CBS Capital Budgeting & Asset Management Flashcards

The Profitability Index (PI) is calculated as:

Answer: Present value of future cash flows divided by the initial investment

The PI equals the ratio of the present value of future cash inflows to the initial outlay, indicating value created per dollar invested.

Asset impairment testing requires a write-down when an asset's carrying value exceeds its:

Answer: Recoverable amount (higher of fair value less costs to sell or value in use)

Under U.S. GAAP and IFRS, an impairment loss is recognized when the carrying amount exceeds the recoverable amount of the asset.

In post-audit analysis of capital projects, the primary purpose is to:

Answer: Compare actual project outcomes to initial projections to improve future decision-making

Post-audit analysis evaluates whether a completed project met its projected financial targets, providing feedback to improve future capital budgeting processes.

Capital rationing occurs when a firm:

Answer: Has more acceptable projects than available capital to fund all of them

Capital rationing forces management to select the highest-value subset of positive-NPV projects when funding is constrained.

Sensitivity analysis in capital budgeting is used to:

Answer: Assess how changes in key input variables affect project NPV or IRR

Sensitivity analysis shows how the project's value metric responds when individual assumptions (e.g., sales volume, price, costs) are varied one at a time.

The net present value (NPV) rule states that a project should be accepted if:

Answer: Its NPV is greater than or equal to zero

A non-negative NPV means the project is expected to generate at least the required return, adding value to the firm and its shareholders.