Test bank accounting management 11e chapter 21 CAPITAL BUDGETING AND COST ANALYSIS

CHAPTER 21 CAPITAL BUDGETING AND COST ANALYSIS LEARNING OBJECTIVES Recognize the multiyear focus of capital budgeting Understand the six stages of capital budgeting for a project Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method Use and evaluate the payback method Use and evaluate the accrual accounting rate-of-return (AARR) method Identify and reduce conflicts from using DCF for capital budgeting decisions and accrual accounting for performance evaluation Identify relevant cash inflows and outflows for capital budgeting decisions CHAPTER OVERVIEW Chapter 21 looks at long-run decisions, those spanning multiple years The focus moves from operations of a year-by-year approach to that of an entire life span of a project The accounting for capital budgeting on a project-by-project approach is similar to life-cycle costing introduced in Chapter 12 The role of the management accountant is highlighted in the six stages of capital budgeting Four quantitative methods used in making capital budgeting decisions are described and illustrated The two methods that focus on cash flows and the time value of money are net present value and internal rateof-return, discounted-cash flow models Typically, the discounted cash-flow methods are superior for providing information in the decision-making process because they are the most comprehensive in scope The concept of money having time value is a main feature of these models The other methods presented are the payback method and the accrual accounting rate-of-return The payback method does use cash flow as a basis but does not incorporate time value of money nor profitability The accrual accounting rate-of-return does not focus on cash flow but uses measures from the income statement The role of income taxes is incorporated within the chapter and the role of inflation is in the appendix to the chapter Though the methods presented provide a basis on which to make a quantitative financial decision, the chapter examines the importance of nonfinancial quantitative and qualitative aspects for each decision The tension of evaluating a decision using a different model than the one used to make the initial decision is discussed Capital Budgeting and Cost Analysis 31 CHAPTER OUTLINE I Capital budgeting overview A Challenge to managers to balance long-run and short-run issues B Analysis of ways to increase capital (value) of business with projects that span multiple years II Two dimensions of cost analysis Learning Objective 1: Recognize the multiyear focus of capital budgeting A A project dimension for capital budgeting over entire life of project (horizontal) [Exhibit 21-1] Life of a project is more than one year All cash flows or cash savings over entire life considered B An accounting-period dimension with focus on income determination and routine planning and control that cuts across all projects (vertical) Accounting period of one year Reported income for managers’ bonuses and for effect on company’s stock price C An accounting system that corresponds to project dimension—life-cycle costing [See Chapter 12] Accumulates revenues and costs on a project-by-project basis Accumulation extends accrual accounting system to a system that computes cash flow or income over entire project covering many accounting periods III Stages of capital budgeting A Capital budgeting: a decision-making and control tool for making long-run planning decisions for investments in projects that span multiple years Learning Objective 2: Understand the six stages of capital budgeting for a project B Six stages in capital budgeting Stage 1: Identification stage a To distinguish which types of capital expenditure projects are necessary to accomplish organization objectives and strategies b To use line management to identify projects linked to organization’s objectives and strategies 32 Chapter 21 Stage 2: Search stage a To explore alternatives of capital investments that will achieve organization objectives b To use cross-functional teams from all parts of the value chain to evaluate alternatives Stage 3: Information-acquisition stage a To consider the expected costs and the expected benefits of alternative capital investments b To use financial and nonfinancial costs and benefits that can be quantitative or qualitative Stage 4: Selection stage a To choose projects of implementation whose expected benefits exceed expected costs by the greatest amounts b To use judgment of managers for considering nonfinancial considerations of conclusions based on formal analysis Stage 5: Financing stage a To obtain project funding b To use organization’s treasury function for sources of financing, internally using generated cash flow and externally through capital markets Stage 6: Implementation and control stage a To get projects underway and monitor their performance b To use a postinvestment audit to evaluate if projections made at time of selection compare toactual results IV Capital budgeting methods A Discounted cash-flow (DCF) methods Learning Objective 3: Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method Measure all expected future cash inflows and outflows of a project as if they occurred at a single point in time Use time value of money: dollar received today is worth more than a dollar received in the future (opportunity cost from not having the money today) [Exercise 21-16 and Appendix C] a Weights cash flows by time value of money and usually most comprehensive and best methods to use Capital Budgeting and Cost Analysis 33 b Focuses on cash flows rather than operating income as determined by accrual accounting Expects cash amount to be greater in the future than cash invested now (present) Required rate of return (RRR): minimum acceptable rate of return on an investment • Return the organization could expect to receive elsewhere for investment of comparable risk • Also called discount rate, hurdle rate, or (opportunity) cost of capital • Point of comparison when using internal rate of return (IRR) B Two DCF methods Net present value (NPV) method a NPV calculates expected monetary gain or loss from project by discounting all expected future cash inflows and outflows to the present point in time, using required rate of return (RRR) i Only projects with zero (return = RRR) or positive (return > RRR) net present value acceptable ii Higher the NPV, the better when all other things equal b NPV method i Step 1: Draw a sketch of relevant cash inflows and outflows [Exhibit 21-2] • Organizes data in systematic way • Focuses only on cash flows • Indifferent as to where cash flows come from ii Step 2: Choose the correct compound interest table from Appendix C • Use given discount factors of time periods (n) and interest rate (r or i) • Determine if annuity (series of payments of equal time and amount) or lump sum payment iii Step 3: Sum the present value figures to determine the net present value (net means some amounts are inflows and others are outflows—the difference) • 34 Chapter 21 If NPV is zero or positive, accept—cash flows are adequate to recover net initial investment and earn a return equal to or greater than RRR over useful life of project • If NPV is negative, not accept—expected rate of return is below RRR c NPV needs managers to also judge nonfinancial factors Internal rate-of-return method [Exhibit 21-3] a IRR calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows b IRR method • Use calculator or computer program to compute • Use trial-and-error approach  Step 1: Calculate NPV using a chosen discount rate  Step 2: Choose (and keep trying) a lower or higher discount rate to have NPV equal zero, the point at which the chosen rate is the IRR (If NPV < 0, use lower rate; if NPV > 0, use higher rate) • Use factor from present value of an annuity table if cash inflows are equal [Refer to Exhibit 21-3, Table 4, and Problems for Self-Study] • Accept project if internal rate of return (IRR) equals or exceeds required rate of return (RRR) Comparison of net present value and internal rate-of-return methods a NPV uses dollars rather than percentages that aids in summing individual projects to see effect of accepting a combination of projects; IRR of individual projects cannot be added or averaged to represent IRR of a combination of projects b NPV assumes reinvestment at required rate of return in comparing projects with unequal economic lives whereas internal rate-of-return does not have such comparison available Sensitivity analysis [Exhibit 21-4] a Sensitivity analysis used to examine how a result from use of NPV or IRR will change if predicted financial outcomes are not achieved or if an underlying assumption changes b Helps managers focus on decisions that are most sensitive to different assumptions and worry less about decisions that are not so sensitive C Payback method Learning Objective 4: Use and evaluate the payback method Payback measures time it will take to recoup, in form of expected future cash flows, the net initial investment in a project Capital Budgeting and Cost Analysis 35 a Does not distinguish between origins of cash flows (like DCF models) b Simplest to calculate with project having uniform cash flows i With uniform cash flows: Net initial investment ÷ Uniform increase in annual future cash flows ii Without uniform cash flows: Each year’s cash flow accumulated until sum equals net initial investment c Highlights liquidity d Projects with shorter paybacks preferred to those with longer paybacks, if all other things are equal e Organization can choose a cutoff period as basis for accepting or rejecting payback of project Payback useful measure a Method easy to understand, as DCF methods not affected by accrual accounting conventions such as depreciation b Used when preliminary screening of many proposals is necessary c Expected cash flows in later years of a project are highly uncertain Payback weaknesses a Fails to incorporate the time value of money b Does not consider a project’s cash flows after the payback period c Ignores cash flows after the payback period d Method may promote only short-lived projects from choosing too short a cutoff period D Accrual accounting rate-of-return method Learning Objective 5: Use and evaluate the accrual accounting rate-of-return (AARR) method Accrual accounting rate-of-return (AARR) method: divides an accrual accounting measure of income by an accrual accounting measure of investment (also called accounting rate of return) AARR calculations [Surveys of Company Practice] a Increase in expected average annual after-tax operating income ÷ Net initial investment 36 Chapter 21 b Quotient is rate (similar to IRR) or percentage c Calculates return using operating income numbers after considering accruals and taxes whereas IRR calculates return on basis of after-tax cash flows and time value of money (IRR method regarded as better than AARR method) d Computations easy to understand and they use numbers reported in the income statement e Considers income earned throughout a project’s expected useful life (unlike payback which ignores cash flows after payback period) Do multiple choice 1–8 Assign Exercises 21-17, 18, 20, 21, 22, 23, and Problems 21-27, 29, and 30 V Other considerations Learning Objective 6: Identify and reduce conflicts from using DCF for capital budgeting decisions and accrual accounting for performance evaluation A Evaluating managers and goal-congruence issues Inconsistency between using the NPV method as best for capital budgeting decisions and then using a different method to evaluate performance over short time horizon (such as accrual accounting results) Temptations for managers to use methods that would increase bonuses or personal goals or if transferred frequently B Relevant cash flows in discounted cash flow analysis [Exhibit 21-5] Learning Objective 7: Identify relevant cash inflows and outflows for capital budgeting decisions Relevant cash flows: differences in expected future cash flows as a result of making the investment Relevant after-tax flows [Exhibit 21-6] a Differential approach used i Two methods based on income statement: one focuses on cash items only; the other used with net income and depreciation adjustments ii One method uses cash flow from operations—item-by-item method • If savings (S) in any aspect, then income tax (t) aspect = t x S • If depreciation (D) in any aspect, the income tax aspect = t x D • If gain (G) in any aspect, the income tax aspect = t x G Capital Budgeting and Cost Analysis 37 • If loss (L) in any aspect, the income tax aspect = t x L b Three categories of cash flows for capital investment projects i Net initial investment • Initial machine investment (cash outflow to purchase machine) • Initial working capital of investment (working-capital cash flow) • After-tax cash flow from current disposal of old machine (cash inflow) ii Operations (difference between each year’s cash flow under the alternatives) • Annual after-tax cash flow from operations (excluding depreciation effects) • Income tax cash savings from annual depreciation deduction iii Terminal disposal of assets and recovery of working capital • After-tax cash flow from terminal disposal of machine • After-tax cash flow from recovery of working capital c General rule in tax planning used—where there is a legal choice, take the deduction sooner rather than later Do multiple choice and 10 Assign Exercises 21-19, 24, 25, and Problems 21-28, 31, and 32 C Managing the project Management control of the investment activity itself a Some initial investments are relatively easy to implement b Some initial investments are more complex and take more time Management control of the project—postinvestment audit a Compares actual results for a project to the costs and benefits expected at time project selected b Provides feedback about performance i Original estimates overly optimistic iii Problems in implementing the project D Strategic considerations in capital budgeting 38 Chapter 21 Company’s strategy is source of its strategic capital budgeting decisions Capital investment decisions that are strategic require consideration of broad range of factors that may be difficult to estimate or measure E Intangible assets and capital budgeting Strategic decisions about intangible assets such as brand names, customer base, and intellectual capital of employees Capital budgeting methods (NPV) useful for evaluating a company’s intangible assets Illustration using example of intangible asset of customer base a Cash inflows (revenues minus expenses) for each customer compared over a period of years b Analysis refined in at least three ways i By recognizing an even longer time horizon ii By recognizing that not all customers will be retained over an extended time period (customer retention rate measures percentage of existing customers that will be retained next period) iii By recognizing that new customers will be attracted c Success in maintaining long-run profitable relationships with customers highlighted V Appendix: Capital budgeting and inflation CHAPTER QUIZ SOLUTIONS: 1.d 2.c 3.a 4.b 5.c 6.a 7.d 8.d 9.c 10.b Capital Budgeting and Cost Analysis 39 CHAPTER QUIZ [CPA Adapted] If the algebraic sum of the present values of all cash flows related to a proposed capital expenditure discounted at the company’s required rate of return is positive, it indicates that the a b c d resultant amount is the maximum that should be paid for the asset discount rate used is not the proper required rate of return for this company investment is the best alternative return on the investment exceeds the company’s required rate of return The following data apply to questions 2–6 The Hilltop Corporation is considering (as of 1/1/02) the replacement of an old machine that is currently being used The old machine is fully depreciated but can be used by the corporation through 2006 If Hilltop decides to replace the old machine, Baker Company has offered to purchase it for $40,000 on the replacement date The disposal value of the old machine would be zero at the end of 2006 Hilltop uses the straight-line method of depreciation for all classes of machinery If the replacement occurs, a new machine would be acquired from Busby Industries on January 2, 2002 The purchase price of $500,000 for the new machine would be paid in cash at the time of replacement Due to the increased efficiency of the new machine, estimated annual cash savings of $125,000 would be generated through 2006, the end of its expected useful life The new machine is expected to have a zero disposal price at the end of 2006 All operating cash receipts, operating cash expenditures, and applicable tax payments and credits are assumed to occur at the end of the year Hilltop employs the calendar year for reporting purposes Discount tables for several different interest (discount) rates that are to be used in any discounting calculations are given below Assume for questions 2–6 that Hilltop is not subject to income taxes Present Value of $1.00 Received at the End of Period Period 6% 8% 10% 12% 14% 94 89 84 79 75 93 86 79 74 68 91 83 75 68 62 89 80 71 64 57 88 77 68 59 52 Present Value of an Annuity of $1.00 Received at the End of Each Period Period 6% 8% 10% 12% 14% 0.94 1.83 2.67 3.47 4.21 0.93 1.78 2.58 3.31 3.99 0.91 1.73 2.49 3.17 3.79 0.89 1.69 2.40 3.04 3.61 [CMA Adapted] If Hilltop requires investments to earn an 8% return, the net present value for replacing the old machine with the new machine is a $175,000 b $50,000 c $48,750 d $(36,250) [CMA Adapted] The internal rate of return, to the nearest percent, to replace the old machine is a 12% b 10% c 8% d 6% [CMA Adapted] The payback period to replace the old machine with the new machine is a 2.5 years b 3.6 years c 4.0 years d 4.4 years The accrual accounting rate of return on the initial investment, to the nearest percent, is a 0% 40 Chapter 21 b 5.0.% c 5.6% d 28% 0.88 1.65 2.32 2.91 3.43 Among the nonfinancial quantitative and qualitative factors that Hilltop should consider in its analysis are a b c d lower direct labor cost and less scrap and rework lower hourly support labor cost and reduction in manufacturing cycle time lower product defect rate and faster response to market changes improved competitive position and cost of retraining of personnel [CPA Adapted] The assumption that cash flows are reinvested at the rate earned by the investment belongs to which of the following capital budgeting methods? a b c d Internal rate of return No No Yes Yes Net present value No Yes Yes No [CPA Adapted] The payback capital budgeting technique considers a b c d Time value of money Yes Yes No No Income over entire life of project Yes No Yes No Refer to data for questions 2–6 If Hilltop is subject to an income tax rate of 30%, what amount of annual cash savings would be used in a discounted cash flow method or in the payback method? a $157,500 b $125,000 c $117,500 d $87,500 10 Refer to data for questions 2–6 If Hilltop is subject to an income tax rate of 30% and a required rate of return of %, the net present value for replacing the old machine with the new machine is a $(100,875) b $3,825 c $18,825 d $163,425 Capital Budgeting and Cost Analysis 41 WRITING/DISCUSSION EXERCISES Recognize the multiyear focus of capital budgeting Compare the reasons for using life-cycle costing to the project-by-project orientation for capital budgeting In Chapter 12, life-cycle costing was noted as being particularly important when (a) nonproduction costs were large, (b) a high percentage of total life-cycle costs were incurred before production began and before any revenues received, and (c) many of the life-cycle costs were locked in at the beginning stages of the process Project-by-project approach to capital budgeting decision has these same characteristics Understand the six stages of capital budgeting for a project How the six stages of capital budgeting support the concept that one can look at resource allocation in a budget and note what top management considers most important? Throughout the six stages, the emphasis is on the objectives and strategy of the organization The decisions about projects involve the entire organization as noted in each of the stages Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method What approaches might be used to recognize risk in capital budgeting? The required rate of return (RRR) is a critical variable in discounted cash flow analysis It is the rate of return that the organization forgoes by investing in a particular project rather than in an alternative project of comparable risk Risk is used here to refer to the business risk of the project, not the specific manner in which the project is financed A safe generalization is that the higher the risk, the higher the required rate of return and the faster management would want to recover the net initial investment A higher risk means a greater chance that the project may lose money, and what makes management willing to take added risk is a higher expected rate of return Organizations can use one or more of the following in dealing with risk factors of projects:      Adjusting the required rate of return (higher rate when higher risk) Adjusting the estimated future cash inflows (reduce the estimated cash inflows if higher risk) Estimating the probability distribution of future cash inflows and outflows for each project Sensitivity analysis (discussed in chapter in text) Varying the required payback time (discussed in chapter in text) Can the emphasis on cash flows be reconciled with an accrual accounting approach? A basic tenet of accrual accounting is realization The accrual basis of accounting, though recognizing revenue when earned and expense when incurred, is separated from the operating events in the cash flow statement because of timing differences, not because of basic differences in amounts The importance of cash flow is noted by requiring the cash flow statement as one of the basic financial statements of a company 42 Chapter 21 Use and evaluate the payback method The payback method of capital budgeting has been compared to a meat cleaver and the discounted cash flow methods to a scalpel Why might this be an appropriate analogy? If an organization must select a few projects from a large pool of projects, an initial threshold could be established by use of the payback method Only projects that would pay back within a prescribed number of years would be considered in more detail Use and evaluate the accrual accounting rate-of-return (AARR) method Discuss the need to specifically define words used in describing the various methods It has been stated that the conceptual framework for financial accounting is primarily the definition of terms Because accounting serves as an information tool for organizations (“the language of business”), the value of common meanings for terms is critical For example, the use of the term “return” elicits several definitions “Return” has several different meanings Return can mean income Income can mean operating income, net income, income before interest and income taxes, and income from extraordinary items among other uses The text clearly illustrates the use of the term in this chapter Do note that the accrual accounting method has its own required rate of return that differs from the required rate of return used in net present value or internal rate of return Identify and reduce conflicts from using DCF for capital budgeting decisions and accrual accounting for performance evaluation The tension between methods used to make the initial decision and then to evaluate the decision is an ongoing problem Recall some other situations in which this has been noted Some examples thus far have been from Chapter – LO (related one in Chapter 15 – LO2), Chapter – LO4, Chapter 11 – LO9, and Chapter 20 – LO3 Similar situations are discussed in the last two chapters—22 and 23 One common point to be noted: If the purpose is clearly stated and understood for original decision, the evaluation of the results of that decision should be in terms of the fulfilling of that purpose—and not other purposes Identify relevant cash inflows and outflows for capital budgeting decisions What would be the effect of using a depreciation method other than straight-line when considering the role of income taxes on the net present value method? Accelerated depreciation methods such as double-declining balance and sum-of-years’ digits serve the purpose of taking the deduction sooner rather than later The cash flow in the earlier years is larger (tax savings), creating more present value inflows, resulting in higher NPV Capital Budgeting and Cost Analysis 43 SUGGESTED READINGS Arya, A., Fellingham, J and Glover, J., “Capital Budgeting: Some Exceptions to the Net Present Value Rule,” Issues in Accounting Education (August 1998) p.499 [10p] Ashton, A., Ashton, R and Maines, l., “Instructional Case: General Medical Center—Evaluation of Diagnostic Imaging Equipment,” Issues in Accounting Education (November 1998) p.985 [19p] Bailes, J., Nielsen, J and Lawton, S., “How Forest Product Companies Analyze Capital Budgets,” Management Accounting (October 1998) p.24 [7p] Balakrishnan, R and Bhattacharya, U., “Ace Company (B): The Option Value of Waiting and Capital Budgeting,” Issues in Accounting Education (Fall 1997) p.399 [13p] Coburn, S., Grove, H and Cook, T “How ABC Was Used in Capital Budgeting,” Management Accounting (May 1997) p.38 [9p] Copeland, T., “The Real-Options Approach to Capital Allocation,” Strategic Finance (October 2001) p.33 [6p] Gordon, L and Myers, M., “Postauditing Capital Projects,” Management Accounting (January 1991) p.39 [4p] Hendricks, J., Bastian, R and Sexton, T., “Bundle Monitoring of Strategic Projects,” Management Accounting (February 1992) p.31 [6p] Migliore, R and McCracken, D., “Tie Your Capital Budget to Your Strategic Plan,” Strategic Finance (June 2001) p.38 [5p] Truitt, J F., “Capital Rationing: An Annualized Approach,” Journal of Cost Analysis (Summer 1988) p.63 [13p] Wolk, H I., Porter, G A and Vetter, D E., “Net Working Capital Investment and Capital Budgeting Analysis: Some Pedagogical Insights,” Journal of Accounting Education (Fall 1989) p.253 [10p] 44 Chapter 21 [...]... Waiting and Capital Budgeting, ” Issues in Accounting Education (Fall 1997) p.399 [13p] Coburn, S., Grove, H and Cook, T “How ABC Was Used in Capital Budgeting, ” Management Accounting (May 1997) p.38 [9p] Copeland, T., “The Real-Options Approach to Capital Allocation,” Strategic Finance (October 2001) p.33 [6p] Gordon, L and Myers, M., “Postauditing Capital Projects,” Management Accounting (January... of 30% and a required rate of return of 8 %, the net present value for replacing the old machine with the new machine is a $(100,875) b $3,825 c $18,825 d $163,425 Capital Budgeting and Cost Analysis 41 WRITING/DISCUSSION EXERCISES 1 Recognize the multiyear focus of capital budgeting Compare the reasons for using life-cycle costing to the project-by-project orientation for capital budgeting In Chapter. .. balance and sum-of-years’ digits serve the purpose of taking the deduction sooner rather than later The cash flow in the earlier years is larger (tax savings), creating more present value inflows, resulting in higher NPV Capital Budgeting and Cost Analysis 43 SUGGESTED READINGS Arya, A., Fellingham, J and Glover, J., Capital Budgeting: Some Exceptions to the Net Present Value Rule,” Issues in Accounting. ..6 Among the nonfinancial quantitative and qualitative factors that Hilltop should consider in its analysis are a b c d lower direct labor cost and less scrap and rework lower hourly support labor cost and reduction in manufacturing cycle time lower product defect rate and faster response to market changes improved competitive position and cost of retraining of personnel 7 [CPA Adapted] The... Bastian, R and Sexton, T., “Bundle Monitoring of Strategic Projects,” Management Accounting (February 1992) p.31 [6p] Migliore, R and McCracken, D., “Tie Your Capital Budget to Your Strategic Plan,” Strategic Finance (June 2001) p.38 [5p] Truitt, J F., Capital Rationing: An Annualized Approach,” Journal of Cost Analysis (Summer 1988) p.63 [13p] Wolk, H I., Porter, G A and Vetter, D E., “Net Working Capital. .. costing was noted as being particularly important when (a) nonproduction costs were large, (b) a high percentage of total life-cycle costs were incurred before production began and before any revenues received, and (c) many of the life-cycle costs were locked in at the beginning stages of the process Project-by-project approach to capital budgeting decision has these same characteristics 2 Understand... Ashton, R and Maines, l., “Instructional Case: General Medical Center—Evaluation of Diagnostic Imaging Equipment,” Issues in Accounting Education (November 1998) p.985 [19p] Bailes, J., Nielsen, J and Lawton, S., “How Forest Product Companies Analyze Capital Budgets,” Management Accounting (October 1998) p.24 [7p] Balakrishnan, R and Bhattacharya, U., “Ace Company (B): The Option Value of Waiting and Capital. .. of capital budgeting for a project How do the six stages of capital budgeting support the concept that one can look at resource allocation in a budget and note what top management considers most important? Throughout the six stages, the emphasis is on the objectives and strategy of the organization The decisions about projects involve the entire organization as noted in each of the stages 3 Use and. .. distribution of future cash inflows and outflows for each project Sensitivity analysis (discussed in chapter in text) Varying the required payback time (discussed in chapter in text) Can the emphasis on cash flows be reconciled with an accrual accounting approach? A basic tenet of accrual accounting is realization The accrual basis of accounting, though recognizing revenue when earned and expense when incurred,... interest and income taxes, and income from extraordinary items among other uses The text clearly illustrates the use of the term in this chapter Do note that the accrual accounting method has its own required rate of return that differs from the required rate of return used in net present value or internal rate of return 6 Identify and reduce conflicts from using DCF for capital budgeting decisions and