ACCT2210_ch11

b

A problem in which you must calculate the worth to you today of receiving a certain amount at some time in the future is a A. future value of a single amount problem. B. present value of a single amount problem. C. future value of an annuity problem. D. present value of an annuity problem.

hurdle rate

The minimum required rate of return for a project is the

d

The payback method A. is a complex method of analysis. B. is infrequently used. C. incorporates the time value of money. D. ignores benefits and costs that occur after the project has paid for itself.

payback period

The total time to recover an original investment is the

present value

The value now of a cash flow to be received in the future is called

c

When a project has a positive net present value, it has a profitability index A. greater than zero. B. less than zero. C. greater than one. D. less than one.

b

When cash flows are equal each year, the payback period is calculated as: A. Initial investment × Annual net cash flow B. Initial investment/Annual net cash flow C. Annual net cash flow/Initial investment D. Annual net cash flow - Initial investment/Project life

a

When comparing mutually exclusive capital investments, managers should A. choose the option with the lowest cost on a net present value basis. B. choose the option with the lowest undiscounted cost. C. not use net present value because it cannot be used to compare investments. D. not use sensitivity analysis.

c

When making screening decisions using the net present value method, a project is acceptable if A. the NPV is greater than the hurdle rate. B. the NPV is greater than the IRR. C. the NPV is positive. D. the NPV is negative.

accounting rate of return

Which of the following capital budgeting methods focuses on net income rather than cash flows? Payback period Accounting rate of return Net present value Internal rate of return

d

Which of the following is the formula for accounting rate of return? A. Initial investment/net income B. Annual net cash flow/Initial investment C. Initial investment/Annual net cash flow D. Net income/Initial investment

accounting rate of return

Which of the following methods is calculated as annual net income as a percentage of the original investment in assets?

b

Which of the following statement regarding the payback method is incorrect? A. The payback period is the amount of time it takes for a capital investment to "pay for itself." B. In general, projects with longer payback periods are safer investments than those with shorter payback periods. C. When cash flows are equal each year, the payback period is calculated by dividing the initial investment in the project by its annual cash flow. D. The payback method is often used as a screening tool for potential investments.

depreciation

Which of the following would be included in net income but not in annual cash flows? Sales revenue Depreciation Initial investment Direct labor

screening decision

A decision that occurs when managers evaluate a proposed capital investment to determine whether it meets some minimum criteria is a(n)

preference decision

A decision that requires managers to choose from among a set of alternative capital investment opportunities is a(n)

a

A positive net present value indicates that a project will A. generate a return in excess of the firm's cost of capital. B. generate more cash than is initially invested. C. generate more cash than alternative projects. D. generate a return in excess of alternative projects.

d

A problem in which you must calculate the value now of a series of equal amounts to be received for some specified number of periods in the future is a A. future value of a single amount problem. B. present value of a single amount problem. C. future value of an annuity problem. D. present value of an annuity problem.

sensitivity analysis

An analysis that reveals whether changing the underlying assumptions would affect the decision is a

annuity

An annual stream of cash flows that occurs uniformly across time

profitability index

Independent projects should be prioritized according to their

independent projects

Projects that are unrelated to one another, so that investing in one project does not preclude or affect the choice about investing in the other alternatives, are

mutually exclusive projects

Projects that involve a choice among competing alternatives, where selection of one project implies rejection of all the other alternatives, are

net present value

The method that compares the present value of a project's future cash flows to the initial investment is

compounding

when interest is earned on top of interest