Chapter20Solutions-Hansen6e - CHAPTER 20 CAPITAL INVESTMENT...

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CHAPTER 20 CAPITAL INVESTMENT QUESTIONS FOR WRITING AND DISCUSSION 1. Independent projects are such that the acceptance of one does not preclude the ac- ceptance of another. With mutually exclus- ive projects, however, acceptance of one precludes the acceptance of others. 2. The timing and quantity of cash flows de- termine the present value of a project. The present value is critical for assessing wheth- er or not a project is acceptable. 3. By ignoring the time value of money, good projects can be rejected and bad projects accepted. 4. The payback period is the time required to recover the initial investment. It is used for three reasons: (a) A measure of risk . Roughly, projects with shorter paybacks are less risky. (b) Obsolescence . If the risk of obsolescence is high, firms will want to re- cover funds quickly. (c) Self-interest . Man- agers want quick paybacks so that short-run performance measures are affected posit- ively, enhancing chances for bonuses and promotion. 5. The accounting rate of return is the average income divided by investment. 6. The cost of capital is the cost of investment funds and is usually viewed as the weighted average of the costs of funds from all sources. In capital budgeting, the cost of capital is the rate used to discount future cash flows. 7. Disagree. Only if the funds received each period from the investment are reinvested to earn the IRR will the IRR be the actual rate of return. 8. If NPV 0, then the investment is accept- able. If NPV < 0, then the investment should be rejected. 9. NPV signals which investment maximizes firm value; IRR may provide misleading sig- nals. IRR may be popular because it provides the correct signal most of the time, and managers are accustomed to working with rates of return. 10. NPV analysis is only as good as the accur- acy of the cash flows. If cash flows are not accurate, then incorrect investment de- cisions can be made. 11. Gains and losses on the sale of existing as- sets should be considered. 12. MACRS provides higher depreciation (a noncash expense) in earlier years than straight-line does. Depreciation expense provides a cash inflow from the tax savings it produces. As a consequence, the present value of the shielding benefit is greater for MACRS. 13. Intangible and indirect benefits are import- ant factors—more important in the avanced manufacturing and P2 environments. Great- er quality, more reliability, reduced lead times, improved delivery, and the ability to maintain or increase market share are ex- amples of intangible benefits. Reduction in support labor in such areas as scheduling and stores are indirect benefits. 14. A postaudit is a follow-up analysis of an in- vestment decision. It compares the projec- ted costs and benefits with the actual costs and benefits. It is especially valuable for ad- vanced technology investments since it re- veals intangible and indirect benefits that can be considered in similar investments in the future. 15.
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This note was uploaded on 09/15/2009 for the course ACCT 305 taught by Professor Zhou during the Spring '09 term at Binghamton.

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Chapter20Solutions-Hansen6e - CHAPTER 20 CAPITAL INVESTMENT...

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