Chapter 12

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Chapter 12

Discussion Questions

|12-1. |What are the important administrative considerations in the capital budgeting process? | | | | | |Important administrative considerations relate to: the search for and discovery of investment opportunities, the | | |collection of data, the evaluation of projects, and the reevaluation of prior decisions. | | | | |12-2. |Why does capital budgeting rely on analysis of cash flows rather than on net income? | | | | | |Cash flow rather than net income is used in capital budgeting analysis because the primary concern is with the amount| | |of actual dollars generated. For example, depreciation is subtracted out in arriving at net income, but this non-cash| | |deduction should be added back in to determine cash flow or actual dollars generated. | | | | |12-3. |What are the weaknesses of the payback method? | | | | | |The weaknesses of the payback method are: | | |There is no consideration of inflows after payback is reached. | | |The concept fails to consider the time value of money. | | | | |12-4. |What is normally used as the discount rate in the net present value method? | | | | | |The cost of capital as determined in Chapter 11. | | | | |12-5. |What does the term mutually exclusive investments mean? | | | | | |The selection of one investment precludes the selection of other alternative investments because the investments | | |compete with one another. For example if a company is going to build one new plant and is considering 5 cities, one | | |city will win and the others will lose. | | | | |12-6. |How does the modified internal rate of return include concepts from both the traditional internal rate of return and | |...
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