Cost Chap 15

The net present value and internal rate of return methods of decision making in capital budgeting are superior to the payback method in that they

consider the time value of money

Debt in the capital structure could be treated as if it were common equity in computing the weighted average cost of capital if the debt were

convertible

For a project such as plant investment, the return that should leave the market price of the firm's stock unchanged is known as the

cost of capital

The combined weighted average interest rate that a firm incurs on its long-term debt, preferred stock, and common stock is the

cost of capital

The weighted average cost of capital approach to decision making is not directly affected by the

current budget for capital expansion

Which of the following best represents a screening decision?

determining if a project's internal rate of return exceeds the firm's cost of capital

The interest rate used to find the present value of a future cash flow is the

discount rate

The net present value method assumes that all cash inflows can be immediately reinvested at the

discount rate

The time value of money is explicitly recognized through the process of

discounting

The net present value method of evaluating proposed investments

discounts cash flows at a minimum desired rate of return

If the discount rate that is used to evaluate a project is equal to the project's internal rate of return, the project's _____________ is zero.

net present value

If a project's profitability index is less than 1, the project's

net present value is negative

If the profitability index for a project exceeds 1, then the project's

net present value is positive

The ___________________ is the highest rate of return that can be earned from the most attractive, alternative capital project available to the firm.

opportunity cost of capital

Which of the following indicates that the first cash flow is at the end of a period?

ordinary annuity, annuity due yes, no

The weighted average cost of capital that is used to evaluate a specific project should be based on the

overall capital structure of the corporation

The weighted average cost of capital represents the

overall cost of capital from all organization financing sources

Which of the following capital budgeting techniques has been criticized because it fails to consider investment profitability?

payback method

All other factors equal, a large number is preferred to a smaller number for all capital project evaluation measures except

payback period

In comparing two projects, the ___________ is often used to evaluate the relative riskiness of the projects.

payback period

Which of the following capital budgeting techniques does not routinely rely on the assumption that all cash flows occur at the end of the period?

payback period

Which of the following capital budgeting techniques ignores the time value of money?

payback period

Which of the following capital budgeting techniques may potentially ignore part of a project's relevant

payback period

If r is the discount rate, the formula [1/(1 + r)] refers to the

present value interest factor associated with r for one period.

Which method of evaluating capital projects assumes that cash inflows can be reinvested at the discount rate?

profitability index

A project's after-tax net present value is increased by all of the following except

revenue accruals

The capital budgeting technique known as accounting rate of return uses

salvage value, time value of money yes, no

Which of the following statements is true regarding capital budgeting methods?

The net present value method assumes that all cash inflows can be reinvested at the project's cost of capital.

With regard to a capital investment, net cash inflow is equal to the

net increase in cash receipts over cash payments

A change in the discount rate used to evaluate a specific project will affect the project's

net present value

The pre-tax and after-tax cash flows would be the same for all of the following items except

a cash payment for salaries and wages

Which of the following changes would not decrease the present value of the future depreciation deductions on a specific depreciable asset?

a decrease in the discount rate

When a project has uneven projected cash inflows over its life, an analyst may be forced to use _______ to find the project's internal rate of return.

a trial-and-error approach

Annual after-tax corporate net income can be converted to annual after-tax cash flow by

adding back the depreciation amount

The basis for measuring the cost of capital derived from bonds and preferred stock, respectively, is the

after-tax rate of interest for bonds and stated annual dividend rate for preferred stock.

The after-tax net present value of a project is affected by

all of the above - tax-deductible cash flows, non-tax deductible cash flows, accounting accruals

If management judges one project in a mutually inclusive set to be acceptable for investment,

all other projects in the set are also accepted

Sensitivity analysis is

an appropriate response to uncertainty in cash flow projections.

All other factors equal, which of the following would affect a project's internal rate of return, net present value, and payback period?

an increase in the initial cost of the project

The time value of money is considered in long-range investment decisions by

assigning greater value to more immediate cash flows

In computing the accounting rate of return, the __________ level of investment should be used as the denominator.

average

Multiplying the depreciation deduction by the tax rate yields a measure of the depreciation tax

benefit

If a project generates a net present value of zero, the profitability index for the project will

equal 1

When a profitable corporation sells an asset at a loss, the after-tax cash flow on the sale will

exceed the pre-tax cash flow on the sale

Assume that X represents a sum of money that Bill has available to invest in a project that will yield a return of r. In the formula Y = X(1 + r), Y represents the

future value of X in one period.

The payback method measures

how quickly investment dollars may be recovered

A capital budget is used by management to determine

in what to invest, how much to invest yes, yes

Income taxes are levied on

income as measured by tax rules.

To reflect greater uncertainty (greater risk) about a future cash inflow, an analyst could

increase the discount rate for the cash flow

For a profitable company, an increase in the rate of depreciation on a specific project could

increase the project's internal rate of return

As the marginal tax rate goes up, the benefit from the depreciation tax shield

increases

In a discounted cash flow analysis, which of the following would not be consistent with adjusting a project's cash flows to account for higher-than-normal risk?

increasing the discount rate for cash outflows

The pre-tax cost of capital is higher than the after-tax cost of capital because

interest expense is deductible for tax purposes

Which of the following are tax deductible under U.S. tax law?

interest payments to bondholders

The rate of interest that produces a zero net present value when a project's discounted cash operating advantage is netted against its discounted net investment is the

internal rate of return

Which of the following capital expenditure planning and control techniques has been criticized because it might mistakenly imply that earnings are reinvested at the rate of return earned by the investment?

internal rate of return

If the total cash inflows associated with a project exceed the total cash outflows associated with the project, the project's

internal rate of return is greater than zero

If an investment has a positive net present value, the

internal rate of return is higher than the discount rate

The salvage value of an old lathe is zero. If instead, the salvage value of the old lathe was $20,000, what would be the impact on the net present value of the proposal to purchase a new lathe?

it would increase the net present value of the proposal

A firm's discount rate is typically based on

its cost of capital

The payback period is the

length of time over which the initial investment is recovered.

When using one of the discounted cash flow methods to evaluate the desirability of a capital budgeting project, which of the following factors is generally not important?

method of financing the project under consideration

In a typical (conservative assumptions) after-tax discounted cash flow analysis, depreciation expense is assumed to accrue a

the end of the period

The profitability index is

the ratio of the present value of cash flows to the original investment.

All other things being equal, as the time period for receiving an annuity lengthens,

the related present value factors increase

If investment A has a payback period of three years and investment B has a payback period of four years, then

the relative profitability of A and B cannot be determined from the information given.

Future value is the

value of dollars-in minus dollars-out for future periods adjusted for any interest- compounding factor.

If an analyst desires a conservative net present value estimate, he/she will assume that all cash inflows occur at

year end

The payback method assumes that all cash inflows are reinvested to yield a return equal to

zero