ACTY 2110 - Ch. 11
Studio Films is considering the purchase of some new film equipment that costs $150,000. The new equipment is expected to increase revenues by $115,000 annually. Total annual operating expenses are expected to be $70,000. The accounting rate of return of the equipment is %.
30
A project's payback period is the ______. a.) length of time it takes for the project to recover its initial cost from the net cash inflows generated b.) length of time it takes for the project to begin to generate cash inflows c.) useful life of the capital asset purchased d.) estimated length of the capital investment project from the initial cash outflow to the end of the project
a
Deciding whether to purchase or lease a vehicle is an example of a(n) ______ project decision. a.) mutually exclusive b.) unrelated independent
a
Synonyms for the accounting rate of return are the ______ rate of return and the ______ rate of return. a.) simple, unadjusted b.) simple, internal c.) internal, payback d.) simple, cash flow
a
The cost of capital is the ______. a.) weighted average after tax cost of debt and cost of equity b.) sum of all cash outflows required for a capital investment c.) initial cash outlay required for a capital investment project
a
The internal rate of return method indicates ______. a.) the discount rate that makes the present value of the cash inflows equal to the present value of the cash outflows b.) the discount rate that is equal to the project's minimum required rate of return c.) a discount rate of zero
a
When choosing among independent projects, ______. a.) investment resources must be prioritized b.) accepting one precludes accepting another c.) managers should use the internal rate of return to prioritize the projects
a
When making a capital budgeting decision, it is most useful to calculate the payback period ______. a.) as part of the screening process b.) as part of the preference decision process c.) when the company is concerned with the time value of money
a
Which of the following capital budgeting decision tools focuses on net operating income rather than cash flows? a.) Accounting rate of return b.) Profitability index c.) Net present value d.) Internal rate of return
a
Non-discounting methods of evaluating capital investments are ______. a.) accounting rate of return b.) payback c.) net present value d.) internal rate of return
a, b
The weighted -average cost of capital ______. a.) is how much it costs a company to fund capital projects b.) should be reflected in the company's discount rate c.) averages the after-tax cost of debt and average asset investment
a, b
Which of the following statements are true? a.) The time value of money should be considered in capital budgeting decisions. b.) Money is more valuable today than it will be in the future. c.) The payback method is a discounted cash flow method.
a, b
Capital budgeting decisions include ______. a.) acquiring a new facility to increase capacity b.) deciding to replace old equipment c.) purchasing new equipment to reduce cost d.) increasing the salary of the current company president e.) determining which equipment to purchase among available alternatives f.) choosing to lease or buy new equipment g.) hiring new factory workers
a, b, c, e, f
Discounted cash flow methods ______. a.) incorporate the time value of money b.) are generally superior to non-discounting methods c.) include the accounting rate of return d.) include the profitability index
a, b, d
Typical capital budgeting decisions include ______. a.) lease or buy decisions b.) research and development projects c.) employee hiring and firing decisions d.) equipment selection decisions e.) product and service pricing decisions
a, b, d
Which of the following statements are true? a.) The internal rate of return method makes an assumption about reinvesting cash flows that may not be realistic. b.) The net present value method is generally preferred over the internal rate of return method when making preference decisions. c.) Unlike the internal rate of return method, the net present value method assumes that cash flows received from a project are not reinvested. d.) The net present value and internal rate of return methods provide consistent information when making screening decisions.
a, b, d
An advantage of IRR as compared to NPV is that IRR ______. a.) is generally easier for managers to interpret b.) makes a more realistic assumption about the reinvestment of cash flows c.) makes it easier to compare projects of different sizes d.) is the only method of the two that can be used for both preference and screening decisions
a, c
A screening decision ______. a.) is used to determine if a project is a candidate for further consideration b.) relates to whether a proposed project is the best option among more than one acceptable project c.) is made after a capital budgeting project is accepted d.) relates to whether a proposed project meets some minimum criteria
a, d
Major limitations of the accounting rate of return method for evaluating capital investment proposals include that it ______. a.) is based on net income instead of net cash flows b.) is calculated using cash flows rather than revenue and expense c.) is a simple and intuitive approach d.) ignores the time value of money
a, d
Net present value is ______. a.) the difference between the present value of cash inflows and present value of cash outflows for a project b.) a capital budgeting technique that ignores the time value of money c.) inferior to the payback method when doing capital budgeting d.) used to determine if a project is an acceptable capital investment
a, d
How much net income a potential project is expected to generate as a relative percentage of required investment is told by the _____ _____ of return.
accounting rate
Equal interest rates, interest periods, and dollar amounts each interest period are all characteristics of ______.
annuities
A monthly house or car payment is an example of a(n) _____.
annuity
An advantage of IRR over NPV is that it is stated ______. a.) as an absolute dollar value b.) on a relative basis
b
The discount rate ______. a.) equals the profitability index b.) should reflect the company's cost of capital c.) is multiplied by all present cash flows to discount them
b
The hurdle rate is the ______ rate of return on an investment. a.) maximum allowable b.) minimum acceptable c.) desired
b
Which of the following statements are true? a.) The payback method is best used for preference decisions. b.) Capital budgeting techniques that use time value of money are superior to those that don't. c.) Any capital budgeting technique can be used for screening decisions. d.) The IRR method is best for evaluating mutually exclusive projects.
b, c
Shortcomings of the payback period include it ______. a.) cannot be used to evaluate projects with uneven cash flows b.) does not consider the time value of money c.) does not indicate how long it takes to recoup the investment d.) ignores cash flows that occur after the payback period
b, d
Net cash flow differs from net income because of ______. a.) the payback period b.) the accounting rate of return c.) accrual-based accounting d.) capital budgeting decisions
c
The basic premise of the payback method is ______. a.) projects with longer payback periods are more desirable investments than projects with shorter payback periods b.) the higher the net present value, the more desirable the investment c.) projects with shorter payback periods are safer investments than projects with longer payback periods d.) the lower the internal rate of return, the more desirable the investment
c
A tool to help managers make decisions about investments in major assets such as new facilities, equipment, and products is called _____ _____.
capital budgeting
Investing in new technology to save on labor costs is an example of a(n) _____ _____ decision.
capital investment
When the dollar amount of interest earned on a given investment increases every year, ______ interest is in force.
compound
Interest earned on top of interest is called _____.
compounding
The internal rate of return is compared to the _____ of _____ when analyzing the acceptability of an investment project.
cost capital
To determine if a project is acceptable, compare the internal rate of return to the company's ______.
cost of capital
A stream of cash flows that occur uniformly over time is a(n) ______. a.) future value b.) payback c.) present value d.) annuity
d
Unlike other capital budgeting methods, the accounting rate of return method focuses on ______, rather than ______. a.) cash flows, net operating income b.) the initial investment, the salvage value c.) the salvage value, the initial investment d.) net operating income, cash flows
d
To convert net income to net cash flow, add back _____ expense.
depreciation
Net present value, internal rate of return, and profitability index are referred to as _____ _____ _____ methods because they incorporate the time value of money.
discounted cash flow
Backing out interest to find the equivalent value in today's present dollars is called _____.
discounting
The opposite of compounding is _____.
discounting
True or false: An advantage of the accounting rate of return (ARR) is that it uses net income to evaluate capital investments.
false
True or false: When the discount rate increases a project is more likely to be acceptable because its net present value will also increase.
false
True or false: When two projects are mutually exclusive, investing in one does not eliminate the other one from consideration.
false
If you have $1,000 now and want to know what it will be worth in 3 years, you are solving a(n) _____ _____ problem.
future value
The minimum required rate of return is also known as the _____ rate.
hurdle
As the cost of capital (discount rate) decreases, the net present value of a project will ______.
increase
When projects are _____ or unrelated to one another, each project can be evaluated on its own merit.
independent
When two projects are ______, investing in one of the projects does not preclude investing in the other.
independent
Capital investment methods that ignore the time value of money are referred to as _____-_____ methods.
non discounting
Some of the cash flows received over the life of a project are generally ignored when using the _____ method.
payback
The time that it takes for a project to recoup its original investment is the _____ period.
payback
Managers are required to evaluate and compare more than one capital investment alternative when making a(n) _____ decision.
preference
Capital budgeting techniques involve solving _____ _____ problems because of the need to know how much something is worth today.
present value
The ratio of a project's benefits (measured by the present value of future cash flows) to its required investment is the _____ _____.
profitability index
When prioritizing independent projects when limited investment funds are available, the best capital budgeting method to use is the ______.
profitability index
When resources are limited, mangers should prioritize independent projects based on the _____ _____.
profitability index
Narrowing down a set of projects for further consideration is a(n) _____ decision.
screening
The two types of capital investment decisions are _____ decisions and _____ decisions.
screening, preference
The principle that money is more valuable today than it will be in the future is referred to as the _____ _____ of _____.
time value money
True or false: For capital budgeting purposes, capital assets includes item research and development projects.
true
True or false: Preference decisions are made to prioritize and select from capital budgeting alternatives.
true
The internal rate of return is the discount rate that results in a net present value of _____ for the investment.
zero