ECONOMICS

COST ACCOUNTING

CAPITAL BUDGETING

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Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]

When using one of the discounted cash flow methods to evaluate the desirability of a capital budgeting project, which of the following factors is generally not important?

A	method of financing the project under consideration
B	timing of cash flows relating to the project
C	impact of the project on income taxes to be paid
D	amounts of cash flows relating to the project

Explanation:

Detailed explanation-1: -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-2: -One example of a non-discount method is the payback method, since it does not consider the time value of money. The payback method simply computes the number of years it will take for an investment to return cash that is equal to the amount invested.

Detailed explanation-3: -The DCF method is superior to the ROI method for analyzing capital investment decisions because it incorporates the time value of money. 5 The DCF method estimates the value of an investment’s projected future cash flows as if the cash flows were available today.

Detailed explanation-4: -When discounted cash flow methods of capital budgeting are used, the working capital required for a project is ordinarily counted as a cash outflow at the beginning of the project and as a cash inflow at the end of the project. 4. Discounted cash flow techniques automatically provide for recovery of initial investment.

There is 1 question to complete.