A306 Capital Bugeting Methods

budgeting; investments

Capital _______ refers to the process of evaluating and making decisions about ________ in major capital assets

capital; operations

Cost of _______ refers to the cost of financing a company’s _______

Payback; original

_______ period is the amount of time it will take for a capital investment to earn back the cost of the _______ investment

value; end

payback period does not incorporate the time _____ of money; does not incorporate any cash flows that occur after the ___ of the payback period

Initial; cash

Payback period (constant cash flows) = ______ investment / Annual net ___ flows

future

Net present value (NPV) is the present value of ______ cash flows from a capital investment (including the cash outflows from the initial investment)

• Can be used to compare capital investment projects

compare

with NPV you _____ the present value of cash inflows and cash outflows to determine the net present value

Internal; zero; greater than or equal to

______ rate of return (IRR) The rate of return that will yield a ____ NPV

• If the IRR is _______ ____ __ _____ __ the required rate of return, the NPV will be positive, indicating that the project is acceptable

ratio; benefit

Profitability index (PI) is the _____ of the present value of future cash flows to the initial investment (indicates how much ______ is generated for each dollar of initial investment)

positive

A profitability index higher than 1 indicates that a project has a ______ NPV

cash; Initial

Profitability index = PV of net _____ flows / ____ investment