Financial Planning Flashcards

A procurement manager must justify a $500,000 equipment purchase expected to return $125,000 per year in savings. What is the simple payback period?

Answer: 4 years

Payback equals initial investment divided by annual cash inflow: $500,000 / $125,000 = 4 years.

Which budgeting approach requires every expense to be justified from scratch each period rather than adjusting the prior year's figures?

Answer: Zero-based budgeting

Zero-based budgeting starts each cycle at zero and requires justification for every line item.

When comparing two suppliers' offers with different payment timing, which technique best accounts for the time value of money?

Answer: Net present value

NPV discounts future cash flows to present value, making offers with different timing directly comparable.

A buyer reports that a negotiated price increase was held to 2% instead of the supplier's requested 6%. How should this outcome typically be classified?

Answer: Cost avoidance

Preventing a future cost increase is cost avoidance because the budget baseline does not fall.

Which cost is generally classified as an operating expense (OPEX) rather than a capital expenditure (CAPEX)?

Answer: Annual software subscription fees

Recurring subscription fees are consumed within the period and expensed as OPEX.

In a flexible budget, what happens to budgeted variable costs when actual production volume rises above plan?

Answer: They are adjusted upward in proportion to volume

A flexible budget recalculates variable costs at the actual activity level for fair comparison.

A purchase price variance (PPV) is calculated as:

Answer: (Actual price − Standard price) × Actual quantity

PPV isolates the price difference by multiplying it by the actual quantity purchased.