Chapter 12 Smartbook -- Finance

MACRS classifies assets into ______ categories to determine the allowable rate of depreciation.

9 or nine

Investment B's curve falls below investment A's curve at every point on the graph. Investment (A or B) is superior.

A

The firm has 2 investment opportunities to choose from, A and B. The cash inflows for each investment of $50,000 is provided in the table below. Using the payback method the firm should choose investment (A or B) _________ ?

A

A replacement decision can be made using either a total analysis or an _______ analysis.

incremental

Select all that apply The payback method fails to consider Multiple select question. inflows after the payback period the quickest payback the time value of money inflows prior to the payback period

inflows after the payback period the time value of money

The internal rate of return (IRR) measures the Multiple choice question. attractiveness of an investment in dollars time required to recoup an investment profitability of investments as a return percentage

profitability of investments as a return percentage

Under the payback method, the investment that Blank______ is the one selected. Multiple choice question. has the highest net present value has the highest cash inflows recoups its investment in the least amount of time has the highest internal rate of return

recoups its investment in the least amount of time

If the NPV for an investment is less than zero, the firm will Multiple choice question. be indifferent to accepting or rejecting the project accept the project reject the project

reject the project

A decision concerning the purchase of new technology to replace old technology is called a ________ decision

replacement

Elective expensing applies to companies that purchase no more than $_______ in total property purchases within a year. (Omit the dollar sign and commas)

1000000

The firm has 2 investment opportunities to choose from, A and B. The cash inflows for each investment of $75,000 is provided in the table below. Using the payback method what is the payback period for each investment? Multiple choice question. A = 3 1/2 years, B = 2 years Both A and B = 5 years A = 4 years, B = 3 years A = 3 1/2 years, B = 2 1/2 years

A = 3 1/2 years, B = 2 1/2 years

The curves of investment A and investment B cross one another at 10%. If investment A's curve falls below investment B's curve prior to the crossover point, which investment is superior at discount rates less than 10% (A or B) ?

B

Section 179 elective expensing is primarily beneficial to large businesses. True false question.

False

Select all that apply In a mutually exclusive investment decision the firm will choose the investment that has the highest Multiple select question. IRR Payback period prime interest rate NPV

IRR NPV

Capital budgeting theory(s) that are theoretical sound include Multiple choice question. IRR and payback NPV and payback NPV, IRR, and payback IRR and NPV

IRR and NPV

Select all that apply Which conceptually sound methods used to evaluate capital expenditures are more acceptable and should be applied to most situations? Multiple select question. Internal rate of return Net future value Payback method Net present value

Internal rate of return Net present value

Based on the table below, which investment alternative(s) will the firm choose if their cost of capital is 12%? Investment B Investment D Investment C Investment A

Investment B

Which capital budgeting method makes the conservative assumption that each inflow can be reinvested at the discount rate? Multiple choice question. MACRS IRR NPV Payback

NPV

Select all that apply An important investment characteristic(s) required to apply the net present value profile is/are Multiple select question. MACRS The amount of capital to be rationed NPV at zero discount rate NPV at the cost of capital

NPV at zero discount rate NPV at the cost of capital Need help? Review these concept resources.Read About the Concept Feedback Next QuestionReading

Match the capital budgeting method with the correct definition Instructions Payback IRR NPV measures the time required to recoup an investment measures profitability of an investment as a return measures the attractiveness of investments in dollars

Payback measures the time required to recoup an investment IRR measures profitability of an investment as a return NPV measures the attractiveness of investments in dollars

Projects with heavier late cash flows are penalized more than projects with heavier early cash flows at higher discount rates. True false question.

True

True or false: the payback method computes the time required to recoup the initial investment.

True

Depreciation is added back to accounting flows to provide cash flows because depreciation is Multiple choice question. a tax savings a loop in the tax system a non-cash expense an expense

a non-cash expense

Capital rationing is a(n) Multiple choice question. artificially determined constraint amount above $5 million product of marginal analysis method of achieving maximum profitability

artificially determined constraint

ADR (asset depreciation range) represents the Multiple choice question. assets useful life in years assets method of depreciation number of years the asset will be depreciated middle of the assets useful life

assets useful life in years

If the NPV for an investment is equal to zero, the firm will Multiple choice question. reject the project, rather than accept the project be indifferent to accepting or rejecting the project accept the project, rather than reject the project

be indifferent to accepting or rejecting the project

The need to use external sources of financing for investment projects may lead to ________ rationing.

capital

The need to use external sources of financing for investment projects may lead to _________ rationing.

capital

An artificial constraint placed by the management of a firm on the amount of funds that can be invested in a given period is known as Multiple choice question. capital rationing capital projecting capital budgeting

capital rationing

Capital budgeting decisions emphasize _________ flows.

cash

All of the following are advantages of the payback method except Multiple choice question. easy to understand considers the time value of money emphasizes liquidity easy to use and understand

considers the time value of money

All of the following are advantages of the payback method except Multiple choice question. easy to understand emphasizes liquidity easy to use and understand considers the time value of money

considers the time value of money

The net present value method requires that all inflows provide a return that is equal to the Multiple choice question. cost of capital payback period internal rate of return sum of the future values

cost of capital

The reinvestment assumption of the net present value assumes that all inflows can be reinvested at the Multiple choice question. cost of capital yield from a given investment YTM prime rate

cost of capital

The reinvestment assumption of the net present value assumes that all inflows can be reinvested at the Multiple choice question. prime rate YTM cost of capital yield from a given investment

cost of capital

The internal rate of return (IRR) is the interest rate that makes net present value (NPV) Multiple choice question. less than zero equal to zero greater than zero

equal to zero

MACRS is the method of depreciation used Multiple choice question. for tax purposes to provide investors and creditors with accurate depreciation amounts in the accounting records to determine the book value of an asset

for tax purposes

MACRS is the method of depreciation used Multiple choice question. to determine the book value of an asset in the accounting records to provide investors and creditors with accurate depreciation amounts for tax purposes

for tax purposes

The net present profile is a way to ________ portray the net present value of a project at different discount rates.

graphically

Firms ration capital for fear of Multiple choice question. losses investing sales growth

growth

Select all that apply Which of the following rates are required when applying the net present value profile. Multiple select question. rate of risk modified internal rate of return internal rate of return discount rate

internal rate of return discount rate

Select all that apply Net present value is the preferred investment selection method because it Multiple select question. is a theoretically valid method. is understood and used by real-world finance professionals does not consider all cash inflows and outflows associated with an investment. does not recognize the time value of money.

is a theoretically valid method. is understood and used by real-world finance professionals

A disadvantage of the payback method is Multiple choice question. the time required to recoup an investments cost simplicity of use it fails to consider the time value of money the ranking of investments equally

it fails to consider the time value of money

Capital rationing hinders a firm from achieving Multiple choice question. its cost of capital economic rationality the IRR maximum profitability

maximum profitability

Finance professionals prefer the Blank______ method for capital budgeting decisions. Multiple choice question. macrs payback internal rate of return net present value

net present value

Characteristics of an investment can be summarized using the Multiple choice question. break-even point internal rate of return net present value profile net present value

net present value profile

Select all that apply What are the methods used to evaluate capital expenditures? Multiple select question. net future value payback method net present value internal rate of return

payback method net present value internal rate of return

Net present value is the sum of the ________ values of all cash outflows and inflows related to a project.

present or current

In order, what are the steps required in the decision making process of a good capital budgeting program search for and discovery of investment opportunities collection of data evaluation and decision making reevaluation and adjustment

search for and discovery of investment opportunities collection of data evaluation and decision making reevaluation and adjustment

An advantage of the payback method is Multiple choice question. it fails to consider the time value of money the recognition of the time value of money simplicity of use the consideration of all cash inflows over the projects life

simplicity of use

Select all that apply A replacement decision can involve several additions to the basic investment decision. What are the additions to be considered? Multiple select question. tax consequences related to the sale of the new machine tax consequences related to the sale of the old machine sale of the old machine sale of the new machine

tax consequences related to the sale of the old machine sale of the old machine

An investment can perform better than another at low discount rates and perform poorly to the other at high discount rates due to the Multiple choice question. timing of inflows economic pressures higher internal rate of return construction of the graph

timing of inflows

Who is responsible for making decisions regarding major capital expenditures Multiple choice question. middle management lower management the supervisor top management

top management

To assume that investments with very high IRR's can be reinvested at an equally high rate is Multiple choice question. realistic unrealistic rational reasonable

unrealistic

Capital rationing hinders a firm from achieving maximum _________ .

value or profitability

The reinvestment assumption of the internal rate of return assumes that all inflows can be reinvested at the Multiple choice question. prime rate offered to the banks best customers yield from a given investment cost of capital

yield from a given investment