1. What is the difference between capital budgeting decisions and management decisions covered in?

2. What concept must be considered when looking at cash flows over several years for a long-term investment? Explain.

3. What is meant by the term present value?

4. What is the formula used to calculate the present value of a future cash flow? Describe each component.

5. Describe the three steps required to evaluate investments using the net present value method.

6. How do most firms establish the required rate of return used to calculate the net present value?

7. What is meant by the term internal rate of return? Explain the IRR decision rule?

8. For the purpose of calculating net present value and internal rate of return, do companies use the accrual basis of accounting? Explain.

9. Why might a firm choose to accept a long-term investment even if the net present value is below zero?

10. What might cause a manager to reject a long-term investment even though the net present value is positive?

11. Describe the two steps required to calculate net present value and internal rate of return when using Excel.

12. What is the payback method, and why do managers use this method?

13. What are the two weaknesses associated with the payback method?

14. Refer to What method of evaluating long-term investments is most popular? Why do you think the payback method is the least-used method?

15. What does the term working capital refer to, and how does working capital affect the evaluation of long-term investments?

16. Assume a company pays income taxes. How are revenue and expense cash flows adjusted for income taxes when calculating the net present value?

17. Assume a company pays income taxes. How does depreciation expense affect cash flows even though it is a non-cash expense?