Cost Chapter 21

A "what-if" technique that examines how a result will change if the original predicted data are not achieved or if an underlying assumption changes is called: a. sensitivity analysis b. net present value analysis c. internal rate-of-return analysis. d. adjusted rate-of-return analysis

A

If the net present value for a project is zero or positive, this means that the: a. project should be accepted b. project should not be accepted c. expected rate of return is below the required rate of return d. Both a and c are correct.

A

In capital budgeting, a project is accepted only if the internal rate of return equals or: a. exceeds the required rate of return b. is less than the required rate of return c. exceeds the net present value d. exceeds the accrual accounting rate of return

A

In using the net present value method, only projects with a zero or positive net present value are acceptable because: a. the return from these projects equals or exceeds the cost of capital b. a positive net present value on a particular project guarantees company profitability c. the company will be able to pay the necessary payments on any loans secured to finance the project d. Both a and b are correct.

A

The relevant terminal disposal price of a machine equals the: a. difference between the salvage value of the old machine and the ultimate salvage value of the new machine b. total of the salvage values of the old machine and the new machine c. salvage value of the old machine d. salvage value of the new machine

A

The stage of the capital budgeting process that distinguishes which types of capital expenditure projects are necessary to accomplish organization objectives is the: a. identification stage b. search stage c. information-acquisition stage d. selection stage

A

The stage of the capital budgeting process which chooses projects for implementation is the: a. selection stage b. search stage c. identification stage d. management-control stage

A

The stage of the capital-budgeting process in which projects get underway and performance is monitored is the: a. implementation and control stage b. search stage. c. identification stage d. management-control stage

A

Which of the following involves significant financial investments in projects to develop new products, expand production capacity, or remodel current production facilities? a. capital budgeting b. working capital c. master budgeting d. project-cost budgeting

A

A capital budgeting tool that management can use to summarize the difference in the future net cash inflows from an intangible asset at two different points in time is referred to as: a. the accrual accounting rate-of-return method b. the net present value method c. sensitivity analysis d. the payback method

B

An example of a sunk cost in a capital budgeting decision for new equipment is: a. an increase in working capital required by a particular investment choice b. the book value of the old equipment c. the necessary transportation costs on the new equipment d. All of these answers are correct.

B

An important advantage of the net present value method of capital budgeting over the internal rate-of-return method is: a. the net present value method is expressed as a percentage b. the net present values of individual projects can be added to determine the effects of accepting a combination of projects c. There is no advantage d. Both a and b are correct.

B

Depreciation is usually not considered an operating cash flow in capital budgeting because: a. depreciation is usually a constant amount each year over the life of the capital investment b. deducting depreciation from operating cash flows would be counting the lump-sum amount twice c. depreciation usually does not result in an increase in working capital d. depreciation usually has no effect on the disposal price of the machine

B

Net present value is calculated using the: a. internal rate of return b. required rate of return c. rate of return required by the investment bankers d. None of these answers is correct.

B

The definition of an annuity is: a. similar to the definition of a life insurance policy b. a series of equal cash flows at intervals c. an investment product whose funds are invested in the stock market d. Both a and b are correct.

B

The method that measures the time it will take to recoup, in the form of future cash inflows, the total dollars invested in a project is called: a. the accrued accounting rate-of-return method b. payback method c. internal rate-of-return method d. the book-value method

B

The minimum annual acceptable rate of return on an investment is the: a. accrual accounting rate of return b. hurdle rate c. internal rate of return d. net present value

B

The payback method of capital budgeting approach to the investment decision highlights: a. cash flow over the life of the investment b. the liquidity of the investment c. the tax savings of the depreciation amounts d. having as lengthy payback time as possible

B

The stage of the capital budgeting process which explores alternative capital investments that will achieve organization objectives is the: a. identification stage b. search stage c. information-acquisition stage d. selection stage

B

All of the following are methods that aid management in analyzing the expected results of capital budgeting decisions EXCEPT: a. accrual accounting rate-of-return method b. discounted cash-flow method c. future-value cash-flow method d. payback method

C

Comparison of the actual results for a project to the costs and benefits expected at the time the project was selected is referred to as: a. the audit trail b. management control c. a postinvestment audit d. a cost-benefit analysis

C

In situations where the required rate of return is not constant for each year of the project, it is advantageous to use: a. the adjusted rate-of-return method b. the internal rate-of-return method c. the net present value method d. sensitivity analysis

C

In the analysis of a capital budgeting proposal, for which of the following items are there no after-tax consequences? a. cash flow from operations b. gain or loss on the disposal of the asset c. reduction of working capital balances at the end of the useful life of the capital asset d. None of these answers is correct.

C

The focus in capital budgeting should be on: a. the tax consequences of different investment strategies b. the internal rate of return of different strategies c. expected future cash flows that differ between alternatives d. None of these answers is correct.

C

The stage of the capital budgeting process which considers the expected costs and the expected benefits of alternative capital investments is the: a. identification stage b. search stage c. information-acquisition stage d. selection stage

C

The two factors capital budgeting emphasizes are: a. qualitative and nonfinancial b. quantitative and nonfinancial c. quantitative and financial d. qualitative and financial

C

Which of the following results of the net present value method in capital budgeting is the LEAST acceptable? a. $(10,000) b. $(7,000) c. $(18,000) d. $0

C

All of the following are major categories of cash flows in capital investment decisions EXCEPT: a. the initial investment in machines and working capital b. recurring operating cash flows c. the initial working capital investment d. depreciation expense reported on the income statement

D

Discounted cash flow methods for capital budgeting focus on: a. cash inflows b. operating income c. cash outflows d. Both a and c are correct.

D

For capital budgeting decisions, the use of the accrual accounting rate of return for evaluating performance is often a stumbling block to the implementation of the: a. net cash flow b. most effective goal-congruence choice c. discounted cash flow method for capital budgeting d. most effective tax strategy

D

The accounting system that corresponds to the project dimension in capital budgeting is the: a. net present value method b. internal rate of return c. accrual accounting rate of return d. life-cycle costing

D

The approach to capital budgeting which divides an accounting measure of income by an accounting measure of investment is the: a. net present value b. internal rate of return c. payback method d. accrual accounting rate of return

D

The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the: a. net present value method b. accrual accounting rate-of-return method c. payback method d. internal rate of return

D

The capital budgeting method which 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 required rate of return is the: a. payback method b. accrual accounting rate-of-return method c. sensitivity method d. net present value method

D

The net present value method focuses on: a. cash inflows b. accrual-accounting net income c. cash outflows d. Both a and c are correct.

D

The stage of the capital budgeting process in which a firm obtains funding for the project is the: a. identification stage b. search stage c. information-acquisition stage d. financing stage

D

Which capital budgeting technique(s) measure all expected future cash inflows and outflows as if they occurred at a single point in time? a. net present value b. internal rate of return c. payback d. Both a and b are correct.

D

Which of the following are NOT included in the formal financial analysis of a capital budgeting program? a. quality of the output b. safety of employees c. cash flow d. Neither a nor b are included.

D

Which of the following is NOT an appropriate term for the required rate of return? a. discount rate b. hurdle rate c. cost of capital d. All of these answers are correct.

D

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

False

Cash received from the disposal of old equipment is not relevant to a decision to buy a replacement.

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

False

In determining whether to keep a machine or replace it, the original cost of the machine is always a relevant factor.

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.

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.

False

The identification stage of capital budgeting explores alternative capital investments that will achieve the objectives of the organization

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.

False

The payback method is only useful when the expected cash flows in the later years of the project are highly uncertain.

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.

False

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.

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

True

In calculating the net initial investment cash flows, any increase in working capital required for the project should be included.

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.

True

It is possible to use the net present value in an analysis of customer profitability.

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.

True

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.

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.

True

The payback method allows for managers to highlight liquidity.

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

True