ACCT 2302 Chapter 11 Smart Book PDF

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ACCT 2302 CHAPTER 11 SMARTBOOK A company’s net operating income for the year is $118,000. Depreciation expense for the year equals $23,000. The company’s net cash inflow for the year is __________. $141,000 A project’s payback period is the __________. LENGTH OF TIME IT TAKES FOR THE PROJECT TO RECOVER ITS INITIAL COST FROM THE NET CASH INFLOWS GENERATED A screening decision __________. IS USED TO DETERMINE IF A PROJECT IS A CANDIDATE FOR FURTHER CONSIDERATION; RELATES TO WHETHER A PROPOSED PROJECT MEETS SOME MINIMUM CRITERIA A tool to help managers make decisions about investments in major assets such as new facilities, equipment, and products is called (CAPITAL BUDGETING) Capital budgeting decisions include __________. DETERMINING WHICH EQUIPMENT TO PURCHASE AMONG AVAILABLE ALTERNATIVES; ACQUIRING A NEW FACILITY TO INCREASE CAPACITY; PURCHASING NEW EQUIPMENT TO REDUCE COST; DECIDING TO REPLACE OLD EQUIPMENT; CHOOSING TO LEASE OR BUY NEW EQUIPMENT Capital investment methods that ignore the time value of money are referred to as (NON-DISCOUNTING) methods. Deciding whether to purchase or lease a vehicle is an example of a(n) __________ project decision. MUTUALLY EXCLUSIVE Deciding whether to purchase or lease a vehicle is an example of a(n) __________ project decision. MUTUALLY EXCLUSIVE Farm Central is considering the purchase of a larger combine to increase productivity. Combine A costs $210,000 and has a useful life of 10 years. The combine will reduce labor costs by $25,000 per year. The payback period of the combine is __________ years. 8.4 How much net income a potential project is expected to generate as a relative percentage of required investment is told by the (ACCOUNTING RATE) of return. How much net income a potential project is expected to generate as a relative percentage of required investment is told by the (ACCOUNTING RATE) of return.

Major limitations of the accounting rate of return method for evaluating capital investment proposals include that it __________. IGNORES THE TIME VALUE OF MONEY; IS BASED ON NET INCOME INSTEAD OF NET CASH FLOWS Managers are required to evaluate and compare more than one capital investment alternative when making a(n) (PREFERENCE) decision. Narrowing down a set of projects for further consideration is a(n) (SCREENING) decision. Net cash flow differs from net income because of __________. ACCRUALBASED ACCOUNTING Non-discounting methods of evaluating capital investments are __________. ACCOUNTING RATE OF RETURN; PAYBACK Poppy's Gumball Co. is planning to invest in a new marketing campaign that would require an initial investment of $85,000. The project is expected to generate net income of $27,200. The accounting rate of return on the project is __________. 32% Sandy's Soda Co. is planning an investment in new cooling equipment that would cost $56,000. The new equipment would save on operating costs over the next 5 years as follows: $21,500 in year 1; $23,100 in year 2; $19,000 in year 3; $13,900 in year 4; and $15,200 in year 5. The payback period for the cooling equipment is __________ years. 2.6 Shortcomings of the payback period include it __________. IGNORES CASH FLOWS THAT OCCUR AFTER THE PAYBACK PERIOD; DOES NOT CONSIDER THE TIME VALUE OF MONEY Some of the cash flows received over the life of a project are generally ignored when using the (PAYBACK) method. Spicer Dentistry is considering the purchase of a new x-ray machine. The machine costs $2,400 and has a useful life of 10 years. The new machine is expected to reduce operating costs by $400 per year. The payback period for the x-ray machine is (6) years. Synonyms for the accounting rate of return are the __________ rate of return and the __________ rate of return. SIMPLE; UNADJUSTED The accounting rate of return equals __________. NET INCOME / INITIAL INVESTMENT

The basic premise of the payback method is __________. PROJECTS WITH SHORTER PAYBACK PERIODS ARE SAFER INVESTMENTS THAN PROJECTS WITH LONGER PAYBACK PERIODS The hurdle rate is the __________ rate of return on an investment. MINIMUM ACCEPTABLE The minimum required rate of return is also known as the (HURDLE) rate. The principle that money is more valuable today than it will be in the future is referred to as the (TIME VALUE OF MONEY) The time that it takes for a project to recoup its original investment is the (PAYBACK) period. The two types of capital investment decisions are __________ and __________ decisions. PREFERENCE AND SCREENING The two types of investment decisions are (SCREENING) decisions and (PREFERENCE) decisions. Tilly's Travels purchased a new tour bus at a cost of $320,000. The bus is expected to increase cash inflows over the next 5 years as follows: $98,000 in year 1; $87,500 in year 2; $74,500 in year 3; $60,000 in year 4; and $59,000 in year 5. The payback period for the new bus is (4) years. To convert net income to net cash flow, add back (DEPRECIATION) expense. True or false: An advantage of the accounting rate of return (ARR) is that is uses net income to evaluate capital investments. FALSE True or false: For capital budgeting purposes, capital assets includes item research and development projects. TRUE True or false: Preference decisions are made to prioritize and select from capital budgeting alternatives. TRUE True or false: When two projects are mutually exclusive, investing in one does not eliminate the other one from consideration. FALSE Typical budgeting decisions include __________. LEASE OR BUY DECISIONS; EQUIPMENT SELECTION DECISIONS; RESEARCH AND DEVELOPMENT PROJECTS Unlike other capital budgeting methods, the accounting rate of return method focuses on __________, rather than __________. NET OPERATING INCOME; CASH FLOWS

When making a budgeting decision, it is most useful to calculate the payback period __________. AS PART OF THE SCREENING PROCESS When making a capital budgeting decision, it is most useful to calculate the payback period __________. AS PART OF THE SCREENING PROCESS When projects are (INDEPENDENT) or unrelated to one another, each project can be evaluated on its own merit. When two projects are __________, investing in one of the projects does not preclude investing in the other. INDEPENDENT Which of the following statements are true? THE TIME VALUE OF MONEY SHOULD BE CONSIDERED IN CAPITAL BUDGETING DECISIONS; MONEY IS MORE VALUABLE TODAY THAN IT WILL BE IN THE FUTURE...