CBS Capital Budgeting & Asset Management Flashcards

Which capital budgeting method calculates the time required to recover the initial investment from project cash flows?

Answer: Payback Period

The payback period measures how many years it takes to recoup the original capital outlay from a project's net cash inflows.

A project has an NPV of $0. This means the project's return is exactly equal to the:

Answer: Required rate of return (discount rate)

An NPV of zero indicates the project earns precisely the discount rate used, meaning it meets but does not exceed the required rate of return.

Under the Modified Accelerated Cost Recovery System (MACRS), which depreciation method is used in the early years of an asset's life?

Answer: Double-declining balance

MACRS uses the double-declining balance method in early years then switches to straight-line when that method yields a larger deduction.

The hurdle rate used in capital budgeting is most commonly defined as the firm's:

Answer: Weighted Average Cost of Capital (WACC)

The WACC represents the blended cost of all capital sources and serves as the minimum acceptable return threshold for new investments.

Which of the following best describes a sunk cost in capital budgeting analysis?

Answer: A cost already incurred that cannot be recovered regardless of the decision

Sunk costs are past expenditures that are irrelevant to future capital budgeting decisions because they cannot be recovered.

A capital lease differs from an operating lease primarily because a capital lease:

Answer: Transfers substantially all risks and rewards of ownership to the lessee

A capital (finance) lease transfers the economic risks and rewards of ownership to the lessee, requiring the asset to be recognized on the balance sheet.