Exam 22: Managing the Firms Assets

Discuss the working-capital cycle of a small business.

A disadvantage of the accounting return on investment technique is that it ignores the time value of money.

Which of the following questions do all types of capital budgeting techniques try to answer?

When a business sells its accounts receivable to a finance company, this is called

If capital budgeting is so important, why do so few firms use the techniques the textbook discusses, especially the better methods? (Mention the textbook's premises in developing your answer.)

Assume that the cost of certain equipment your business is considering purchasing is $100,000. You plan to depreciate the equipment over five years, at which point the salvage value is expected to be $8,000. Anticipated after-tax profits (losses) are as follows: Compute the accounting return on investment. (Show the formula and your computations.)

You Make the Call-Situation 3 Adrian Fudge of the Fudge Corporation wants you to forecast its financing needs over the fourth quarter (October-December). He has made the following observations relative to planned cash receipts and disbursements:

The payback period technique deals with accounting profits in measuring how long it will take to recover the initial cash outlay of an investment.

Average annual after-tax profits per year divided by the average book value of the investment equals

The discounted cash flow technique measures the present value of future benefits from an investment as compared to the investment outlay.

Which of the following is not a part of managing working capital?

Net cash flow should be equated with net profit.

You Make the Call-Situation 2 Ruston Manufacturing Company is a small firm selling entirely on a credit basis. It has experienced successful operation and earned modest profits. Sales are made on the basis of net payment in 30 days. Collections from customers run approximately 70 percent in 30 days, 20 percent in 60 days, 7 percent in 90 days, and 3 percent bad debts. The owner has considered the possibility of offering a cash discount for early payment. However, the practice seems costly and possibly unnecessary. As the owner puts it, "Why should I bribe customers to pay what they legally owe?"

The accounting return on investment technique reveals how many dollars in average profits are generated per dollar of investment.

The payback period technique does not consider the time value of money.

The date on which accounts receivable are collected affects the working-capital cycle.

Naomi needs to earn a twelve percent return from investing in her cousin's business. Under the NPV method of discounting cash flows, if the business can earn only a ten percent return, she will not satisfy her

Which of the following is sometimes called near cash?

Liquidity has very little significance to small firms.

A firm's working-capital cycle refers to the flow of cash to purchase and sell fixed assets.