126 the identify the problem stage of capital

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126) The 'identify the problem' stage of capital budgeting gathers information from all parts of the value chain to evaluate alternative projects. 126) Answer: True False Explanation: This is the definition of the 'collect relevant information stage.' 127) Managers using discounted cash flow methods to make capital budgeting decisions make the same decisions that they would make if they used the accrual accounting rate - of - return methods. 127) Answer: True False Explanation: Managers using discounted cash flow methods to make capital budgeting decisions may make different decisions than they would make if they used the accrual accounting rate - of - return method. 128) Internal rate - of - return is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time. 128) Answer: True False Explanation: The internal rate - of - return calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows. 129) The four categories of cash flow for an investment project are: (1) net initial investment; (2) net income; (3) after tax cash flow from operations; and (4) after tax cash flow from terminal disposal of an asset. 129) Answer: True False Explanation: The three categories of cash flow for an investment project are: (1) net initial investment; (2) after tax cash flow from operations; and (3) after tax cash flow from terminal disposal of an asset. 130) The accrual accounting rate of return is the method of capital budgeting that is based most closely on the information in the financial statements. 130) Answer: True False Explanation: 131) Capital budgeting focuses on projects over their entire lives to consider all the cash flows or cash savings from investing in a single project. 131) Answer: True False Explanation: 132) Depreciation tax deductions result in tax savings that partially offset the cost of acquiring the capital asset. 132) Answer: True False Explanation: 133) In determining whether to keep a machine or replace it, the original cost of the machine is always a relevant factor. 133) Answer: True False Explanation: In determining whether to keep a machine or replace it, the original cost of the machine is a sunk cost and is not a relevant factor. 47
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ESSAY. Write your answer in the space provided or on a separate sheet of paper. 134) How is inflation related to capital budgeting? Discuss. Answer: When using the net present value method (the definitive method for evaluating alternative options in capital budgeting), it is important to understand what elements are included in the rate - of - return percentage. In general, it is expected that there will always be a decline in the general purchasing power of whatever monetary units are in use (dollar, etc.). The real rate of return consists of a risk - free element as well as a business risk element but excludes the inflation element. The nominal rate of return includes all three components: the risk - free element, business risk element, and inflation element.
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