Ch 14 Capital Budgeting Decision

Front 1

What is the term "capital budgeting" used to describe?

Back 1

Capital Budgeting is used to describe how managers plan significant investments in projects that have long-term implications such as the purchase of new equipment or the introduction of new products.

Front 2

Which two broad categories does Capital budgeting fall under?

Back 2

Screening decisions and preference decisions.

Front 3

What are screening decisions?

Back 3

These decisions relate to whether a proposed project is acceptable; the required rate of return is the minimum rate of return a project must yield to be acceptable.

Front 4

What are preference decisions?

Back 4

These decisions relate to selecting from several acceptable alternatives.

Front 5

Why is it important to recognize the time value of money when evaluating investment proposals?

Back 5

Because capital investments usually earn returns that extend over long periods of time.

Front 6

What are the two approaches to making capital budgeting decisions that use discounted cash flows?

Back 6

1) internal rate of return method
2) net present value method

Front 7

What is the difference between the present value of a project's cash inflows and the present value of a project's cash outflows?

Back 7

It is the net present value.

Front 8

If the net present value is positive, then the project is...

Back 8

Acceptable because it promises a return greater than the required rate of return.

Front 9

If the net present value is zero, then the project is...

Back 9

Acceptable because it promises a return equal to the required rate of return.

Front 10

If the net present value is negative, then the project is...

Back 10

Not acceptable because it promises a return less than the required rate of return.