Ch 12 T/F
The profitability index equals the present value of net cash inflows from the investment divided by the cost of the investment.
True
The residual value is considered in a net present value computation.
True
The three factors that affect the time value of money are principal, number of periods, and the interest rate.
True
When evaluating the cash flows from an investment, a reduction in cash outflows is treated as the same as an increase in cash inflows.
True
The internal rate of return is used as the discount rate when calculating the net present value of a project.
False
The net present value method assumes that all cash inflows are immediately reinvested at a rate of return equal to the internal rate of return.
False
The net present value method does not incorporate the time value of money.
False
Accrual-based accounting is not used in determining the accounting rate of return.
False
Capital budgeting is done when common stock is issued.
False
Capital budgeting methods will not work with unequal cash flows during the capital asset's life. Other methods must be utilized in those cases.
False
Capital budgeting techniques such as payback method and net present value are based upon Generally Accepted Accounting Principles (GAAP) and accrual accounting.
False
Capital investments do not typically require large sums of money.
False
Choosing among alternative capital investments is called a post-audit.
False
In calculating the net present value of an investment in equipment, the required investment and its residual value should be subtracted from the present value of all future cash inflows.
False
Investments with longer payback periods are more desirable, all else being equal.
False
Neither the payback period nor the IRR capital budgeting method recognizes the time value of money.
False
One dollar to be received in the future is worth more than one dollar today.
False
The ARR allows managers to compare the present value of future cash generated by a project against the cost of investing in that project.
False
The discounted cash flow methods for capital budgeting are generally considered inferior to the payback period and the ARR because they consider the time value of money.
False
The payback and accounting rate of return models are conceptually better than the discounted cash flow models because they are based on cash flows, and they consider both profitability and the time value of money.
False
The payback method primarily focuses on profitability and not time.
False
Calculating interest on the principal and on all the interest earned to date is called compound interest.
True
Capital budgeting predictions must consider factors such as changing consumer preferences, competition, and government regulations.
True
Net present value and the internal rate of return are examples of discounted cash flow models used in capital budgeting decisions.
True
One advantage of the internal rate of return is that it considers the time value of money.
True
The Internal Rate of Return, the Accounting Rate of Return, Net Present Value and Payback Period are four recognized capital budgeting methods.
True
The accounting rate of return method of analyzing capital budgeting decisions measures the average annual rate of return from using the asset over its entire life.
True
The accounting rate of return uses non-cash flow factors including depreciation in calculating the operating income of the asset.
True
The cost associated with renovating a warehouse to be used as a restaurant would be considered to be a capital asset.
True
The costs to develop a major website for a company would be considered to be a capital asset if those costs are significant and material (for example, the costs to develop the website exceed $100,000).
True
The ARR is the only method that uses accrual accounting figures and thus making it important to financial statement users.
True
The Future Value of $1 table is used to calculate how much $100 in hand today would be worth in 5 years.
True
The payback method can be used when the net cash inflows from a capital investment are unequal.
True
A series of equal payments or deposits made at equal time intervals are called compound interest.
False
The hurdle rate is the length of time it takes to recoup an investment's initial cost from the cash inflows that investment generates.
False
When computing the present value of a future sum, the interest rate must always be expressed as an annual rate.
False
When evaluating capital investment projects, if the internal rate of return is less than the required rate of return, the project will be accepted.
False
When selecting a capital investment project from three alternatives, the project with the highest net present value will always be preferable.
False
When the profitability index is less than 1.00 for a project, that project has a positive net present value.
False
The principal amount, the interest rate, and the number of periods are all factors needed to calculate the time value of money.
True
The process of making capital investment decisions is referred to as capital budgeting.
True
The accounting rate of return is a measure of profitability computed by dividing the average annual operating income from an asset by the initial amount invested in the asset.
True
The health care insurance cost of a company for its assembly-line workers would not be considered to be a capital asset.
True
The interest rate that makes the net present value of the investment equal to zero is the internal rate of return.
True
The net present value model differs from the IRR model in that it does NOT show the project's unique rate of return.
True
One disadvantage of the payback method is that it does not consider the time value of money.
True
Post-audits of capital investments compare actual net cash inflows to projected net cash inflows.
True
Self-check-in machines at airports are an example of capital assets.
True