COST ACCOUNTING
CAPITAL BUDGETING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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resultant amount is the maximum that should be paid for the asset.
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discount rate used is not the proper required rate of return for this company
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investment is the best alternative.
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return on the investment exceeds the company’s required rate of return.
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Detailed explanation-1: -If the algebraic sum of the present values of all cash flows related to a proposed capital expenditure discounted at the company’s required rate of return is positive, it indicates that the. resultant amount is the maximum that should be paid for the asset.
Detailed explanation-2: -A manager must gather information to forecast cash flows for each project in order to determine its expected profitability. This is because the decision to accept or reject a capital investment is based on such an investment’s future expected cash flows.
Detailed explanation-3: -Internal Rate of Return method computes the discount rate at which the difference between the present value of an investment project’s future net cash flows and net initial cash outflows is 0, i.e., the IRR is the discount rate that sets the NPV to 0.
Detailed explanation-4: -The Net Present Value (NPV) method involves discounting a stream of future cash ows back to present value. The cash ows can be either positive (cash received) or negative (cash paid). The present value of the initial investment is its full face value because the investment is made at the beginning of the time period.
Detailed explanation-5: -The Internal rate of return is also among the top techniques that are used to determine whether the firm should take up the investment or not. It is used together with NPV to determine the profitability of the project. IRR is the discount rate when all the NPV of all the cash flows is equal to zero.