ACC 241 STUDY EXAMS GUIDE QUESTIONS AND
ANSWERS SURE A+
✔✔Noneconomic Considerations - ✔✔Anything we would include in decision-making
that doesn't result in a #
✔✔What happens anytime we close a division? - ✔✔We lose the contribution
✔✔What do we want to do when there is a constraint? - ✔✔Maximize products with the
highest contribution because it allows us to make the highest profit with limited
resources
✔✔Capital Budgeting Key Aspects - ✔✔-Long-term decisions
-Multiple time periods involved
-Large sums of $ invested
-Cash flows, not accrual based
✔✔What is the one accrual based capital budgeting method? - ✔✔Accounting Rate of
Return (ARR)
✔✔What are we looking at when we look at capital investments? - ✔✔Cash outflows
✔✔What are the 5 capital budgeting methods? - ✔✔2 Initial Screening Methods that
ignore TVM
-Payback Period
-Accounting Rate of Return
3 Methods that do not ignore the TVM
-Profitability Index
-Net Present Value
-Internal Rate of Return
✔✔Annuity - ✔✔= cash flows at = intervals over time
✔✔Payback Period - ✔✔How long it takes to recover the cash invested in a capital
project
✔✔Rate - ✔✔Minimum required rate of return
AKA - discount rate, hurdle rate, and cost of capital
✔✔Net Impact - ✔✔The PV of cash flows
, ✔✔An Investment Proposed - ✔✔A series of cash flows over the life of an investment;
inflows and outflows
✔✔When the TVM of money is ignored in capital budgeting, what happens to the
discount rate? - ✔✔We don't care
✔✔Internal Rate of Return - ✔✔Interest rate of a proposal
The discount rate that makes NPV=0
✔✔What is the best NPV option? - ✔✔When NPV=0 because we know for sure that the
proposal rate=required rate
✔✔Why does IRR never change? - ✔✔Because we have no control of it and it's a result
of cash flows
✔✔Profitability Index - ✔✔Method to rank different proposals; For every $1 invested we
want to get the most back for it
✔✔What happens when we calculate a negative NPV? - ✔✔The investment should be
thrown out and we shouldn't bother doing IRR and PI
✔✔What does the profitability index help prioritize? - ✔✔Where to invest out money
✔✔Why is it bad to ignore TVM? - ✔✔Because that means we are ignoring opportunity
costs
✔✔Cost of Capital - ✔✔What we give up to make a capital investment
✔✔How does money grow? - ✔✔In the direction of time
Future = grow
Past = contract
✔✔Contribution Margin - ✔✔Amount from sales available to cover fixed costs
✔✔To obtain a target profit...? - ✔✔CM must be higher than FC by the same amount as
the target profit
✔✔Cost Volume Profit Analysis requires what? - ✔✔Costs are fixed or variable
✔✔What does the cost volume analysis assume about fixed costs? - ✔✔That they do
not change as total volume changes
ANSWERS SURE A+
✔✔Noneconomic Considerations - ✔✔Anything we would include in decision-making
that doesn't result in a #
✔✔What happens anytime we close a division? - ✔✔We lose the contribution
✔✔What do we want to do when there is a constraint? - ✔✔Maximize products with the
highest contribution because it allows us to make the highest profit with limited
resources
✔✔Capital Budgeting Key Aspects - ✔✔-Long-term decisions
-Multiple time periods involved
-Large sums of $ invested
-Cash flows, not accrual based
✔✔What is the one accrual based capital budgeting method? - ✔✔Accounting Rate of
Return (ARR)
✔✔What are we looking at when we look at capital investments? - ✔✔Cash outflows
✔✔What are the 5 capital budgeting methods? - ✔✔2 Initial Screening Methods that
ignore TVM
-Payback Period
-Accounting Rate of Return
3 Methods that do not ignore the TVM
-Profitability Index
-Net Present Value
-Internal Rate of Return
✔✔Annuity - ✔✔= cash flows at = intervals over time
✔✔Payback Period - ✔✔How long it takes to recover the cash invested in a capital
project
✔✔Rate - ✔✔Minimum required rate of return
AKA - discount rate, hurdle rate, and cost of capital
✔✔Net Impact - ✔✔The PV of cash flows
, ✔✔An Investment Proposed - ✔✔A series of cash flows over the life of an investment;
inflows and outflows
✔✔When the TVM of money is ignored in capital budgeting, what happens to the
discount rate? - ✔✔We don't care
✔✔Internal Rate of Return - ✔✔Interest rate of a proposal
The discount rate that makes NPV=0
✔✔What is the best NPV option? - ✔✔When NPV=0 because we know for sure that the
proposal rate=required rate
✔✔Why does IRR never change? - ✔✔Because we have no control of it and it's a result
of cash flows
✔✔Profitability Index - ✔✔Method to rank different proposals; For every $1 invested we
want to get the most back for it
✔✔What happens when we calculate a negative NPV? - ✔✔The investment should be
thrown out and we shouldn't bother doing IRR and PI
✔✔What does the profitability index help prioritize? - ✔✔Where to invest out money
✔✔Why is it bad to ignore TVM? - ✔✔Because that means we are ignoring opportunity
costs
✔✔Cost of Capital - ✔✔What we give up to make a capital investment
✔✔How does money grow? - ✔✔In the direction of time
Future = grow
Past = contract
✔✔Contribution Margin - ✔✔Amount from sales available to cover fixed costs
✔✔To obtain a target profit...? - ✔✔CM must be higher than FC by the same amount as
the target profit
✔✔Cost Volume Profit Analysis requires what? - ✔✔Costs are fixed or variable
✔✔What does the cost volume analysis assume about fixed costs? - ✔✔That they do
not change as total volume changes
