Capital Budgeting Concepts Chapter 15

identifying, analyzing

True (A)

<p>Whether it provides a return equal to or greater than that required by investors.</p> Signup and view all the answers

<p>Capital Budgeting = The process of identifying, analyzing, and selecting investment projects whose returns are expected to extend beyond one year. Working Capital = Current assets and their supporting financing. Required Rate of Return = The minimum return that investors expect to receive on an investment to compensate for the risk they undertake. Business Risk = The uncertainty associated with a company's future earnings and profitability.</p> Signup and view all the answers

<p>operating, or business-risk, complexion</p> Signup and view all the answers

<p>True (A)</p> Signup and view all the answers

<p>The assumption that the required return is given and is the same for all investment projects.</p> Signup and view all the answers

<p>Negotiating with suppliers for project materials (D)</p> Signup and view all the answers

<p>True (A)</p> Signup and view all the answers

<p>Marketing department</p> Signup and view all the answers

<p>reevaluating</p> Signup and view all the answers

<p>New products or expansion of existing products = Marketing department Replacement of equipment or buildings = Production area Research and development = Research and development department Exploration = Exploration team Other (for example, safety-related or pollution-control devices) = Various departments</p> Signup and view all the answers

<p>True (A)</p> Signup and view all the answers

<p>Marketing Department (D)</p> Signup and view all the answers

<p>cost</p> Signup and view all the answers

<p>Cash flows directly represent the actual money coming into and out of the firm, while income flows can be affected by accounting adjustments and may not accurately reflect the real economic impact of a project.</p> Signup and view all the answers

<p>Section Chiefs = Initial review and evaluation of proposals within their area Plant Managers = Approval of moderate-sized projects Capital Expenditures Committee = Final review and approval of major capital expenditures Board of Directors = Ultimate approval of significant investments</p> Signup and view all the answers

<p>Increasing shareholder wealth (D)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>Opening a chain of high-end gourmet restaurants. Their corporate strategy is focused on fast food, and this project would be a significant departure from their established brand and customer base.</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>loss</p> Signup and view all the answers

<p>To compensate for the tax benefits received from accelerated depreciation in earlier years. (B)</p> Signup and view all the answers

<p>Depreciable basis refers to the original cost of the asset, including any expenses incurred to put it into service, minus any accumulated depreciation.</p> Signup and view all the answers

<p>The asset's original purchase price. (D)</p> Signup and view all the answers

<p>Depreciable Basis = The original cost of an asset, including any capital expenditures, minus accumulated depreciation. Recapture of Depreciation = The tax on the profit realized from selling a depreciable asset for more than its book value. Capital Gains Tax Rate = The tax rate applied to profits earned from selling assets that are not considered ordinary income. Tax Shield Savings = The reduction in taxes due to deductible expenses, such as the loss on the sale of a depreciable asset. Ordinary Income Tax Rate = The primary tax rate applied to a company's regular business income.</p> Signup and view all the answers

<p>True (A)</p> Signup and view all the answers

<p>Tax shield savings represent the reduction in taxes that a company realizes due to the deductible expense of the loss. This benefits them by lowering their overall tax liability.</p> Signup and view all the answers

<p>Initial cash outflow, Interim incremental net cash flows, Terminal-year incremental net cash flow (A)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>To assess the ongoing financial benefits generated by a project after the initial investment.</p> Signup and view all the answers

<p>terminal-year incremental net cash flow</p> Signup and view all the answers

<p>Initial Cash Outflow = Installation costs, changes in net working capital, sale proceeds from asset disposition, tax adjustments Interim Incremental Net Cash Flows = Revenue generated, expenses incurred Terminal-year Incremental Net Cash Flow = Sale proceeds from assets, tax adjustments on asset disposal, recovery of working capital</p> Signup and view all the answers

<p>True (A)</p> Signup and view all the answers

<p>Tax adjustments are crucial because they directly impact the net cash flows received by the firm.</p> Signup and view all the answers

<p>Depreciation expense (B)</p> Signup and view all the answers

<p>$1,837 (B)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>$32,219</p> Signup and view all the answers

<p>$(4,920)</p> Signup and view all the answers

<p>$16,500 (C)</p> Signup and view all the answers

<p>Incremental cash flow before windup = $22,319 Final salvage value = $16,500 Taxes due to sale = $(6,600) Terminal-year incremental cash flow = $32,219</p> Signup and view all the answers

<p>$14,810</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

The process of identifying, analyzing, and selecting long-term investment projects.

Assets that provide economic benefits for more than one year, such as equipment and buildings.

A business case for a capital investment expected to yield future financial benefits.

The minimum profit that an investment project must earn to satisfy investors.

Immediate cash payment required to initiate a capital investment.

Anticipated profits or advantages that result from a capital investment.

The perception of risk associated with the firm’s operations and investment choices.

Assessing whether an investment provides an adequate return relative to risk.

The process of evaluating and selecting investment projects based on their cash flows and strategic objectives.

Formal summaries that outline potential projects to invest in, aligned with strategic goals.

Calculating the after-tax cash flows that an investment project is expected to generate.

The process of analyzing the cash inflows and outflows of investment projects to assess viability.

The standard used to select investment projects that will create the most value for the firm.

Five categories of projects: new products, equipment replacement, R&D, exploration, and others.

Continual assessment of implemented projects and performing postaudits on completed investments.

Different departments like marketing or production generate investment proposals based on needs.

The sale of an asset that has a depreciated value from business use.

When sold for more than its depreciated book value, the excess is taxed as income.

Original cost of an asset minus accumulated depreciation.

Tax rate applied to the profit from selling an asset greater than depreciable basis.

Standard tax rate applied to regular income, including recaptured depreciation.

Tax reduction from losses that can offset taxable income.

When the sale price is less than the tax book value, resulting in a deductible loss.

The rate of tax applied to the last dollar earned, here assumed at 40%.

Cash flows specifically tied to a project, reflecting its financial impacts.

The upfront net cash investment needed to start a project.

Net cash flows occurring after the initial investment, before the final period.

Cash flow generated in the final year of the project, often including special transactions.

Includes costs like asset purchase, installation, and changes in working capital.

Adjustments in current assets and liabilities needed for the project.

A framework for identifying relevant cash flows for a project.

Special cash flows that occur when terminating a project, usually significant.

Investment proposals should match the overall goals of the company to avoid conflicts.

Investment proposals undergo several approvals based on their value or complexity.

The method by which firms evaluate potential investment proposals before approval.

The amount of capital invested affects how many approval layers are necessary.

Projects must be evaluated based on expected future cash flows, not accounting profits.

The cash expected to be returned after an investment is made, crucial for decision-making.

Companies are developing more advanced methods for evaluating capital investments.

Only cash can be reinvested in the firm or distributed as dividends to shareholders.

The difference in revenue generated from operations, excluding depreciation and taxes, over a period.

Deductions allowed by tax authorities for the depreciation of an asset over time, reducing taxable income.

The profit remaining after operating expenses are deducted from revenues, before any taxes are considered.

Cash flow generated in the final year of a project, including salvage values and tax implications.

The estimated resale value of an asset at the end of its useful life.

The income left after deducting taxes from income before tax, reflecting actual earnings available.

Expenses associated with selling or disposing of an asset at the project's end, including taxes owed on sale.