CH12

The ________ capital budgeting method uses accrual accounting income. A) accounting rate of return B) payback C) net present value D) internal rate of return

A

The ________ capital budgeting method uses accrual accounting, rather than net cash flows, as a basis for calculations. A) ARR B) Payback C) NPV D) IRR

A

The formula for calculating the accounting rate of return for a capital asset is A) average annual operating income from asset/amount invested in asset. B) average annual net cash inflow from asset/amount invested in asset. C) (average annual operating income + depreciation expense)/amount invested in asset. D) (average annual cash inflows - depreciation expense)/(amount invested in asset + residual value of asset).

A

The time value of money is explained by which of the following? A) Invested money earns income over time. B) Money is more valuable over time. C) A stream of payments is received over time. D) Interest is always compounded over time.

A

What will happen to the net present value (NPV) of a project if the discount rate is increased from 8% to 10%? A) NPV will always decrease. B) NPV will always increase. C) The discount rate change will not affect NPV. D) We cannot determine the direction of the effect on NPV from the information provided.

A

Regarding capital rationing decisions for capital assets, which of the following is true? A) Companies should always choose the investment with the shortest payback period. B) Companies should always choose the investment with the highest NPV. C) Companies should always choose the investment with the highest ARR. D) None of the above are true.

D

The ________ capital budgeting model is generally the simplest to compute. A) accounting rate of return B) net present value C) internal rate of return D) payback

D

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A company finds that the residual value of $8,000 for the equipment in a capital budgeting project has been inadvertently omitted from the calculation of the net present value (NPV) for that project. How does this omission affect the NPV of that project? A) The project's NPV should be higher, but be less than $8,000 higher, with the residual value included. B) The project's NPV should be $8,000 higher with the residual value included. C) The project's NPV should be $8,000 lower with the residual value included. D) The project's NPV should be lower, but be less than $8,000 lower, with the residual value included.

A

If the accounting rate of return exceeds the required accounting rate of return, A) invest in the capital asset. B) do not invest in the capital asset. C) only invest if the payback period is also greater than the required rate of return. D) only invest if the payback period is also less than the required rate of return.

A

A manager wants to know which investment decision will affect the bottom line of the financial statements according to Generally Accepted Accounting Principles. Which capital budgeting method would he choose? A) Payback method B) Accounting rate of return method C) Net present value method D) Profitability index

B

How does depreciation affect the calculation of a project's accounting rate of return (ARR)? A) Depreciation is added to the annual cash inflows. B) Depreciation is deducted from the annual cash inflows. C) Depreciation does not affect ARR. D) Depreciation is only deducted if the ARR is less than the minimum required rate of return.

B

The "rate of return that makes the NPV of a capital project equal to zero" is best described by which of the following terms? A) Accounting rate of return B) Internal rate of return C) Discount rate D) Net present value

B

The ________ capital budgeting model considers both profitability and the time value of money. A) payback B) net present value C) accounting rate of return D) Both a and c are correct

B

The ________ is generally considered to be the most superior method for making capital budgeting decisions. A) accounting rate of return method B) net present value method C) payback method D) incremental method

B

The following are all methods of analyzing capital investments except A) Payback Period. B) Regression Analysis. C) Net Present Value (NPV). D) Accounting Rate of Return (ARR).

B

The process of choosing among different alternative investments due to limited resources is referred to as A) capital investing. B) capital rationing. C) resource rationing. D) resource allocation.

B

The term ________ is best described as "the length of time required to recover the cost of an investment." A) time value of money B) payback period C) capital budgeting D) annuity

B

The term ________ is best described as a relationship among principal, interest rate, and time. A) capital budgeting B) time value of money C) payback period D) annuity

B

What will happen to the internal rate of return (IRR) of a project if the discount rate is decreased from 9% to 7%? A) IRR will always increase. B) The discount rate change will not affect IRR. C) IRR will always decrease. D) We cannot determine the direction of the effect on IRR from the information provided

B

"Management's minimum desired rate of return on an investment" is best described by which of the following terms? A) Payback return B) Internal rate of return C) Discount rate D) Net present value

C

A company is evaluating a variety of different capital investment opportunities. Due to limited funds, the company can only choose one project. What would be the best capital budgeting method for this company to use to select a project? A) Payback method B) Accounting rate of return method C) Profitability index D) Net present value method

C

A company would consider all of the following in computing the IRR of an investment, except A) predicted cash inflows over the life of the project. B) the cost of the project. C) depreciation expense on the assets of the project. D) present value factors.

C

After a company invests in capital assets, it will perform a ________ in order to compare the actual to the projected net cash inflows. A) cash flow analysis B) pre and post analysis C) post-audit D) post-cash flow

C

All else being equal, a company would choose to invest in a capital asset if which of the following is true? A) If the payback period equals the amount invested B) If the expected accounting rate of return is less than the required rate of return C) If the expected accounting rate of return is greater than the required rate of return D) If the average amount invested is equal to the net cash inflows

C

The "decision model that computes the difference between the present value of the investment's net cash inflows, using a desired rate of return, and the cost of the initial investment" is best described by which of the following terms? A) Accounting rate of return B) Discount rate C) Net present value D) Internal rate of return

C

The ________ capital budgeting methods are based on cash flows, profitability, and the time value of money. A) payback and accounting rate of return B) payback and net present value C) net present value and internal rate of return D) accounting rate of return and internal rate of return

C

The term ________ is best described as "a stream of equal installments made at equal time intervals." A) time value of money B) capital budgeting C) annuity D) payback period

C

Which of the following is a weakness of the internal rate of return (IRR)? A) IRR assumes that the cash inflows from the project are immediately reinvested at the minimum required rate of return. B) IRR ignores the time value of money. C) IRR assumes that the cash inflows from the project are immediately reinvested at the internal rate of return. D) IRR is not a percentage rate, but is expressed in dollars.

C

Which of the following is used as the equation's numerator when computing the payback period for a capital asset with equal annual net cash inflows? A) Expected annual cash inflow B) Total cash inflows C) Amount invested D) Net cash outflow

C

Which of the following items would be considered a capital asset? A) Purchase of office supplies to be used internally over the next year B) Payment for this year's advertising campaign C) Construction of a new store building D) Donation of money to United Way

C

"A measure of profitability computed by dividing the average annual operating income by the amount of the investment" is best described by which of the following terms? A) Net present value B) Discount rate C) Internal rate of return D) Accounting rate of return

D

(Present value tables required) The present value of an investment is affected by which of the following? A) The interest rate B) The number of time periods (length of the investment) C) The type of investment (annuity versus lump sum) D) All of the above

D

) Senseman Company has three potential projects from which to choose. Selected information on each of the three projects follows: Project A Project B Project C Investment required$42,500 $56,000 $53,700 Net present value $45,700 $75,400 $70,200 of project Using the profitability index, rank the projects from most profitable to least profitable. A) A, B, C B) C, B, A C) B, A, C D) B, C, A

D

Another name for the minimum desired rate of return is A) discount rate. B) required rate of return. C) hurdle rate. D) All of the above

D

What would a project's profitability index be if the project has an internal rate of return which is equal to the company's discount rate? A) It would be 0.5. B) It would be 0.0. C) It would be 1.0. D) It cannot be determined from information provided

B

Which of the following is used as the equation's numerator when computing the accounting rate of return for a capital asset? A) Average amount invested in the asset B) Average annual operating income from the asset C) Total amount invested in the asset D) Average net cash flows from the asset

B

How does depreciation affect the calculation of a project's payback period? A) Depreciation is deducted from the annual cash inflows. B) Depreciation is added to the annual cash inflows. C) Depreciation is only deducted if the payback period exceeds five years. D) Depreciation does not affect the payback calculation.

D

The net present value method assumes that the cash inflows from a project are immediately reinvested at the A) internal rate of return. B) accounting rate of return. C) market rate of return. D) required rate of return.

D

The term ________ is described as a "formal means of analyzing long-range investment alternatives." A) annuity B) time value of money C) payback period D) capital budgeting

D

What is an attribute of the internal rate of return? A) It is the interest rate that makes the NPV of the investment equal to zero. B) It is the interest rate that makes the cost of the investment equal to the present value of the investment's net cash inflows. C) It is used in the capital rationing process. D) All of the above are attributes of the internal rate of return.

D

Which of the capital budgeting methods is the best? A) Payback period B) Net present value C) Internal rate of return D) No single method is best.

D

Which of the following areas does not make significant use of time value of money concepts? A) Capital investment analysis B) Lending and borrowing C) Personal finance planning D) Marketing research

D

Which of the following is a characteristic of a capital asset? A) The item will be used for a long period of time. B) The item involves a significant sum of money. C) None of these characteristics are correct. D) Both A and B are correct.

D

Which of the following is not an advantage of post-audits of capital investments? A) They indicate whether project should continue or should be abandoned. B) They help managers make better estimates for future projects. C) They encourage managers to submit realistic net cash inflows with their project proposals. D) They help managers to decide which project should be selected.

D