A306 smartbook ch 7

The factor of the internal rate of return is 5.033 for a project lasting 7 years. The internal rate of return is

9%

What assumption underlies net present value analysis? Multiple choice question. 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. If the net present value of a project is positive, its payback period will be acceptable. If the net present value of a project is positive, the company's net income will increase.

All cash flows generated by an investment project are immediately reinvested at a rate of return equal to the discount rate.

Select the capital budgeting approaches that use discounted cash flows. Multiple select question. Internal rate of return method Simple rate of return method Net present value method Payback method Cost-volume-profit method

Internal rate of return method Net present value method

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

faster the cost of the investment is recovered

The simple rate of return Blank______. Multiple select question. fluctuates from year to year along with fluctuations in revenue and expense discounts future net operating income back to the present is calculated using cash flows rather than 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

The net present value of a project is Blank______. Multiple select question. the cost of an investment less the present value of the project's salvage value 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

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

Typical capital budgeting cash outflows include Blank______. Multiple select question. installation costs salvage value of old equipment working capital invested cost reductions initial equipment investments

working capital invested initial equipment investments installation costs

When a project with a negative NPV has significant intangible benefits, the Blank______. Multiple choice question. total present value of the project's cash outflows should be compared to the estimated intangible benefits annual intangible benefit necessary to make the investment worthwhile should be calculated intangible benefits should not be considered since the NPV is negative

annual intangible benefit necessary to make the investment worthwhile should be calculated

Another term for the minimum required rate of return is the cost of ---

capital

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

capital budgeting

A postaudit involves Blank______. Multiple choice question. taking on a capital investment project directly following the analysis phase checking whether expected results are actually realized paying for audit services provided

checking whether expected results are actually realized

Suppose a project with a negative net present value would provide intangible benefits. To estimate the annual value of intangible benefits needed to accept the project, Blank______ the negative net present value excluding intangible benefits by the Blank______. Multiple choice question. divide, present value of $1 factor multiply, present value factor for an annuity multiply, present value of $1 factor divide, present value factor for an annuity

divide, present value factor for an annuity

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

earlier

A capital investment project's payback period is the Blank______. Multiple choice question. 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 useful life of the capital asset purchased 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

If the internal rate of return is Blank______. Multiple select question. less than the hurdle rate the project should be rejected less than the hurdle rate the project is acceptable greater than the hurdle rate the project should be rejected greater than the hurdle rate the project is acceptable

less than the hurdle rate the project should be rejected greater than the hurdle rate the project is acceptable

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

long-term

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

long-term

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

payback

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

payback internal rate of return net present value

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

screening

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 Blank______. Multiple choice question. should be rejected is acceptable

should be rejected

The capital budgeting methods that focus on incremental operating income rather than cash flows is Blank______. Multiple choice question. payback simple rate of return net present value internal rate of return

simple rate of return

Current assets minus current liabilities is called

working capital

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 Blank______. Multiple choice question. 11% 10% 5% 14%

11%

Which of the following statements are true? Multiple select question. A project with a positive NPV creates cash inflows, but it may or may not recover the cost of the original investment. A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds. The net present value method automatically provides for return of the original investment. The net present value method does not provide for return of the original investment.

A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds. The net present value method automatically provides for return of the original investment.

Which of the following is NOT a typical capital budgeting cash outflow? Multiple choice question. Initial equipment investment Working capital invested Installation costs Cost reductions

Cost reductions

Which of the following statements are true? Multiple select question. 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. 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.

Synonyms for the simple rate of return are the Blank______ rate of return and the Blank______ rate of return. Multiple choice question. accounting, unadjusted accounting, cash flow net, adjusted cash flow, net

accounting, unadjusted

A postaudit is a valuable process because Blank______. Multiple choice question. it forces companies to fire employees who made poor estimates during the decision making process actual values can be used to determine if the project is performing as expected it gives managers something to do after they are done with the decision-making process

actual values can be used to determine if the project is performing as expected

The net present value method assumes that all cash flow other than the initial investment occur Blank______ the period Multiple choice question. at the beginning of at the end of evenly throughout

at the end of

The cost of capital is the Blank______. Multiple choice question. cost of state and local permits that are required to undertake a project average rate of return a company must pay its long-term creditors and shareholders for the use of their funds initial cash required for a capital investment net of the salvage value realized from the sale of the investment sum of all cash outflows required for a capital investment

average rate of return a company must pay its long-term creditors and shareholders for the use of their funds

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

be reduced by

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

both the net present value and internal rate of return methods

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

ypical capital budgeting decisions include Blank______ decisions. Multiple select question. equipment selection employee hiring and firing lease or buy product and service pricing cost reduction

equipment selection lease or buy cost reduction

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

Investment required ÷ Annual net cash inflow is the formula to find the factor that needed to calculate the Blank______. Multiple choice question. internal rate of return net present value simple rate of return cost of capital

internal rate of return

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

internal rate of return net present value payback

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

investment required ÷ annual net cash inflow

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

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

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

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

often increases when a company takes on a new project

When making a preference decision, comparing the net present value of one project to the net present value of another project can Blank______. Multiple choice question. never be done only be done if the discount rate is the same only be done if the initial investments are equal always be done

only be done if the initial investments are equal

Reggie's Refrigerators is considering the purchase of some new equipment. The company has limited its purchase options to two alternatives. Option A has an internal rate of return of 10%, and option B has an internal rate of return of 13%. If the required rate of return on the project is 9.5%, Blank______. Multiple choice question. neither option is acceptable option A is the preferred choice option B is the preferred choice either option is equally acceptable

option B is the preferred choice

The term discounting cash flows refers to the process of calculating the Blank______ value of those cash flows. Multiple choice question. present future past

present

Conducting a postaudit Blank______. Multiple select question. provides an opportunity to cut losses on floundering projects determines which capital project should be selected for investment provides an opportunity to reinforce and possibly expand successful projects flags any manager's attempts to inflate benefits or downplay costs in a project proposal

provides an opportunity to cut losses on floundering projects provides an opportunity to reinforce and possibly expand successful projects flags any manager's attempts to inflate benefits or downplay costs in a project proposal

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

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

When computing the simple rate of return, the initial investment should be reduced by any ---- value realized from the sale of the old equipment.

salvage

The two broad categories into which capital budgeting decisions fall are Blank______ and Blank______ decisions. Multiple select question. screening replacement purchasing preference

screening preference

The two broad categories into which capital budgeting decisions fall are ---- and ---- decisions

screening and preference

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

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

The concept that a dollar today is worth more than a dollar a year from now is called the ---- ---- of money

time value

The net present value of one project can only be directly compare to the net present value of another project if the initial investments are equal. True false question.TrueFalse

true

When using the simple rate of return method, a project that does not have constant incremental revenues and expenses may look desirable in some years and undesirable in others. True false

true

Water World is planning to build a new attraction at its water park. A new wave pool has a project profitability index of 1.09, and a new water slide has a profitability index of 1.14. The best choice for Water World is the Blank______. Multiple choice question. water slide wave pool

water slide

A project has an acceptable rate of return, if the net present value is Blank______. Multiple choice question. zero or above above zero only below zero only zero or below

zero or above