Ch. 12

The Analytic Hierarchy Process (AHP) is:

A multi-criteria decision technique that can combine qualitative and quantitative factors in the overall evaluation of decision alternatives.

Which one of the following is an advantage of the payback method?

A. It provides a (rough) measure of risk.

In making capital budgeting decisions, the principal focus is on:

After-tax cash flows and the timing of these cash flows.

The tax impact of a capital investment project (such as the replacement of a major piece of machinery) is present during:

B. All stages: initiation, operation, and final disposal of the project.

Which of the following methods is potentially useful for helping an organization align its capital expenditures with its strategy?

B. Analytic hierarchy process (AHP).

Intolerance of uncertainty often leads managers to:

B. Choose projects with short payback periods.

In terms of evaluating mutually exclusive projects, the internal rate of return (IRR) method mistakenly favors investment proposals with:

B. Long useful lives.

The time value of money is explicitly considered in which of the following capital budgeting method(s)?

B. Net present value (NPV) method.

Which one of the following capital budgeting decision models consists of dividing the total initial investment outlay by annual after-tax cash inflows (when such inflows are assumed equal over time)?

B. Payback period.

Especially for projects with long lives, estimation of revenues (or benefits), costs, and cash flows of a capital investment project is a difficult task principally because of:

B. Uncertainty about future events.

A composite of the cost of various sources of funds comprising a firm's capital structure is its:

B. Weighted-average cost of capital (WACC).

Which of the following statements regarding capital investment analysis is false?

Benefits of potential investment projects are conceptually expressed in terms of accounting income (or reduction in costs).

Which one of the following is calculated by dividing average annual net operating income by the average investment associated with a capital project?

C. Book (accounting) rate of return.

The capital budgeting method(s) that is (are) most likely to provide consistency between data for capital budgeting and data for subsequent performance evaluation is (are) the:

C. Book (i.e., accounting) rate of return method.

Which of the following can a final disposal of a capital asset (e.g., machinery used in the operation of a business) not produce?

D. An operating gain or loss.

The process of identifying, evaluating, selecting, and controlling capital investments is referred to as:

D. Capital budgeting.

Given the same total cash flow returns (CFRs), the internal rate of return (IRR) method of capital budgeting would favor a proposal having yearly CFRs that were:

D. Heavier towards the beginning of a proposal's life.

Which one of the following is the estimated rate (i.e., percentage) that makes the discounted present value of future cash flows equal to the initial investment?

D. Internal rate of return (IRR).

Which of the following is not a characteristic of the payback method for making capital budgeting decisions?

D. It considers returns over the entire life of the project.

Which one of the following is an advantage of the book (accounting) rate of return method for analyzing capital investment proposals?

Data for calculating the return are typically readily available.

For a typical capital investment project, the bulk of the investment-related cash outflow occurs:

During the initiation stage of the project (i.e., at time period 0).

Results from the net present value (NPV) method and the internal rate of return (IRR) method may differ between projects if the projects differ in all of the following except:

E. Book (accounting) rate of return on the two projects.

Which of the following statements regarding cost of capital is not true? A. It reflects the perceived level of risk for which investors in debt and equity securities expect to be compensated. B. It is another term for "required rate of return." C. It is typically defined as a weighted-average of all sources of capital for the company. D. It is used to calculate the present value of anticipated after-tax cash flows for a project. E. It is used when calculating the internal rate of return (IRR) of a proposed investment.

E. It is used when calculating the internal rate of return (IRR) of a proposed investment.

Research has shown that in framing capital investment decisions, sunk costs tend to:

Escalate commitment in making capital budgeting decisions.

Which of the following is not true regarding the appropriate discount rate to be used in conjunction with discounted cash flow (DCF) decision models?

For projects of "above average" risk, the appropriate discount rate is the weighted-average cost of capital (WACC)

The internal rate of return (IRR) for an investment:

May produce different results than the net present value method (NPV) in evaluating projects with different useful lives.

Which of the following is NOT one of the more common strategic benefits provided by capital investment projects?

Reducing the number of short-term (i.e., operational) decisions that management must make.

Accounting makes all of the following contributions to the capital budgeting process except:

The theoretical development of appropriate decision models.

Which of the following is not a characteristic of capital budgeting post-audits?

They encourage managers to build slack into capital investment proposals.