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Cost Accounting

William Carter

Chapter 23

Econ Eva for Cap Exp - all with Video Answers

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Chapter Questions

Problem 1

Describe the procedure for computing the weighted-average cost of capital.

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Problem 2

Why would a firm use its weighted-average cost of capital as the hurdle rate (minimum rate) for a project investment decision, rather than the specific marginal cost of funds?

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Problem 3

Discuss the practical difficulties in estimating the firm's weighted-average cost of capital. CGA-Canada (adapted). Reprint with permission.

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Problem 4

Define the payback (or payout) period method.

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Problem 5

How do the two accounting rate of return methods differ?

Ameer Said
Ameer Said
Numerade Educator

Problem 6

What is the present value concept and why is it important in capital budgeting?

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Problem 7

What is the basic difference between the payback method and the net present value method?

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Problem 8

What is the difference between the net present value and the internal rate of return calculations?

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Problem 9

Both the net present value method and the internal rate of return method assume that the earnings produced by a project are reinvested in the company. However, each approach assumes a different rate of return at which earnings are reinvested. Describe the rate of return assumed in each of the two approaches and discuss which of the assumed rates is more realistic.

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Problem 10

Some companies inflate the discount rate used in the net present value method to compensate for risk associated with the capital expenditure project. This approach is unsound. Explain why and suggest an alternative approach that is theoretically preferable.

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