Chapter 7

A dollar today is worth _________ than a dollar earned a year from now.

more

The term capital budgeting is used to describe how managers plan significant investments in projects that have ______ implications. Multiple choice question. short-term long-term

long-term

The required rate of return is the ______ rate of return a project must yield to be acceptable. Multiple choice question. exact maximum minimum

minimum

The concept of the time value of money is based on the notion that a dollar today is worth (more/less) __________ than a dollar a year from now.

more

If the original investment in a capital project has been recovered, the net present value will be: Multiple choice question. negative or zero either positive, negative or zero, depending on the discount rate positive or zero

positive or zero

Select all that apply The two broad categories into which capital budgeting decisions fall are ______ and ______ decisions. Multiple select question. purchasing preference replacement screening

preference screening

The required rate of return is: Multiple choice question. the minimum rate of return a project must yield to be acceptable the maximum rate of return a project must yield to be acceptable any return above zero

the minimum rate of return a project must yield to be acceptable

Why must future cash flows relating to a capital investment be discounted when calculating the net present value of the investment? Multiple choice question. Future cash flows need not be discounted when calculating net present value. It is easier to discount future cash flows when calculating net present value, even though it makes cash flows less comparable. Because of the time value of money, future cash flows must be discounted to be comparable to other cash flows.

Because of the time value of money, future cash flows must be discounted to be comparable to other cash flows.

To determine if a project is acceptable compare the internal rate of return to the company's: Multiple choice question. tax rate profit margin sales ratio hurdle rate

hurdle ratew

Investment required/Annual net cash inflow is the formula to find the factor that enables calculation of the: Multiple choice question. net present value simple rate of return internal rate of return cost of capital

internal rate of return

In an equipment capital budgeting decision, recovering the original investment means that the: Multiple choice question. equipment was returned and the funds used to pay for the equipment were taken back investment has generated enough cash inflows to completely cover the cost of the equipment funds used to pay for the equipment were provided by selling an old piece of equipment

investment has generated enough cash inflows to completely cover the cost of the equipment

Current assets minus current liabilities is called _________ _________.

working; capital

The internal rate of return is the discount rate that results in a net present value of ________ for the investment.

zero

Select all that apply Which of the following are true regarding the time value of money? Given the same overall dollar return, a project that lasts 20 years is preferable to a project that lasts 5 years. Projects that provide earlier returns are preferable to those that promise later returns. By collecting a project's return quickly, the investor has the opportunity to re-invest that money to earn even more. One dollar today is worth less than one dollar a year from now.

Projects that provide earlier returns are preferable to those that promise later returns. By collecting a project's return quickly, the investor has the opportunity to re-invest that money to earn even more.

Select all that apply Which of the following statements are true? Multiple select question. In order for a project to be acceptable, the discount rate must be higher than the minimum acceptable rate of return. The cost of capital may be used to screen out undesirable projects. When using the internal rate of return method, the cost of capital is used as the hurdle rate. When the net present value method is used, the discount rate equals the hurdle rate.

The cost of capital may be used to screen out undesirable projects. When using the internal rate of return method, the cost of capital is used as the hurdle rate. When the net present value method is used, the discount rate equals the hurdle rate.

How managers plan significant investments in projects that have long term implications such as purchasing new equipment or introducing new products is called: Multiple choice question. capital budgeting directing funds investment initiative controlling costs

capital budgeting

The basic premise of the payback method is the ________, the more desirable the investment. Multiple choice question. faster the cost of the investment is recovered lower the internal rate of return slower the cost of the investment is recovered higher the net present value

faster the cost of the investment is recovered

The two broad categories into which capital budgeting decisions fall are ________ decisions and ________ decisons.

screening; preference

Define: + Cost of capital + Working capital + Initial investment + Salvage value

+ Cost of capital: Average rate of return that must be paid to long-term creditors and shareholders for use of their funds + Working capital: Current assets minus current liabilities + Initial investment: Funds needed to purchase a capital asset or begin a capital investment project + Salvage value: Funds gained from the sale of a capital asset

True or false: The net present value can be used to determine whether a project should be accepted. True False

True

The simple rate of return is also referred to as the _________ or ________ rate of return.

accounting; unadjusted

The simple rate of return equals the: Multiple choice question. annual net average cash flows/increase in working capital required. annual incremental net operating income/total cash outflows. annual incremental net operating income/initial investment. annual net average cash flows/initial investment.

annual incremental net operating income/initial investment.

When computing the simple rate of return, the annual incremental net operating income in the numerator should ______ the investment's depreciation charges. Multiple choice question. be increased by not be changed by be reduced by

be reduced by

To screen out undesirable investments, ________ use(s) the cost of capital. Multiple choice question. only the net present value method neither the net present value nor internal rate of return methods only the internal rate of return method both the net present value and internal rate of return methods

both the net present value and internal rate of return methods

Select all that apply Capital budgeting decisions include: Multiple select question. determining which equipment to purchase among available alternatives choosing to lease or buy new equipment purchasing new equipment to reduce cost increasing the salary of the current company president acquiring a new facility to increase capacity hiring new factory workers deciding to replace old equipment

determining which equipment to purchase among available alternatives choosing to lease or buy new equipment purchasing new equipment to reduce cost acquiring a new facility to increase capacity deciding to replace old equipment

Calculating the present value of money is referred to as ________ cash flows.

discounting

Because of the time value of money, projects that promise ______ returns are preferable to those that promise the opposite. Multiple choice question. later earlier lower higher

earlier

When the annual net cash inflow is the same each year, the payback period equals the ________ required divided by the annual net cash ___________.

investment; inflow

Working capital: Multiple choice question. is the cost savings provided by the capital investment often increases when a company takes on a new project is the value recaptured after the end of an investment's use is the amount paid for ownership of the investment

often increases when a company takes on a new project

The basic premise of the _______ method is that the more quickly the cost of an investment can be recovered, the more desirable the investment is.

payback

Select all that apply Capital budgeting methods that focus on cash flows rather than incremental operating income are: simple rate of return payback net present value internal rate of return

payback net present value internal rate of return

A screening decision: Multiple choice question. relates to whether a proposed project is the best option among more than one acceptable project relates to whether a proposed project is acceptable is made after a capital budgeting project is accepted is used to identify projects that need to be improved

relates to whether a proposed project is acceptable

The internal rate of return is compared against the minimum _________ rate of return when analyzing the acceptability of an investment project.

required

Another term for the minimum required rate of return is the cost of _________.

capital

Which of the following capital budgeting decision tools focuses on net operating income rather than cash flows? Multiple choice question. Simple rate of return Internal rate of return Net present value Minimum required rate of return

Simple rate of return

When using the simple rate of return, the initial investment should be reduced by the ________ value of old equipment.

salvage

One of the two broad categories of capital budgeting decisions, a __________ decision, relates to whether a proposed project is acceptable based on a preset criterion.

screening

The cost of capital serves as a ______ tool. Multiple choice question. preference screening

screening Reason: Any project with a negative net present value is discarded from consideration.

View Perfect is considering an investment in a new line of windows. The project is expected to last 10 years. If the factor of the internal rate of return is 5.889, the internal rate of return is: Multiple choice question. 11% 5% 10% 14%

11% Reason: Present Value of an Annuity of $1 in Arrears - the 10 period 5.889 factor is 11%.

What assumption underlies net present value analysis? Multiple choice question. If the net present value of a project is positive, the company's net income will increase. If the net present value of a project is positive, its payback period will be acceptable. All cash flows generated by an investment project are immediately reinvested at a rate of return equal to the discount rate. All cash flows including the initial investment are paid/received at the beginning of the period.

All cash flows generated by an investment project are immediately reinvested at a rate of return equal to the discount rate. Reason: + Even if the net present value is positive, the payback period should be longer than what the company considers acceptable. + All cash inflows are assumed to be received at the end of the period.

Select all that apply The payback method: does not consider how quickly an investment is recovered is not a true measure of investment profitability does not consider the time value of money ignores all cash flows that occur after the payback period. cannot evaluate projects with uneven cash flows

Does not consider the time value of money Is not a true measure of investment profitability Ignores all cash flows that occur after the payback period

True or false: When a capital investment decision is being made between two or more alternatives, the project with the shortest payback period is always the most desirable investment. True False

False Reason: The project with the shortest payback period will earn its investment back most quickly, but is not necessarily the most desirable project between the alternatives.

True or false: To verify the internal rate of return (IRR) compute the project's net present value using the IRR as the discount rate to determine if it is zero. True False

True Reason: The internal rate of return is the discount rate that makes net present value equal to zero.

Select all that apply Which of the following statements are true? Multiple select question. In order for a project to be acceptable, the discount rate must be higher than the minimum acceptable rate of return. The cost of capital may be used to screen out undesirable projects. When using the internal rate of return method, the cost of capital is used as the hurdle rate. When the net present value method is used, the discount rate equals the hurdle rate.

When using the internal rate of return method, the cost of capital is used as the hurdle rate. When the net present value method is used, the discount rate equals the hurdle rate. The cost of capital may be used to screen out undesirable projects.

Net present value is the: Multiple choice question. expected net operating income of a project actual return on investment of a project sum of the present value of a project's cash inflows and the present value of the project's cash outflows difference between the present value of a project's cash inflows and the present value of the project's cash outflows

difference between the present value of a project's cash inflows and the present value of the project's cash outflows

Select all that apply The simple rate of return: discounts future net operating income back to the present is calculated using cash flows rather than revenue and expense fluctuates from year to year along with fluctuations in revenue and expense ignores the time value of money

fluctuates from year to year along with fluctuations in revenue and expense ignores the time value of money

When net cash inflow is the same every year, the equation used to calculate the factor of the internal rate of return is: Multiple choice question. accounting net income from the project/annual net cash inflow annual net cash inflow/investment required investment required/annual net cash inflow investment required/accounting net income from the project

investment required/annual net cash inflow

The internal rate of return: Multiple choice question. is the rate of return required for all investments made by a company is also known as the simple rate of return method does not consider the time value of money is the discount rate that makes NPV equal zero for a project

is the discount rate that makes NPV equal zero for a project

Select all that apply Typical capital budgeting decisions include: Multiple select question. product and service pricing decisions lease or buy decisions employee hiring and firing decisions equipment selection decisions cost reduction decisions

lease or buy decisions equipment selection decisions cost reduction decisions

A capital investment project's payback period is the: Multiple choice question. useful life of the capital asset purchased length of time it takes for the project to begin to generate cash inflows length of time it takes for the project to recover its initial cost from the net cash inflows generated estimated length of the capital investment project from the initial cash outflow to the end of the project

length of time it takes for the project to recover its initial cost from the net cash inflows generated

Select all that apply Capital budgeting methods that focus on cash flows rather than incremental operating income are: Multiple select question. payback net present value simple rate of return internal rate of return

payback net present value internal rate of return

Investment required/Annual net cash inflow is the formula for the: Multiple choice question. discount rate payback period net present value simple rate of return

payback period

The length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates is the _______ _______.

payback; period

Little Tots Gym has a required rate of return of 13%. The gym is considering the purchase of $12,500 of new equipment. The internal rate of return on the project has been calculated to be 11%. This project: Multiple choice question. is acceptable should be rejected

should be rejected Reason: In order for a project to be acceptable, the internal rate of return must equal or exceed the required rate of return.

The internal rate of return is: Multiple choice question. a project's minimum required rate of return the rate of return of an investment project over its useful life the appropriate salvage value of purchased equipment a discount rate of zero

the rate of return of an investment project over its useful life

Select all that apply The net present value of a project is: Multiple select question. used in determining whether or not a project is an acceptable capital investment. the present value of the project's projected annual tax savings. the difference between the present value of cash inflows and present value of cash outflows for a project. the present value of the project's salvage value.

used in determining whether or not a project is an acceptable capital investment. the difference between the present value of cash inflows and present value of cash outflows for a project.

Select all that apply Typical capital budgeting cash outflows include: Multiple select question. working capital invested initial equipment investments cost reductions installation costs salvage value of old equipment

working capital invested initial equipment investments installation costs