Question

A number of terms and concepts from this chapter and a list of descriptions, definitions, and explanations appear below. For each term listed below (1-9), choose at least one corresponding item (a-k). Note that a single term may have more than one description and a single description may be used more than once or not at all.(a) Discounted cash flow method of capital budgeting.(b) Estimate of the average annual return on investment that a project will generate.(c) Capital budgeting method that identifies the discount rate that generates a zero net present value.(d) Decision that requires managers to evaluate potential capital investments to determine whether they meet a minimum criterion.(e) Only capital budgeting method based on net income instead of cash flow.(f) Ratio of the present value of future cash flows to the initial investment.(g) Value that a cash flow that happens today will be worth at some point in the future.(h) Concept recognizing that cash received today is more valuable than cash received in the future.(i) Decision that requires a manager to choose from a set of alternatives.(j) How long it will take for a particular capital investment to pay for itself.(k) Capital budgeting technique that compares the present value of the future cash flows for a project to its original investment.

Answer 1

Capital Budgeting involves evaluating potential capital investments and making decisions based on factors like the discounted cash flow method, average annual return on investment, and net present value. The different terms and their descriptions provided in the question are explained in detail.

Step-by-step explanation:

The subject of this question is Capital Budgeting in the field of business. Capital budgeting involves evaluating potential capital investments and making decisions based on factors like the discounted cash flow method, average annual return on investment, and net present value.

1. (a) Discounted cash flow method of capital budgeting: It is a technique that calculates the present value of future cash flows by applying a discount rate to determine the value of a project.
2. (b) Estimate of the average annual return on investment that a project will generate: It is a measure used to determine the profitability of an investment over a specified time period.
3. (c) Capital budgeting method that identifies the discount rate that generates a zero net present value: It is the Internal Rate of Return (IRR) method.
4. (d) Decision that requires managers to evaluate potential capital investments to determine whether they meet a minimum criterion: This is known as investment appraisal.
5. (e) Only capital budgeting method based on net income instead of cash flow: This is the Accounting Rate of Return (ARR) method.
6. (f) Ratio of the present value of future cash flows to the initial investment: This is the Profitability Index (PI) or Benefit-Cost Ratio (BCR).
7. (g) Value that a cash flow that happens today will be worth at some point in the future: This is the concept of present value.
8. (h) Concept recognizing that cash received today is more valuable than cash received in the future: This is the concept of time value of money.
9. (i) Decision that requires a manager to choose from a set of alternatives: This is a strategic decision-making process.
10. (j) How long it will take for a particular capital investment to pay for itself: This is the payback period.
11. (k) Capital budgeting technique that compares the present value of the future cash flows for a project to its original investment: This is the Net Present Value (NPV) method.