The payback period has the following weaknesses as decision criterion for capital projects: Uses accounting income instead of cash flows Ignores cash flows beyond the payback period Does not take into account the time value of money yes yes yes no yes yes yes yes no yes no no

The payback period has the following weaknesses as decision criterion for capital projects: Uses accounting income instead of cash flows Ignores cash flows beyond the payback period Does not take into account the time value of money yes yes yes no yes yes yes yes no yes no no

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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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

The payback period has the following weaknesses as decision criterion for capital projects:

Uses accounting income instead of cash flows	Ignores cash flows beyond the payback period	Does not take into account the time value of money
yes	yes	yes
no	yes	yes
yes	yes	no
yes	no	no

Definition Definition Net amount of cash that an entity receives and expends over the course of a given period. For a business to continue operating, positive cash flows are required, and they are also necessary to produce value for investors. Investors in particular prefer to see growing cash flows even after capital expenditures have been paid for (which is known as free cash flow).

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Multiple choice: 1. Too large an investment in fixed capital may leave too little money for A. Working capital B. Settlements C. Compliance D. Requirements 2. Circulating capital A. Cash on hand B. Working capital C. Net balances D. Cash disbursement
Capital Budgeting decisions involve commitment of Select one: a. dividend payment b. only working Capital c. None of the option d. small sums of money e. capital not required
Difficulties arise with the use of IRR for investment appraisal where: There is more than one sign change in the pattern of cashflows over a project’s life. The investment is mutually exclusive. There is a borrowing opportunity All of the above
22)
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.
e) How does the basic net present value model of capital budgeting deal with the problem of project risk? What are the shortcoming of this approach
CHOICES A. Only Statement I is correctB. Only Statement II is falseC. Statements II and III are falseD. Only Statement III is falseE. All statements are correct
QUESTION #1: Which of the following is a disadvantage of using the IRR method of capital budgeting over other types: A- IRR does not consider the time and value of money. B- IRR assumes reinvestment of project cash flows at the same rate as the IRR C- IRR ignores the prudent simplicity of paybacks D- None of the above QUESTION #2: The net present value (NPV) of an investment is___________. A- The present value of all benefits (cash inflows) B- The present value of all costs (cash outflows) of the project C- The present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project D- The present value of all benefits (cash outflows) minus the present value of all costs (cash inflows) of the project
be appropriate? Explain. 8.4 Average Accounting Return Concerning AAR: LO 2 Describe how the average accounting return is usually calculated and describe the information this measure provides about a sequence of cash flows. What is the AAR criterion decision rule? a. b. What are the problems associated with using the AAR as a means of evaluating a project's cash flows? What underlying feature of AAR is most troubling to you from a financial perspective? Does the AAR have any redeeming qualities?
investments we make today generate cash flows at different time intervals in the future.This makes the evaluation process complicated.How do you address this issue when ivaluating investment projects
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
How can I explain these?