ACC 202 Chapter 13

Which of the following statements is true? A. The payback period is the length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates B. Projects with shorter payback periods are always more desirable than projects with longer payback periods C. The payback method of making capital budgeting decisions considers the time value of money D. All of the statements are true

A The payback period is the length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates. A shorter payback period does not always mean that one investment is more desirable than another. The payback method of making capital budgeting decisions does not consider the time value of money

The performance rule for ranking projects by the profitability index is: A. The higher the profitability index, the more desirable the project B. The lower the profitability index, the more desirable the project C. The higher the net present value, the more desirable the project D. The lower the net present value, the more desirable the project

A When using the profitability index to rank competing investment projects, the preference rule is as follows: the higher the profitability index, the more desirable the project

Which of the following is false? A. An investment with a positive net present value is acceptable because it means the actual return on investment is greater than the required rate of return B. An investment with a zero net present value is not acceptable because it means the actual return on investment is equal to the required rate of return C. An investment with a negative net present value is not acceptable because it means the actual return on investment is less than the required rate of return D. None of the statements are false

B An investment with a zero net present value is acceptable because it means the actual return on investment is equal to the required rate of return

When the cash flows are the same every period after the initial investment in a project, the payback period is equal to: A. The payback rate of return B. The factor of the internal rate of return C. The simple rate of return D. The net present value

B Payback period=Investment required/net annual cash inflow Factor to use in the tables: Internal rate of return=Investment/Net annual cash flows

In comparing two investment alternatives, the difference between the net present values of the two alternatives obtained using the total-cost approach will be: A. Less than the net present value obtained using the incremental cost approach B. The same as the net present value obtained using the incremental cost approach C. Greater than the net present value obtained using the incremental cost approach D. Cannot be determined

B The net present value in favor of one alternative obtained using the total-cost approach is the same as the net present value obtained using the incremental-cost approach. The total-cost approach simply includes all cash flows associated with each alternative whereas the incremental-cost focuses only on differential costs (that is, those costs and revenues that differ between the two alternatives being considered).

The net present value method takes into account...

Cash flow over life of project time value of money Under the net present value method, the present value of a project's cash inflows is compared to the present value of the project's cash outflows. As such, not only does the net present value method take into account the cash flow of a project over its life, it considers the time value of money

Lefty Company's discount rate is 12%. If Lefty has a 5-year investment project that has a project profitability index of zero, this means that: A. the net present value of the project is equal to zero B. the internal rate of return of the project is equal to the discount rate C. the payback period of the project is equal to the project's useful life D. both A and B above are true

D

Which of the following statements is true about how depreciation expense is handled by the following capital budgeting techniques? A. It is included in the accounting rate of return, internal rate of return, and payback methods B. It is excluded in the accounting rate of return, but included in the internal rate of return and payback methods C. It is excluded in the accounting rate of return, internal rate of return, and payback methods D. It is included in the accounting rate of return, but excluded from the internal rate of return and payback methods

D Add back depreciation to NOI when calculating Accounting (simple) rate of return Accounting (simple) rate of return=Annual net operating income/investment

Depreciation is an expense that... A. reduces income B. increases income C. is a tax shield D. A and C are both true

D Depreciation is not a cash flow but it triggers a savings of cash by reducing taxable income

Accept a proposal if...

IRR is equal to or greater than the minimum required rate of return When using IRR, the cost of capital acts as a hurdle rate that a project must clear for acceptance

Considers the time value of money...

NPV IRR Profitability Index

Does not consider the time value of money...

Payback Period Accounting rate of return

T/F Capital budgeting decisions are better when the effect of income taxes is considered

T