30 Questions
What is the purpose of step 3 in the cost estimation process?
To collect consistent and accurate data
What is the primary advantage of the high-low method?
It requires the study of a graph of the data
What does the slope of the line (b) represent in the high-low equation?
The unit variable cost
What is a disadvantage of the high-low method?
It relies on only two points, and the selection of those two points requires judgment
What is the purpose of step 6 in the cost estimation process?
To assess the accuracy of the cost estimate
What is the measure of the accuracy of the estimation method?
Mean absolute percentage error
What is a limitation of the Sales Value at Split-off method?
Market prices for some industries change constantly.
What is a characteristic of independent projects?
Their cash flows are not affected by the cash flows of other projects.
What is the purpose of capital budgeting?
To identify, evaluate, select, and control capital investments.
What is the net realizable value (NRV) of a product?
The product’s estimated sales value at the split-off point.
What is a characteristic of the Net Realizable Value (NRV) method?
It can be used when joint products cannot be sold at the split-off point.
What is a capital investment?
A project that involves a large expenditure of funds and expected future benefits over a number of years.
What is the term used to describe the situation where the acceptance of one investment alternative precludes the acceptance of one or more other alternatives?
Mutually exclusive projects
What is the primary purpose of using the weighted-average cost of capital (WACC) in capital budgeting?
To determine the discount rate for a project
What is the result of a capital budgeting decision if the net present value (NPV) of a project is greater than zero?
The project is accepted
What is the difference between discounted cash flow (DCF) and non-discounted cash flow (non-D CF) decision models?
DCF incorporates the present value of future cash flows, while non-D CF does not
What is the term used to describe the rate used in capital budgeting for converting future cash flows to a present-value basis?
Discount rate
What is net working capital in the context of capital budgeting?
Current assets minus current liabilities
What does the Internal Rate of Return (IRR) represent?
The rate of return that results in a NPV of zero
What should happen if IRR > WACC?
The proposed project should be accepted
What does the Modified Internal Rate of Return (MIRR) assume?
All positive interim cash flows are reinvested at the WACC
What is the formula for calculating the payback period when cash inflows are equal?
Net initial investment ÷ Annual after-tax cash inflows
What is a strength of the Payback Decision Model?
It is easy to understand
What does a longer payback period indicate?
A higher perceived risk
What is a limitation of the model that does not consider returns over the entire life of the investment?
It fails to consider the time value of money.
Which model takes into consideration the time value of money?
Discounted Payback Model
What is a weakness of the Accounting (Book) Rate of Return (ARR) method?
It does not adjust for the time value of money.
What happens if the discounted payback period is less than the life of the project?
The project will have a positive NPV.
What is a disadvantage of the Discounted Payback Model?
It ignores returns beyond the payback period.
What is a strength of the Discounted Payback Model?
Takes into consideration the time value of money.
Learn about the 6 steps involved in the cost estimation process, including defining the cost object, determining cost drivers, collecting accurate data, and more.
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