1. What is capital budgeting? 2. What are some characteristics that make capital budgeting different from other types of budgets (like a sales budget or cash budget)? 3. Why is the concept of present value relevant to capital budgeting, but not so relevant to other types of budgeting? 4. Describe the Payback Period in your own words. Under what circumstances would Payback be an effective method to use in evaluating competing investment alternatives? 5. Describe the Accounting Rate of Return in your own words. What are its weaknesses as an investment evaluation tool? 6. Describe the calculation of NPV in your own words. What does the word "Net" in Net Present Value refer to? 7. Define the Internal Rate of Return. 8. Johnson Company plans to spend $3,993 on a 5 year project that will return $1,000 cash per year. Calculate the IRR; is it 8%? 9. Johnson Company spends $2709 for an investment that returns $2,000 the first year, and $1,000 the second year. Is the IRR also 8%? 10. In practice, it seems that the NPV method is used more often than IRR. Why do you think this would be the case? 11. Johnson Company calculated the NPV of an investment, and using a discount rate of 10%, the NPV was zero. Does this mean that the investment is unacceptable? What does it mean? 12. Suppose Johnson calculated the NPV and found that the NPV was $3,400 using a discount rate of 6%. Do you think the internal rate of return in this case would be a. less than 6% or b. greater than 6% or c. exactly equal to 6%? 13. Describe what is meant by the following terms: a. cost of capital b. hurdle rate c. the time value of money 14. What is capital rationing?