Capital Budgeting/Investment Analysis: chapter 24 True and false

The expected period of time that will elapse between the date of a capital investment and the complete recovery in csh of the amount invested is called internal rate of return.

False - it's payback

The present value index calculation is a "return per dollar invested" comparison that helps analysts rank proposals when capital investment funds are limited

True

When evaluating a proposed capital expenditure by the net present value method, if the NPV negative, the proposal is should be rejected , unless it is required for "qualitative" reasons.

True

Which of the following investments has the greatest present value? : an investment that yields A. 100,000 in 1 year B 50,000 at the end of each year for 2 years. C. 33,333 at the end of each year for 3 years D. 25,000 at the end of each year for 4 years

A. 100,000 in 1 year

Which of the following capital budgeting methods ignore the time value of money? A. Cash payback B. NPV C. IRR D. "A" , "B" and "C" E. Just "B" and "C"

A: Cash Payback

The present value (rounded) of 20,000 to be received one year from today, assuming a 15% interest rate is: A 15,451 B. 17,000 C. 17,391 D. 20,000 E. 23,000

C. 17,391

When analyzing and paring two capital projects with unequal lives the correct analysis procedure is to A. Revise the life of the short project to equal the life of the longer project B. Revise the life of the longer project to equal the life of the shorter project C. Revise the life of the longer project to equal the life of the shorter project and calculate a new salvage value D. Stop the analysis because projects with unequal lives should not be compared

C. Revise the life of the longer project to equal the life of the shorter project and caluclate a new salvage value

NPV and IRR are superior to the cash payback method because they are: A. Required by GAAP B. Required by the IRS C. Using the Time value of money D. All of the above

C. Using the time value of money

In capital budgeting, a company's Discount Rate (often referred to as their Cost of Capital or Hurdle rate) is the : A. Prime Rate B. Dow Jones Market Rate C. Weighted average cost of debt, Equity and retained Earnings

C. Weighted average cost of Debts, equity,m and retained Earnings

Joe's Clothing is considering opening a new store. The expected investment cost is 270,000. Expected annual sales are 150,000 and annual costs are 90,000, which includes 22,500 in depreciation. What's the Pay back ? A. 1.8 years B. 2.7 years C. 3.0 years D. 3.3 years E. 4.5 years

D. 3.3 Years

An Investment costing 21,000 and providing annual cash inflows of 3,500 has a payback of: A. 3 years B. 5 years C. 5.5 years D. 6 years E. 9years

D. 6 Years

The technique that considers a range of "what if" possibilities when analyzing capital projects is referred to as: A the reciprocal method B. Discount rate analysis C. Variable costing D. Sensitivity analysis

D. Sensitivity analysis

When making capital investment decision, which of the following is not discounted? A. Net income B. Initial Investment C. Operating Expenses D. All should be discounted E.Salvage Value

D. all should be discounted.

If a 240,000 asset being depreciated fully by straight line will increase a company's annual net income by 40,000 a year, the nit's approximate average Rate of Return is: A. 6.0% B. 6.7% C. 26.7% D. 29.7 % E. 33.3 %

E. 33.3 %

A factor that may "complicate" capital budgeting analysis is: A. Expense uncertainty B. Inflation C. Unequal project lives D. Income taxes E All of these

E. All of these

Which of the following capital investment estimates is probably the most certain (accurately know)? A. Net Income B. Internal Rate of return C. Payback Period D. Total Expense E. Initial investment

E. Initial investment

An annuity is a series of equal or unequal cash flows at fixed intervals

False

Both the internal rate of return and the average rate of return methods of capital budgeting are referred to as discounted cash flow methods.

False

The cash payback method of capital investment analysis is one of the methods referred to as a present value method.

False

A capital investment that provides an internal rate of return that is higher than the company's hurdle rate is usually considered an acceptable investment.

True

The further in the future a receipt of cash is the smaller its present value will be

True