Chapter 12 Review: Capital Investment Decisions and the Time Value of Money

Which of the following methods calculates the investment's unique rate of return? Payback period Net present value Internal rate of return Accounting rate of return

Internal rate of return

Which of the following methods of analyzing capital investment factors in the time value of money? Accounting rate of return Internal rate of return Payback period All of the above methods factor in the time value of money.

Internal rate of return

In order to convert the average annual net cash inflow from the asset back to the average annual operating income from the asset, one must:

Subtract annual depreciation expense.

Which of the following methods focuses on the operating income an asset generates rather than the net cash inflows it generates? Payback period Accounting rate of return Net present value Internal rate of return

Accounting rate of return

The time value of money depends on which of the following factors? Principal amount Number of periods Interest rate All of the above

All of the above

After identifying potential capital investments, the next step in the capital budgeting process is which of the following? Analyzing potential investments through at least one of the four methods Estimating the future net cash inflows of the investments Performing post-audits of the capital investments Engaging in capital rationing

Estimating the future net cash inflows of the investments

When potential capital investment of different size are compared, management should choose the one with the:

Highest profitability index.

Which of the following is false with regard to the payback period? It is computed as follows, regardless of whether cash flows are equal or unequal: Initial investment / Expected annual net cash inflow. The payback period is the length of time it takes to recover the initial cost of the capital investment. The payback period gives no indication of the investment's profitability. All else being equal, a shorter payback period is more desirable than a longer payback period.

It is computed as follows, regardless of whether cash flows are equal or unequal: Initial investment / Expected annual net cash inflow.

The internal rate of return is:

The interest rate that makes the NPV of an investment equal to zero

An investment's NPV is calculated as:

The present value of the investment minus the investment's initial investment