ch 13 acct

A very useful guide for making investment decisions is: The shorter the payback period, the more profitable the project.

false

If new equipment is replacing old equipment, any salvage received from sale of the old equipment should not be considered in computing the payback period of the new equipment.

false

Projects with shorter payback periods are always more profitable than projects with longer payback periods.

false

The payback method considers cash flows after the payback has been reached.

false

The payback method uses discounted cash flow techniques.

false

The payback method will lead to the same decision as other methods of capital budgeting.

false

The project profitability index is used to compare the internal rates of return of two companies with different investment amounts.

false

The simple rate of return is the same as the internal rate of return.

false

The simple rate of return method places its focus on cash flows instead of on accounting net operating income.

false

If a company has computed the project profitability index of an investment project as 0.15, then the project's internal rate of return is _______ than the discount rate.

greater

If investment A has a payback period of 3 years and investment B has a payback period of 4 years, then net present value is?

he relation between investment A's net present value and investment B's net present value cannot be determined from the given information

The rate of return that equates the present value of a project's cash inflows with the present value of its cash outflows (i.e., it sets the NPV equal to zero). Also, the rate of return being earned on funds that remain internally invested in a project.

internal rate of return

Scree j g budget relates to whether a proposed project _________ while a preference decisions are __________

is acceptable or not ; selections among several acceptable alternatives

If two projects require the same amount of investment, then the preference ranking computed using either the project profitability index or the net present value will be the same.

true

In preference decisions, the profitability index and internal rate of return methods may produce conflicting rankings of projects.

true

One criticism of the payback method is that it ignores cash flows that occur after the payback point has been reached.

true

Preference decisions attempt to determine which of many alternative investment projects would be the best for the company to accept.

true

The internal rate of return for a project is the discount rate that makes the net present value of the project equal to zero.

true

The payback method does not consider the time value of money.

true

The simple rate of return focuses on accounting net operating income rather than on cash flows.

true

n comparing two investment alternatives, the difference between the net present values of the two alternatives obtained using the total cost approach will be the same as the net present value obtained using the incremental cost approach.

true

If the internal rate of return is used as the discount rate in computing net present value, the net present value will be:

zero

The internal rate of return of an investment project is the discount rate that results in a ____ net present value for the project.

zero

Simple rate of return =

Annual incremental net operating income / Initial investment

Factor of the internal rate of return =

Investment required / Annual net cash inflow

Payback period =

Investment required / Annual net cash inflow

Minimum annual cash flows from the intangible benefits=

Negative net present value to be offset / Present value factor

Minimum annual cash flows required =

Negative net present value to be offset / Present value factor

Minimum salvage value =

Negative net present value to the offset x Present value factor

Project profitability index =

Net present value of the project / Investment required

An investment project for which the net present value is $300 would result in which of the following conclusions? A. The net present value is too small; the project should be rejected. B. The rate of return of the investment project is greater than the required rate of return. C. The net present value method is not suitable for evaluating this project; the internal rate of return method should be used. D. The investment project should only be accepted if net present value is zero; a positive net present value indicates an error in the estimates associated with the analysis of this investment.

b

Spring Company has invested $20,000 in a project. Spring's discount rate is 12% and the project profitability index on the project is zero. Which of the following statements would be true? I. The net present value of the project is $20,000. II. The project's internal rate of return is equal to 12%.

both

_________ rather the accounting net income is the focus in the capital budgeting because the present vale of cash flow depends on when it occurs.

cash flow

The internal rate of return of an investment project is the ________ that results in a zero net present value for the project.

discount rate

the discount rate in the net present value rate method is based on....

minimim required rate of return

The capital budgeting method that recognizes the time value of money by discounting cash flows over the life of the project, using the company's required rate of return as the discount rate is called the

net present value method

The length of time required to recover the initial cash outlay for a project is determined by using the

payback method

If an investment has a project profitability index of 0.15, then the net present value of the project is ___________.

positive

future cash flows are discounts to their ________

present value

net present value is the difference between the ________ of and investment and the present value of its ___________

present value and cash flows

All cash flows generated by an investment project are immediately reinvested at a rate of return = to the discount rate.

simplifying assumption about NPV

All flows other then initial investment occurs at the end of the period is a....

simplifying assumption about NPV

Discounted cash flows methods are superior to other methods because it has the unique property of taking the _______________ into account.

time value of money

Money's potential to grow in value over time. The relationship between time, money, a rate of return, and earnings growth.

time value of money

If the internal rate of return exceeds the required rate of return for a project, then the net present value of that project is positive.

true