1. Concepts used in cash flow estimation and risk analysis You can come across different situations in your life where the concepts from capital budgeting will help you in evaluating the situation and making calculated decisions. Consider the following situation: The following table contains five definitions or concepts. Identify the term that best corresponds to the concept or definition given. Concept or Definition An example of externality that can have a negative effect on a firm i The cash flow at the end of the life of the project The risk of a project without factoring in the impact of diversification A risk analysis technique that measures changes in the internal rate of return (IRR) and net present value (NPV) as individual variables are changed i Term

1. Concepts used in cash flow estimation and risk analysis You can come across different situations in your life where the concepts from capital budgeting will help you in evaluating the situation and making calculated decisions. Consider the following situation: The following table contains five definitions or concepts. Identify the term that best corresponds to the concept or definition given. Concept or Definition An example of externality that can have a negative effect on a firm i The cash flow at the end of the life of the project The risk of a project without factoring in the impact of diversification A risk analysis technique that measures changes in the internal rate of return (IRR) and net present value (NPV) as individual variables are changed i Term

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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In calculating the incremental after-tax cash flows associated with a particular investment, the firm must consider many types of cash flows. Select all the incremental cash flow types below that the firm would not incorporate directly into their incremental after-tax cash flow estimates. A) revenues B) operating costs C) sunk costs D) net working captial E) opportunity costs F) financing costs
Which of the following best describes the process of capital budgeting? a Forecasting revenues and expenses hmiting funds for capital improvements without considering the profitability of proposed prot determining a companys short term goals d. determinung the amount to spend on fixed assets and which fixed assets to purchase
4. In time value of money, we use five categories of information, viz., present value, future value, discount rate, number of compounding periods and interim payments. In particular, the choice of the right discount rates is a challenge as it represents a combination of risk factors, such as business; inflation; environmental; social and political risks. Your company is planning an investment project in commercial forestry. Prepare a briefing note appraising the top management on the potential risks in evaluating a project in commercial forestry and how will this impact the project decisions.
Which of the following statements is FALSE? A. When evaluating a capital budgeting decision, we generally include interest expense. B. Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project. C. Many projects use a resource that the company already owns. O D. As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.
True or False: In solving a capital budgeting problem involving investment opportunities that are divisible (i.e., you can invest in portions of the opportunities instead of “all or nothing”), you rank the opportunities on thebasis of internal rate of return and add to the portfolio opportunities andfractions of opportunities, beginning with the largest internal rate of return,until “the investment bucket is filled.”
Should interest expenses and dividend be included as an incremental cash flow in capital budgeting analysis? Please explain.
SECTION B Answer all the questions below:. B1) Do you think capital budgeting is important? Justify? B2) List all the techniques of Capital Budgeting? You think are relevant today? B3) Do you think that these techniques are really helpful to financial managers? B4) Do you think that these techniques can be used in situations like COVID-19? B5) According to you which technique is better and why?
Incremental cash flows: a. refer to only cash flows which occur at the end of a project b. are cash flows which change if you proceed with the project c. refer to only cash flows which occur at the start of a project d. are never included in capital budgeting analysis e. refer to the existing cash flows of the business
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2. Match each of the following terms with the appropriate definition. The time expected to recover the cash initially invested in a project. A minimum acceptable rate of return on a potential investment. 1. Discounting A return on investment which results in a zero net present value. 2. Net Present Value A comparison of the cost of 3. Capital Budgeting an investment to its projected cash flows at a single point in time. 4. Accounting Rate of Return 5. Net Cash Flow A capital budgeting method focused on the rate of return on a project's average investment. 6. Internal Rate of Return 7. Payback Period The process of restating future cash flows in terms 8. Hurdle Rate of present time value. Cash inflows minus cash outflows for the period. A process of analyzing alternative long-term investments. >
1. Define and identify the components of: a. Operating cycle b. Cash conversion cycle 2. What is the impact of longer cash conversion cycles on a firm's working capital needs? 3. Explain the profitability-risk trade-off of alternative levels of working capital balances..