INVESTMENT DECISIONS (IMP NOTES)

● The capital budgeting model that is generally considered the best model for
long-range decisionmaking is the Discounted cash flow model.

● Reductions in annual cash operating costs means before tax cash flow.

● The net present value method of capital budgeting involves the assumption that
the resulting cash flows will be able to be invested at the rate of return that is
used as a discount rate in the analysis.

● The project's net present value will be higher when cash flows are received
earlier.

● The relevant cash flows can be divided into three categories: (1) net initial
investment, (2) annual net cash flows, and (3) project termination cash
flows.

● An incremental cash flow is the difference in cash received or disburse

resulting from selecting one option instead of another. It is not a category
of relevant cash flows.

● MACRS is also known as 200% declining-balance.

● For tax purposes, straight-line depreciation is an alternative to the MACRS

method. Both methods will result in the same total depreciation over the life
of the asset; however, MACRS will result in greater depreciation in the early
years of the asset’s life because it is an accelerated method.

● The cost of capital is often called a cutoff rate.

● To determine whether a project with a certain IRR is acceptable, this rate of

return is compared with the firm’s cost of capital and its hurdle rate. I.e.. the
rate of return that the management has chosen as the benchmark for the
acceptable projects

● The bailout payback method calculates the payback period using the sum of
net cash flows and the salvage value. The bailout payback method does not
estimate short-term profitability.
● The NPV and the profitability index may yield different decisions if the projects
are mutually exclusive and of different sizes. And gives the same decision for
independent projects.

● Capital rationing only sets a limit on the amount of funds invested; it does
choose the best projects that meet that limit. And it does not help to optimize
investment policy.

● The payback reciprocal can be used to approximate a project’s

internal rate of return if the cash flow pattern is relatively stable.

● Capital projects affects multiple accounting periods is a

challenge that the long-term aspect of capital budgeting presents to
the management accountants.

● Activity can be tracked for a single accounting period, The

flexibility of the capital budgeting decision, and freedom of the
organization’s financial planning is not a challenge that the
long-term aspect of capital budgeting presents to the management
accountant.

● Optimistic estimates of cash flow during project selection —

discourages the use of post-audits after implementation.

● The time value of money is concerned with two issues: (1) The
investment value of money, and (2) The risk (uncertainty) in
executory agreement.

● Limitations of ERM arise from the possibility of (1) Faulty human

judgement, (2) Cost- benefit consideration, (3) Simple errors or
mistakes, (4) Collusion, and (4) Management over ride of ERM
decision