Chapter 14 Capital Budgeting Decisions Solutions 13th Edition
Chapter 14
Capital Budgeting Decisions
Solutions to Questions
14-1 Capital budgeting screening decisions
concern whether a proposed investment project
passes a preset hurdle, such as a 15% rate of
return. Capital budgeting preference decisions
are concerned with choosing from among two or
more alternative investment projects, each of
which has passed the hurdle.
14-2 The "time value of money" refers to the
fact that a dollar received today is more valuable
than a dollar received in the future. A dollar
received today can be invested to yield more
than a dollar in the future.
14-3 Discounting is the process of computing
the present value of a future cash flow.
Discounting gives recognition to the time value
of money and makes it possible to meaningfully
add together cash flows that occur at different
times.
14-4 Accounting net income is based on
accruals rather than on cash flows. Both the net
present value and internal rate of return
methods focus on cash flows.
14-5 Discounted cash flow methods are
superior to other methods of making capital
budgeting decisions because they give specific
recognition to the time value of money.
14-6 Net present value is the present value of
cash inflows less the present value of the cash
outflows. The net present value can be negative
if the present value of the outflows is greater
than the present value of the inflows.
14-7 One simplifying assumption is that all
cash flows occur at the end of a period. Another
is that all cash flows generated by an investment
project are immediately reinvested at a rate of
return equal to the discount rate.
14-8 No. The cost of capital is not simply the
interest paid on long-term debt. The cost of
capital is a weighted average of the individual
costs of all sources of financing, both debt and
equity.
14-9 The internal rate of return is the rate of
return of an investment project over its life. It is
computed by finding that discount rate that
results in a zero net present value for the
project.
14-10 The cost of capital is a hurdle that must
be cleared before an investment project will be
accepted. In the case of the net present value
method, the cost of capital is used as the
discount rate. If the net present value of the
project is positive, then the project is
acceptable, since its rate of return will be
greater than the cost of capital. In the case of
the internal rate of return method, the cost of
capital is compared to a project's internal rate of
return. If the project's internal rate of return is
greater than the cost of capital, then the project
is acceptable.
14-11 No. As the discount rate increases, the
present value of a given future cash flow
decreases. For example, the factor for a
discount rate of 12% for cash to be received ten
years from now is 0.322, whereas the factor for
a discount rate of 14% over the same period is
0.270. If the cash to be received in ten years is
$10,000, the present value in the first case is
$3,220, but only $2,700 in the second case.
Thus, as the discount rate increases, the present
value of a given future cash flow decreases.
14-12 The internal rate of return is more than
14% since the net present value is positive. The
internal rate of return would be 14% only if the
net present value (evaluated using a 14%
© The McGraw-Hill Companies, Inc., 2008
782 Managerial Accounting, 12th Edition
Chapter 14 Capital Budgeting Decisions Solutions 13th Edition
Source: https://www.studeersnel.nl/nl/document/open-universiteit/psychodiagnostiek-in-de-arbeids-en-organisatiepsychologie/fasitch-14/1715931
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