with
an NPV of $300,000.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
A firm is trying to choose the most profitable project to invest in.
Which of the following should be used as the company's discount
rate?
A) The company's profitability index.
B) The company's reinvestment rate.
C) The company's weighted average cost of capital.
D) The company's internal rate of return.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
A firm is trying to choose the most profitable project to invest in.
Which of the following should be used as the company's discount
rate?
A) The company's profitability index.
B) The company's reinvestment rate.
C) The company's weighted average cost of capital.
D) The company's internal rate of return.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
A company needs to obtain short-term financing due to an
unexpected event. Which of the following options should it NOT
pursue to meet its financial needs?
A) Issuing commercial paper.
B) Obtaining an asset-based loan.
C) Entering into a repurchase agreement.
D) Issuing corporate bonds.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
A company needs to obtain short-term financing due to an
unexpected event. Which of the following options should it NOT
pursue to meet its financial needs?
A) Issuing commercial paper.
B) Obtaining an asset-based loan.
C) Entering into a repurchase agreement.
D) Issuing corporate bonds.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following is the best reason to use the payback
method to evaluate investments?
A) The payback method helps gauge a project's risk.
B) If you use the payback method, you do not need to perform additional
analyses.
C) The payback method covers all cash inflows and outflows for the
duration of the investment.
D) The payback method is easy to use and understand for most people,
regardless of training.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following is the best reason to use the payback
method to evaluate investments?
A) The payback method helps gauge a project's risk.
B) If you use the payback method, you do not need to perform additional
analyses.
C) The payback method covers all cash inflows and outflows for the
duration of the investment.
D) The payback method is easy to use and understand for most people,
regardless of training.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Calculate the detailed modified payback period for a project with
the following cash flows:Year 0: -$2000Year 1: $1000Year 2: $1000Year 3: $1000Year 4: $3000Year 5: $2000
A) 3 years.
B) 3.33 years.
C) 4 years.
D) 4.33 years.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Calculate the detailed modified payback period for a project with
the following cash flows:Year 0: -$2000Year 1: $1000Year 2: $1000Year 3: $1000Year 4: $3000Year 5: $2000
A) 3 years.
B) 3.33 years.
C) 4 years.
D) 4.33 years.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Calculate the detailed modified payback period for a project with a
discount rate of 5% the following cash flows:Year 0: -$2000Year 1:
$1000Year 2: -$1000Year 3: $1000Year 4: $3000Year 5: $2000
A) 4 years.
B) 3.44 years.
C) 4.44 years.
D) 3.56 years.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Calculate the detailed modified payback period for a project with a
discount rate of 5% the following cash flows:Year 0: -$2000Year 1:
$1000Year 2: -$1000Year 3: $1000Year 4: $3000Year 5: $2000
A) 4 years.
B) 3.44 years.
C) 4.44 years.
D) 3.56 years.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
In which of the following situations would using the payback
method to evaluate an investment be a good idea?
A) To assess projects that require little investment when compared to the
size of the company.
B) To determine which project of several options is the best investment.
C) To assess the value of potential capital or technological
improvements.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
In which of the following situations would using the payback
method to evaluate an investment be a good idea?
A) To assess projects that require little investment when compared to the
size of the company.
B) To determine which project of several options is the best investment.
C) To assess the value of potential capital or technological
improvements.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following disadvantages of the payback method can
be rectified?
A) The payback method does not account for the time value of money.
B) The payback method ignores cash flows beyond the payback period.
C) The payback method does not consider opportunity cost.
D) The payback method does not gauge the risk of an investment.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following disadvantages of the payback method can
be rectified?
A) The payback method does not account for the time value of money.
B) The payback method ignores cash flows beyond the payback period.
C) The payback method does not consider opportunity cost.
D) The payback method does not gauge the risk of an investment.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following is a way the internal rate of return (IRR) is
used in capital budgeting?
A) To determine the average annual return of an investment.
B) All of these answers.
C) As a means to compare the profitability of different investments.
D) As the effective interest rate for savings and loans.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following is a way the internal rate of return (IRR) is
used in capital budgeting?
A) To determine the average annual return of an investment.
B) All of these answers.
C) As a means to compare the profitability of different investments.
D) As the effective interest rate for savings and loans.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
A project has an initial investment requirement of $100,000. In
year 1, it should earn $25,000; in year two, $30,000; and in year
3, $50,000. What is the project's internal rate of return?
A) 5%
B) 6.5%
C) 6
D) 7.5%
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
A project has an initial investment requirement of $100,000. In
year 1, it should earn $25,000; in year two, $30,000; and in year
3, $50,000. What is the project's internal rate of return?
A) 5%
B) 6.5%
C) 6
D) 7.5%
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following describes an advantage the internal rate of
return has over net present value for capital budgeting purposes?
A) The IRR method is clear an easy to understand.
B) Internal rate of return is an indicator of the efficiency, quality or yield of
an investment.
C) The IRR method recognizes the time value of money.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following describes an advantage the internal rate of
return has over net present value for capital budgeting purposes?
A) The IRR method is clear an easy to understand.
B) Internal rate of return is an indicator of the efficiency, quality or yield of
an investment.
C) The IRR method recognizes the time value of money.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
In which of the following situations would it be appropriate to use
the IRR method to make an investment decision?
A) To compare two investments that have different durations.
B) To assess a project which cash flows fluctuate between positive and
negative.
C) To compare two projects that have an equal initial investment.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
In which of the following situations would it be appropriate to use
the IRR method to make an investment decision?
A) To compare two investments that have different durations.
B) To assess a project which cash flows fluctuate between positive and
negative.
C) To compare two projects that have an equal initial investment.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
You are analyzing two different investments and will present your
findings to company executives. Both projects have cash flows
that alternate between positive and negative. Which budgeting
method should you use to evaluate the projects?
A) Modified Internal Rate of Return.
B) Internal Rate of Return.
C) Net Present Value.
D) Payback period method.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
You are analyzing two different investments and will present your
findings to company executives. Both projects have cash flows
that alternate between positive and negative. Which budgeting
method should you use to evaluate the projects?
A) Modified Internal Rate of Return.
B) Internal Rate of Return.
C) Net Present Value.
D) Payback period method.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Under the internal rate of return rule in capital budgeting, which of
the following statements does not apply?
A) The cash inflows can be estimates.
B) The internal rate of return can be equal to the cost of capital.
C) The internal rate of return can vary throughout the life of a project.
D) The initial investment can cover the cost from purchasing new
equipment.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Under the internal rate of return rule in capital budgeting, which of
the following statements does not apply?
A) The cash inflows can be estimates.
B) The internal rate of return can be equal to the cost of capital.
C) The internal rate of return can vary throughout the life of a project.
D) The initial investment can cover the cost from purchasing new
equipment.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Saylor OER. "Business Administration « Saylor.org – Free Online Courses Built by Professors." CC BY 3.0 http://www.saylor.org/majors/Business/
Capital Budgeting
A project has a finance rate of 8% and a reinvestment rate of
10%. The project requires an initial investment of $10,000. In year
one, it will have cash flows of $12,000; year two, -$5000; year
three, $8000. What is the project's MIRR?
A) 5.8%
B) 7.3%
C) 18.4%
D) 12.1%
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
A project has a finance rate of 8% and a reinvestment rate of
10%. The project requires an initial investment of $10,000. In year
one, it will have cash flows of $12,000; year two, -$5000; year
three, $8000. What is the project's MIRR?
A) 5.8%
B) 7.3%
C) 18.4%
D) 12.1%
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following is a correct definition of Net Present Value.
A) The sum of the present values of all a project's revenues and
expenses.
B) NPV = PVinflows + PVoutflows
C) All of these answers.
D) A means of evaluating a project's profitability.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following is a correct definition of Net Present Value.
A) The sum of the present values of all a project's revenues and
expenses.
B) NPV = PVinflows + PVoutflows
C) All of these answers.
D) A means of evaluating a project's profitability.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
When evaluating the cash flows from a project, a financial
manager needs to analyze the:
A) The costs of the project
B) costs, benefits, and opportunity costs of the project.
C) The benefits of the project
D) The costs and benefits of the project
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
When evaluating the cash flows from a project, a financial
manager needs to analyze the:
A) The costs of the project
B) costs, benefits, and opportunity costs of the project.
C) The benefits of the project
D) The costs and benefits of the project
Free to share, print, make copies and changes. Get yours at www.boundless.com
Saylor OER. "Business Administration « Saylor.org – Free Online Courses Built by Professors."
CC BY 3.0 http://www.saylor.org/majors/Business/
Capital Budgeting
The net present value can be:
A) Positive
B) Negative
C) Positive, Zero, or Negative
D) Zero
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
The net present value can be:
A) Positive
B) Negative
C) Positive, Zero, or Negative
D) Zero
Free to share, print, make copies and changes. Get yours at www.boundless.com
Saylor OER. "Business Administration « Saylor.org – Free Online Courses Built by Professors." CC BY 3.0 http://www.saylor.org/majors/Business/
Capital Budgeting
A company is considering a project that has a discount rate of 5%.
In the first year, it will have -$100,000 in cash flows. In year 2, it
will have cash flows of $100,000, and in year 3 the project will
generate $200,000. What is the project's NPV?
A) $358,708
B) $168,232
C) $190,476
D) $193,204
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
A company is considering a project that has a discount rate of 5%.
In the first year, it will have -$100,000 in cash flows. In year 2, it
will have cash flows of $100,000, and in year 3 the project will
generate $200,000. What is the project's NPV?
A) $358,708
B) $168,232
C) $190,476
D) $193,204
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
The sum of cash revenues and expenditures over a period of
time.
A) Cash
B) Assets
C) Account Receivables
D) Cash Flow
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
The sum of cash revenues and expenditures over a period of
time.
A) Cash
B) Assets
C) Account Receivables
D) Cash Flow
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Under the present value concept, a lottery winner would rather
receive:
A) None of these, as the best answer depends on the interest rate that
the lottery winner faces.
B) $10,000 per year for the next 5 years than receive $50,000 today.
C) $10,000 per year for the next 5 years than receive $40,000 today.
D) $10,000 per year for the next 5 years than receive $30,000 today.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Under the present value concept, a lottery winner would rather
receive:
A) None of these, as the best answer depends on the interest rate that
the lottery winner faces.
B) $10,000 per year for the next 5 years than receive $50,000 today.
C) $10,000 per year for the next 5 years than receive $40,000 today.
D) $10,000 per year for the next 5 years than receive $30,000 today.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Saylor OER. "Business Administration « Saylor.org – Free Online Courses Built by Professors." CC BY 3.0
http://www.saylor.org/majors/Business/
Capital Budgeting
Each choice listed below represents a net present value of a
potential project. If you were a CFO of a company which project
would you choose?
A) NPV = $200,000
B) NPV = $500,000
C) NPV = $0
D) NPV = -$100,000
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Each choice listed below represents a net present value of a
potential project. If you were a CFO of a company which project
would you choose?
A) NPV = $200,000
B) NPV = $500,000
C) NPV = $0
D) NPV = -$100,000
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following is an advantage of using the NPV method
to evaluate different projects?
A) All of these answers.
B) It allows for easy comparisons of potential investments.
C) NPV can be customized to reflect the financial concerns and demands
of the company.
D) NPV converts future revenue to current dollars, allowing the company
to quantify a project's value.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following is an advantage of using the NPV method
to evaluate different projects?
A) All of these answers.
B) It allows for easy comparisons of potential investments.
C) NPV can be customized to reflect the financial concerns and demands
of the company.
D) NPV converts future revenue to current dollars, allowing the company
to quantify a project's value.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following is NOT included in calculating a project's
NPV?
A) The project's opportunity cost.
B) The exact discount rate.
C) The exact amounts of cash flow related to the project.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following is NOT included in calculating a project's
NPV?
A) The project's opportunity cost.
B) The exact discount rate.
C) The exact amounts of cash flow related to the project.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following reasons is a reason why a higher discount
rate generally means a lower NPV?
A) Most projects do not pay off until years later, and those cash flows are
highly discounted.
B) A higher discount rate emphasizes earlier cash flows, which is when
the expenses are incurred.
C) When the discount rate is large, there are larger differences between
PV and FV for each cash flow.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following reasons is a reason why a higher discount
rate generally means a lower NPV?
A) Most projects do not pay off until years later, and those cash flows are
highly discounted.
B) A higher discount rate emphasizes earlier cash flows, which is when
the expenses are incurred.
C) When the discount rate is large, there are larger differences between
PV and FV for each cash flow.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following is a way cash flow factors can be used to
improve a business?
A) It can be used to .determine a project's rate of return or value
B) It can be used to determine problems with a business's liquidity.
C) All of these answers.
D) It can be used to evaluate the "quality" of income generated by
accrual accounting.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following is a way cash flow factors can be used to
improve a business?
A) It can be used to .determine a project's rate of return or value
B) It can be used to determine problems with a business's liquidity.
C) All of these answers.
D) It can be used to evaluate the "quality" of income generated by
accrual accounting.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following criteria is NOT taken into consideration
when analyzing a possible replacement project?
A) The cashflows the current project has generated in the past.
B) The depreciation associated with the old and potential replacement
investment.
C) The discounted cash flows from the old and potential replacement
investment.
D) The sunk cost associated with the original project.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following criteria is NOT taken into consideration
when analyzing a possible replacement project?
A) The cashflows the current project has generated in the past.
B) The depreciation associated with the old and potential replacement
investment.
C) The discounted cash flows from the old and potential replacement
investment.
D) The sunk cost associated with the original project.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following could be a sunk cost?
A) The original cost of the item.
B) The expected economic loss of a transaction.
C) All of these answers.
D) Irrational decision-making that led to a transaction.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following could be a sunk cost?
A) The original cost of the item.
B) The expected economic loss of a transaction.
C) All of these answers.
D) Irrational decision-making that led to a transaction.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following is an example of an opportunity cost?
A) If you watch a game instead of going for a run, the cost is poorer
personal health.
B) If invest in one of two projects, the cost is the lost revenue from the
other project.
C) All of these answers.
D) If you buy a candy bar instead of a soda, the cost is thirst.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following is an example of an opportunity cost?
A) If you watch a game instead of going for a run, the cost is poorer
personal health.
B) If invest in one of two projects, the cost is the lost revenue from the
other project.
C) All of these answers.
D) If you buy a candy bar instead of a soda, the cost is thirst.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following describes how an externality can affect a
market?
A) A positive externality can lead to overproduction.
B) A negative externality can lead to over-production.
C) The cost of externalities can always be quantified and "internalized" by
a party to the transaction.
D) Prices in a competitive market reflect the full costs and benefits of
production.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following describes how an externality can affect a
market?
A) A positive externality can lead to overproduction.
B) A negative externality can lead to over-production.
C) The cost of externalities can always be quantified and "internalized" by
a party to the transaction.
D) Prices in a competitive market reflect the full costs and benefits of
production.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
The tax rate that applies to the last dollar of the tax base and is
often applied to the change in one's tax obligation as income rises
is called _____.
A) the statutory tax rate
B) the average tax rate
C) the effective tax rate
D) the marginal tax rate
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
The tax rate that applies to the last dollar of the tax base and is
often applied to the change in one's tax obligation as income rises
is called _____.
A) the statutory tax rate
B) the average tax rate
C) the effective tax rate
D) the marginal tax rate
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following is an element needed to calculate an
asset's depreciation?
A) The cost of the asset minus the asset's salvage value.
B) The estimated useful life of the asset.
C) A method of apportioning the cost of the asset.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following is an element needed to calculate an
asset's depreciation?
A) The cost of the asset minus the asset's salvage value.
B) The estimated useful life of the asset.
C) A method of apportioning the cost of the asset.
D) All of these answers.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Which of the following is NOT a limitation of section 179?
A) The maximum deduction a taxpayer may take in a year is $25,000.
B) The deduction may not exceed the taxpayer's aggregate income for
the year.
C) Taxpayers must make the section 179 election if it put property into
service that qualifies.
D) The deduction is decreased by the difference between the value of
new Sec.179 property and $200,000.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
Which of the following is NOT a limitation of section 179?
A) The maximum deduction a taxpayer may take in a year is $25,000.
B) The deduction may not exceed the taxpayer's aggregate income for
the year.
C) Taxpayers must make the section 179 election if it put property into
service that qualifies.
D) The deduction is decreased by the difference between the value of
new Sec.179 property and $200,000.
Free to share, print, make copies and changes. Get yours at www.boundless.com
Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Capital Budgeting
Attribution
• Wikipedia. "Tax rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Tax_rate
• Wiktionary. "margin." CC BY-SA 3.0 http://en.wiktionary.org/wiki/margin
• Wikipedia. "Section 179 depreciation deduction." CC BY-SA 3.0
http://en.wikipedia.org/wiki/Section_179_depreciation_deduction
• Wiktionary. "deduction." CC BY-SA 3.0 http://en.wiktionary.org/wiki/deduction
• Wikipedia. "Internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Internal_rate_of_return
• Wikipedia. "duration." CC BY-SA 3.0 http://en.wikipedia.org/wiki/duration
• Wiktionary. "mutually exclusive." CC BY-SA 3.0 http://en.wiktionary.org/wiki/mutually+exclusive
• Wikipedia. "Budget." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Budget
• Wikipedia. "Capital budgeting." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capital_budgeting
• Wikipedia. "Common stock." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Common%20stock
• Wikipedia. "Preferred Stock." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Preferred%20Stock
• Wikipedia. "Externalities." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Externalities
• Wiktionary. "benefit." CC BY-SA 3.0 http://en.wiktionary.org/wiki/benefit
• Wikipedia. "Depreciation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Depreciation
• Wiktionary. "allocate." CC BY-SA 3.0 http://en.wiktionary.org/wiki/allocate
• Wikibooks. "Principles of Finance/Section 1/Chapter 2/Time Value of Money/PV and NPV." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_2/Time_Value_of_Money/PV_and_NPV#What_NPV_Me
ans
• Wikipedia. "Net present value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_present_value
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
• Wikispaces. "SU3FINANCE - Chapter 4 - NPV and the Time Value of Money." CC BY-SA
http://su3finance.wikispaces.com/Chapter+4+-+NPV+and+the+Time+Value+of+Money
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/cash-outflow
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/cash-inflow
• Wikibooks. "Principles of Finance/Section 1/Chapter 2/Time Value of Money/PV and NPV." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_2/Time_Value_of_Money/PV_and_NPV#What_NPV_Me
ans
• Wikipedia. "Net present value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_present_value
• Wikispaces. "SU3FINANCE - Chapter 4 - NPV and the Time Value of Money." CC BY-SA
http://su3finance.wikispaces.com/Chapter+4+-+NPV+and+the+Time+Value+of+Money
• Wiktionary. "cash flow." CC BY-SA 3.0 http://en.wiktionary.org/wiki/cash+flow
• Wiktionary. "variable." CC BY-SA 3.0 http://en.wiktionary.org/wiki/variable
• Wiktionary. "discount rate." CC BY-SA 3.0 http://en.wiktionary.org/wiki/discount+rate
• Wikibooks. "Principles of Finance/Section 1/Chapter 2/Time Value of Money/PV and NPV." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_2/Time_Value_of_Money/PV_and_NPV#What_NPV_Me
ans
• Wikipedia. "Net present value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_present_value
• Wikispaces. "BUS304-PrinciplesofFinance - Chapter 7." CC BY-SA http://bus304principlesoffinance.wikispaces.com/Chapter+7
• Wikispaces. "SU3FINANCE - Chapter 4 - NPV and the Time Value of Money." CC BY-SA
http://su3finance.wikispaces.com/Chapter+4+-+NPV+and+the+Time+Value+of+Money
• Wikispaces. "SU3FINANCE - Chapter 7 - Investment Decision Rules." CC BY-SA
http://su3finance.wikispaces.com/Chapter+7+-+Investment+Decision+Rules
• Wikipedia. "internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/internal%20rate%20of%20return
• Wiktionary. "discount rate." CC BY-SA 3.0 http://en.wiktionary.org/wiki/discount+rate
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/gain-or-loss
• Wikipedia. "Payback period." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Payback_period
• Wikipedia. "Modified internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Modified_internal_rate_of_return
• Wikipedia. "cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/cost%20of%20capital
• Wiktionary. "return." CC BY-SA 3.0 http://en.wiktionary.org/wiki/return
• Wiktionary. "Opportunity cost." CC BY-SA 3.0 http://en.wiktionary.org/wiki/Opportunity+cost
• Wikipedia. "Internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Internal_rate_of_return
• Wikipedia. "cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/cost%20of%20capital
• Wikipedia. "capital budgeting." CC BY-SA 3.0 http://en.wikipedia.org/wiki/capital%20budgeting
• Wikipedia. "Internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Internal_rate_of_return
• Wiktionary. "mutually exclusive." CC BY-SA 3.0 http://en.wiktionary.org/wiki/mutually+exclusive
• Wikipedia. "Modified Internal Rate of Return." CC BY-SA 3.0
http://en.wikipedia.org/wiki/Modified%20Internal%20Rate%20of%20Return
• Wikipedia. "Payback period." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Payback_period
• Wikipedia. "Payback period." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Payback_period
• Wiktionary. "cumulative." CC BY-SA 3.0 http://en.wiktionary.org/wiki/cumulative
• Wikipedia. "discounted payback period." CC BY-SA 3.0 http://en.wikipedia.org/wiki/discounted%20payback%20period
• Wikipedia. "Modified internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Modified_internal_rate_of_return
• Wikipedia. "cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/cost%20of%20capital
• Wikipedia. "reinvestment rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/reinvestment%20rate
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
• Wikipedia. "Modified internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Modified_internal_rate_of_return
• Wikipedia. "Payback period." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Payback_period
• Wikipedia. "time value of money." CC BY-SA 3.0 http://en.wikipedia.org/wiki/time%20value%20of%20money
• Wikipedia. "cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/cost%20of%20capital
• Wiktionary. "Opportunity cost." CC BY-SA 3.0 http://en.wiktionary.org/wiki/Opportunity+cost
• Wikipedia. "Internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Internal_rate_of_return
• Wikipedia. "effective interest rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/effective%20interest%20rate
• Wikipedia. "Internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Internal_rate_of_return
• Wikipedia. "Net present value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_present_value
• Wikipedia. "cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/cost%20of%20capital
• Wikipedia. "cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/cost%2520of%2520capital
• Wikipedia. "Payback period." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Payback_period
• Wikipedia. "Modified internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Modified_internal_rate_of_return
• Wiktionary. "Opportunity cost." CC BY-SA 3.0 http://en.wiktionary.org/wiki/Opportunity+cost
• Wikipedia. "time value of money." CC BY-SA 3.0 http://en.wikipedia.org/wiki/time%2520value%2520of%2520money
• Wikipedia. "Payback period." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Payback_period
• Answers.com. "How do you calculate discount payback period." CC BY-SA
http://wiki.answers.com/Q/How_do_you_calculate_discount_payback_period
• Wikipedia. "Weighted average cost of capital." CC BY-SA 3.0
http://en.wikipedia.org/wiki/Weighted%20average%20cost%20of%20capital
• Wikibooks. "Principles of Finance/Section 1/Chapter 2/Time Value of Money/PV and NPV." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_2/Time_Value_of_Money/PV_and_NPV#What_NPV_Me
ans
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
• Wikipedia. "Net present value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_present_value
• Wikispaces. "SU3FINANCE - Chapter 4 - NPV and the Time Value of Money." CC BY-SA
http://su3finance.wikispaces.com/Chapter+4+-+NPV+and+the+Time+Value+of+Money
• Wiktionary. "Opportunity cost." CC BY-SA 3.0 http://en.wiktionary.org/wiki/Opportunity+cost
• Connexions. "What is Project Management?." CC BY 3.0 http://cnx.org/content/m31508/latest/?collection=col11352/latest
• Wiktionary. "Opportunity cost." CC BY-SA 3.0 http://en.wiktionary.org/wiki/Opportunity+cost
• Wiktionary. "sunk cost." CC BY-SA 3.0 http://en.wiktionary.org/wiki/sunk+cost
• Wikipedia. "capital budgeting." CC BY-SA 3.0 http://en.wikipedia.org/wiki/capital%20budgeting
• Wikispaces. "SU3FINANCE - Chapter 4 - NPV and the Time Value of Money." CC BY-SA
http://su3finance.wikispaces.com/Chapter+4+-+NPV+and+the+Time+Value+of+Money
• Wikipedia. "Net present value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_present_value
• Wikibooks. "Principles of Finance/Section 1/Chapter 2/Time Value of Money/PV and NPV." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_2/Time_Value_of_Money/PV_and_NPV#What_NPV_Me
ans
• Wiktionary. "cash flow." CC BY-SA 3.0 http://en.wiktionary.org/wiki/cash+flow
• Wikipedia. "Sunk cost." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Sunk_cost
• Wiktionary. "retrospective." CC BY-SA 3.0 http://en.wiktionary.org/wiki/retrospective
• Wikipedia. "Cash flow." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cash_flow
• Wiktionary. "liquidity." CC BY-SA 3.0 http://en.wiktionary.org/wiki/liquidity
• Wiktionary. "parameter." CC BY-SA 3.0 http://en.wiktionary.org/wiki/parameter
• Wikipedia. "Opportunity cost." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Opportunity_cost
• Wikipedia. "implicit costs." CC BY-SA 3.0 http://en.wikipedia.org/wiki/implicit%20costs
• Wikipedia. "explicit costs." CC BY-SA 3.0 http://en.wikipedia.org/wiki/explicit%20costs
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
• Wikipedia. "Capital budgeting." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capital_budgeting
• Wikipedia. "Modified Internal Rate of Return." CC BY-SA 3.0
http://en.wikipedia.org/wiki/Modified%20Internal%20Rate%20of%20Return
• Wikipedia. "APT." CC BY-SA 3.0 http://en.wikipedia.org/wiki/APT
• Wikipedia. "Profitability index." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Profitability_index
• Wikipedia. "Payback period." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Payback_period
• Wikipedia. "Payback period." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Payback_period
• Wikibooks. "Accountancy/Introduction to Accountancy." CC BY-SA 3.0
http://en.wikibooks.org/wiki/Accountancy/Introduction_to_Accountancy#Overview_of_the_accounting_cycle
• College Cram. "Accounting Cycle Overview | Accounting: Accounting Cycle | College-Cram.com." CC BY http://www.collegecram.com/study/accounting/accounting-cycle/accounting-cycle-overview/
• Wikipedia. "Cash flow." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cash_flow
• Wikipedia. "Default risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Default%20risk
• Wikipedia. "Internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Internal_rate_of_return
• Wikipedia. "Payback period." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Payback_period
• Wikipedia. "Net present value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_present_value
• Wikipedia. "Net present value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_present_value
• Wikipedia. "Accounting rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Accounting_rate_of_return
• Wikipedia. "Profitability index." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Profitability_index
• Wikipedia. "time value of money." CC BY-SA 3.0 http://en.wikipedia.org/wiki/time%20value%20of%20money
• Wikipedia. "discounted cash flow." CC BY-SA 3.0 http://en.wikipedia.org/wiki/discounted%20cash%20flow
• Wikipedia. "Net present value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Net_present_value
Free to share, print, make copies and changes. Get yours at www.boundless.com
Capital Budgeting
• Wikipedia. "Dividend reinvestment plan." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Dividend_reinvestment_plan
• Wikipedia. "Rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Rate_of_return
• Wikipedia. "Internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Internal_rate_of_return
• Wikipedia. "Profitability index." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Profitability_index
• Wikipedia. "Weighted average cost of capital." CC BY-SA 3.0
http://en.wikipedia.org/wiki/Weighted%20average%20cost%20of%20capital
• Wikipedia. "Corporate finance." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Corporate_finance#The_financing_decision
• Wikipedia. "Corporate bond." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Corporate_bond
• Wikipedia. "Asset-based loan." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Asset-based_loan
• Wikipedia. "Promissory note." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Promissory_note
• Wikipedia. "Money market." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Money_market
• Wikipedia. "Capital note." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capital_note#Convertibles
• Wikipedia. "Letter of credit." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Letter_of_credit
• Wikipedia. "Asset-backed commercial paper." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Asset-backed_commercial_paper
• Wikipedia. "Commercial paper." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Commercial_paper
• Wikipedia. "Call option." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Call%20option
• Wikipedia. "accounts receivable." CC BY-SA 3.0 http://en.wikipedia.org/wiki/accounts%20receivable
• Wikipedia. "Swap." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Swap
Free to share, print, make copies and changes. Get yours at www.boundless.com