AFM102 Chapter Notes - Chapter 13: Discounted Cash Flow, Investment, Current Liability

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viridianleopard866

4 Apr 2017

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM102

Professor

Jie Joyce Tian

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Document Summary

Capital budgeting: the process of planning significant outlays on projects that have long-term implications, such as purchasing new equipment or introducing a new product. Screening decisions: decisions as to whether a proposed investment passes a pre established profitability hurdle. Preference decisions: decisions as to which of several competing acceptable investment proposals is best. Net present value: the difference between the present value of the cash inflows and the present value of the cash inflows and the present value of the cash outflows associated with an investment project. Working capital: the excess of current assets over current liabilities. Weighted-average cost of capital (wacc): the average rate of return companies must pay to long-term creditors and shareholders for the use of their funds. Out-of-pocket costs: actual cash outlays for operating costs. Internal rate of return (irr): the discount rate at which the net present value of an investment project is zero.

Related Questions

Blaine Company is considering four investment proposals, each requiring the same amount of initial cash investment. The excess present value index for each proposal is listed below. Using the index as a selection criterion, identify the index of the most attractive proposal.

a. 90

b. 100

c. 110

d. 115

The primary limitation of the cash payback method is that it

a. Uses before-tax cash flows.

b. Identifies the length of time it will take to recover the investment outlay in cash.

c. Ignores the profitability of one investment project as compared to another.

d. Involves a more sophisticated analysis than the net present value method.

Which of the following is not one of the considerations given to capital budgeting proposals?

Select one:

A. Whether there is an immediate need to replace or repair critical assets

B. Whether the proposal is in compliance with capital budgeting policies

C. Whether the proposal would meet the established minimum return on capital

D. Whether the proposal is congruent with the firm's long-term goals

E. All of the above are considerations given to capital budgeting proposals

Capital Budgeting
Glacier Creek Textiles is planning to purchase new manufacturing equipment. The equipment has an acquisition cost of $100,000, an estimated useful life of five years and no residual value. The company uses a 12% rate of return to evaluate capital projects. The cash flows for the five years:

Year	Net Cash Outflows	Net Cash Inflows
Year	Amount invested	Net Cash Inflows
0	($100,000)
1		25,000
2		29,000
3		26,000
4		28,000
5		35,000


Requirements
1. Compute the accounting rate of return.
2. Compute the net present value of the investment using Excel's PV function.
3. Compute the net present value of the investment using Excel's NPV function.
4. Compute the profitability index, rounded to two decimal places.
5. Compute the internal rate of return of the investment using Excel's IRR function. Display to two decimal places, but do not round.

Excel Skills
1. Function PV
2. Function NPV
3. Function IRR

	Evaluate Glacier Creek Textiles' new manufacturing equipment.

	Data
	Annual discount Rate	0.12
	Cash Flow Year 0 (Cost)	(100,000)
	Cash Flow Year 1	25,000
	Cash Flow Year 2	29,000
	Cash Flow Year 3	26,000
	Cash Flow Year 4	28,000
	Cash Flow Year 5	35,000
	Useful Life in years	5
	Residual value	0



Requirement 1	Compute the Accounting Rate of Return

	Average annual operating income	Average amount invested	Accounting Rate of Return - ARR
	xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx	xxxxxxxxxxxxxx	xxxxxxxxxxxxxxxxx



Requirement 2	Compute the net present value of the investment using Excel's PV function.

	Period	Cash Flows
	1	(22,321)	Note: The first period is shown as an example.
	2	xxxxxxxx
	3	xxxxxxxx
	4	xxxxxxxx
	5	xxxxxxxx
	Present value of net cash flows	xxxxxxxx	Note: PV calculates the present value as a negative amount.
	Cost of Asset	xxxxxxxx
	Net Present Value	xxxxxxxx



Requirement 3	Compute the net present value of the investment using Excel's NPV function


	Present value of net cash flows	xxxxxxxxxx
	Cost of asset	xxxxxxxxxx
	Net Present Value	xxxxxxxxxx


Requirement 4	Compute the profitability index, rounded to two decimal places.

	Profitability index	xxxxxxxxxx


Requirement 5	Compute the internal rate of return of the investment using Excel's IRR function.
	Display to two decimal places, but do not round.

	IRR	xxxxxxxxx	Note: IRR requires a negative amount for the investment.

Places with xxxxx's are what needs to be filled in, and it's for excel so if I could see the references to which numbers and the formula used that would be helpful. Thank you!!

tanimpala296

1. Which of the following would be included among the investment numbers of a capital budget?

A. Purchase price of the asset

B. Trade- in value of an asset being replaced

C. Investment tax credit from acquistion

D. Installation costs of the machinery

E. All of the above

2. A valuation determines whether a merger should occur; legalities determine what form the business combination should be.

A. True

B. False

3. A FRICTO analysis enables prudent mangers to assess important issues in asset financing

A. True

B. False

4. Timing issues involve:

A. The costs of the alternative forms of capital

B. Sequencing the alternatives, once funding amouts are known

C. None of the above

D. A & B

5. The present value of a cash flow allows an investor to assess:

A. The present value of a future cash flow

B. The value of a stream of cash flows in terms of the best and most certain alternative

C. What equivalent present payment would be equally acceptable in lieu of the investment consideration

D. A & B

E. A, B, & C

6. Hypothesis that are formed during the qualitative analysis cannot be verfied when the analyst reviews the firm's historical performance.

A. True

B. False

7. If a company consistently uses hurdle rates that are higher than its marginal cost of capital, then:

A. It will certainly increase its earnings

B. It may have fewer and fewer investment activities

C. The risk of the firm will decrease

D. A & C

E. B & C

8. If mangers have discovered an actractive investment but financing opportunities are not good as they have been, they should probaly not delay the acqusition since financing and investment decisions should not be mixed.

A. True

B. False

9. The ratio which many observers use to quantify the stock maerkt's opinion of a firm is the:

A. ROE

B. EPS

C. D/E

D. E/A

E. None of the above

10. In a staple predictable industry an average of the previous 10 year's sales growth figures probably a less accurate forcast than assuming the avg. level of sales next year as in the current year.

A. True

B. False

11. The utility of sensitivity analysis is great in merger valuations as it is in capital budgeting.

A. True

B. False

12. Present value calcualtions allows mergers to:

A. Choose assets which creaste the most value even if their cash flows are times differently

B. Express present values in terms of future cash flows

C. Create value for the firm

D. A & C

E. A,B, & C

13. FRITCTO analysis does not print our poor investments.

A. True

B. False

orangeeagle209

AFM102 Chapter Notes - Chapter 13: Discounted Cash Flow, Investment, Current Liability

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