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Unformatted text preview: CHAPTER 22 DISCUSSION QUESTIONS 1. Capital budgeting is the systematic planning for long-term capital investments. Some examples of decisions that might involve capital budgeting are: a. The decision of whether to purchase new or used assets. b. The decision of whether to repair or to replace assets, such as equipment. c. The decision of choosing between al- ternative investment projects. d. The decision of whether to buy or to lease. e. Other long-term investment decisions. 2. Decisions to invest in assets such as land, buildings, and equipment usually require large outlays of capital. Unless a reasonable return is made on such significant invest- ments, the overall profitability of a firm will suffer dramatically. Long-term investments, by definition, extend over several years. A poor capital budgeting decision will have an adverse effect on a companys earnings for more than just the current period. Other investmentsfor example, in stocks and bondscan usually be terminated by sale through regularly established markets at almost any time. Often, this is not the case for long-term investments in land, buildings, and specialized equipment. Therefore, capit- al budgeting decisions are not easily modi- fied or reversed. 3. The concept that money has value over time is important in accounting and especially in capital budgeting. Like other commodities, money has value because it is a scarce resource. Therefore, an interest payment is generally required for its use. Businesses should seek to use money in the most profit- able way possible. Otherwise, companies are likely to incur high opportunity costs and will not keep pace with inflation. Businesses should therefore consider the time value of money when making capital budgeting de- cisions. 4. Accrual accounting is designed to achieve the proper matching of revenues and ex- penses, as well as to report assets, liabilit- ies, and equities at their proper amounts. As a result, the timing of cash flows is some- what less important. The timing of cash flows usually can be ignored in a short-run accounting cycle, but management pays close attention to cash flows when interest rates are high to ensure the effective use of cash. When long-term cash flows are em- phasized, the time value of money should not be ignored. 5. When discounted cash flow methods are used, depreciation is not considered in the calculations, except indirectly through the tax savings it creates. This is because the discounted cash flow methods consider the full amount of an investment as an outflow initially; therefore, the periodic expensing of the investment through depreciation expense would double-count the cost of the project....
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This note was uploaded on 04/28/2008 for the course ACCT 2301 taught by Professor Conn during the Spring '08 term at St. Edwards.
- Spring '08