Capital Budgeting
False
A capital budget spans only a one-year period.
False
A capital budgeting project is accepted if the required rate of return equals or exceeds the internal rate of return.
False
A decrease in the tax rate will decrease the net present value (NPV) for a given capital budgeting project.
False
A manager who uses discounted cash flow methods to make capital budgeting decisions does not face goal-congruence issues if the accrual accounting rate of return is used for performance evaluation.
True
An example of an intangible asset would be a corporation's customer base.
True
Capital budgeting focuses on projects over their entire lives to consider all the cash flows or cash savings from investing in a single project.
False
Cash received from the disposal of old equipment is not relevant to a decision to buy a replacement.
True
Deducting depreciation from operating cash flows would result in counting the initial investment twice in a discounted cash flow analysis.
True
Depreciation tax deductions result in tax savings that partially offset the cost of acquiring the capital asset.
False
Discounted cash flow methods focus on operating income.
False
Discounted cash flow methods measure all the expected future cash inflows and outflows of a project as if they occurred at equal intervals over the life of the project.
True
In calculating the net initial investment cash flows, any increase in working capital required for the project should be included.
False
In determining whether to keep a machine or replace it, the original cost of the machine is always a relevant factor.
True
In the net present value (NPV) method, after-tax cash flows should be used instead of pre-tax cash flows when taxes are a consideration.
False
Internal rate of return is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.
True
It is possible to use the net present value in an analysis of customer profitability.
False
Managers using discounted cash flow methods to make capital budgeting decisions make the same decisions that they would make in using the accrual accounting rate-of-return methods.
True
Relevant cash flows are expected future cash flows that differ among the alternative uses of investment funds.
True
The accrual accounting rate of return is the method that is based most closely on the information in the financial statements.
False
The accrual accounting rate-of-return method is similar to the internal rate-of-return method because both methods calculate a rate-of-return percentage.
False
The identification stage of capital budgeting explores alternative capital investments that will achieve the objectives of the organization.
True
The information-acquisition stage of capital budgeting considers the expected costs and the expected benefits of alternative capital investments.
True
The net present value method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the hurdle rate.
True
The net present value method can be used in situations where the required rate of return varies over the life of the project.
False
The nominal approach to incorporating inflation into the net present value method predicts cash inflows in real monetary units and uses a real rate as the required rate of return.
True
The payback method allows for managers to highlight liquidity.
False
The payback method is only useful when the expected cash flows in the later years of the project are highly uncertain.
True
The selection stage of the capital budgeting process consists of choosing projects for possible implementation.
True
The use of an accelerated method of depreciation for tax purposes would usually increase the present value of the investment.
False
Unlike the net present value method and the internal rate-of-return method, the payback method does not distinguish between the origins of the cash flows.
