Question 1

By ignoring intangible benefits capital budgeting techniques might incorrectly eliminate projects that could be financially beneficial to the company.

Accepted Answer

Intangible benefits such as improved brand image, customer satisfaction, and employee morale may not show up in traditional financial statements, but they can have a significant impact on a company's long-term success. By not considering these benefits, capital budgeting techniques may underestimate the true value of a project and lead a company to reject potentially beneficial investments.

Question 2

The profitability index allows comparison of the relative desirability of projects that require differing initial investments.

Accepted Answer

The profitability index, also known as the profit investment ratio, is a ratio of the present value of future cash flows to the initial investment. It allows for comparison of different projects with different initial investments by taking into account the time value of money. Projects with a higher profitability index are more desirable as they generate more cash flow relative to the initial investment.

Question 3

For purposes of capital budgeting estimated cash inflows and outflows are preferred for inputs into the capital budgeting decision tools.

Accepted Answer

Estimated cash inflows and outflows are the most preferred inputs for capital budgeting decision tools such as net present value, internal rate of return, payback period, etc. because they represent the actual cash flows that will occur as a result of the investment. Other non-cash measures like accounting profit or accruals may not accurately reflect the actual financial impact of the investment.

Question 4

The profitability index is calculated by dividing the total cash flows by the initial investment.

Accepted Answer

The profitability index is calculated by dividing the present value of future cash flows by the initial investment.

Question 5

The interest yield of a project is a rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected annual cash inflows.

Accepted Answer

The statement is true. The interest yield (also known as the internal rate of return or IRR) is the rate at which the sum of the discounted cash inflows equals the initial investment. This is a commonly used method for evaluating the financial feasibility of a project.

Question 6

Post-audits create an incentive for managers to make accurate estimates since managers know that their results will be evaluated.

Accepted Answer

Post-audits serve as a feedback mechanism to evaluate the accuracy of managers' predictions and decisions. Knowing that their performance will be assessed can motivate managers to strive for accuracy and make informed decisions.

Question 7

The cost of capital is a weighted average of the rates paid on borrowed funds as well as on funds provided by investors in the company's stock.

Accepted Answer

This statement is true. The cost of capital is calculated by taking into consideration the rates paid on both borrowed funds (such as loans and bonds) and funds provided by investors in the company's stock (such as dividends and equity). The weighted average of these rates represents the cost of capital, which is important for determining the minimum rate of return that a company should earn on its investments in order to create value for shareholders.

Question 8

The cash payback method is frequently used as a screening tool but it does not take into consideration the profitability of a project.

Accepted Answer

The cash payback method only focuses on how quickly a project can recoup its initial investment, without considering the long-term profitability or return on investment.

Question 9

A well-run organization should perform an evaluation called a post-audit of its investment projects before their completion.

Accepted Answer

A post-audit is typically performed after the completion of a project to assess its outcomes and effectiveness, not before.

Question 10

Capital budgeting decisions usually involve large investments and often have a significant impact on a company's future profitability.

Accepted Answer

Capital budgeting decisions involve investments in long-term assets like property, plants, and equipment that require a significant amount of funds. These decisions usually have a long-term impact on a company's future profitability and are critical for achieving financial success.

Question 11

The capital budgeting committee ultimately approves the capital expenditure budget for the year.

Accepted Answer

The capital budgeting committee typically reviews and recommends capital expenditure projects, but the final approval is usually given by the board of directors or top management.

Question 12

The net present value method can only be used in capital budgeting if the expected cash flows from a project are an equal amount each year.

Accepted Answer

The net present value method can be used even when the expected cash flows from a project are not equal each year. The method takes into account the timing and magnitude of cash flows throughout the project's life.

Question 13

The internal rate of return method is like the NPV method a discounted cash flow technique.

Accepted Answer

The internal rate of return (IRR) method is a discounted cash flow technique that calculates the rate of return an investment is expected to generate. It is similar to the net present value (NPV) method, as both methods use discounted future cash flows to evaluate an investment.

Question 14

Sensitivity analysis uses a number of outcome estimates to get a sense of the variability among potential returns.

Accepted Answer

Sensitivity analysis does indeed use multiple outcome estimates to gauge the potential variability in returns.

Question 15

The cash payback period is computed by dividing the cost of the capital investment by the net annual cash inflow.

Accepted Answer

This statement is true. The cash payback period is a financial metric used to determine the length of time it takes to recoup the initial cost of a capital investment, and is calculated by dividing the cost of the investment by the net annual cash inflow.

Question 16

A post-audit is an evaluation of how well a project's actual performance matches the projections made when the project was proposed.

Accepted Answer

A post-audit is specifically designed to compare actual performance to initial projections, so the statement is true.

Question 17

To avoid accepting projects that actually should be rejected a company should ignore intangible benefits in calculating net present value.

Accepted Answer

Ignoring intangible benefits would result in an incomplete calculation of net present value and potentially lead to accepting projects that should be rejected. An accurate calculation should consider both tangible and intangible benefits and costs.

Question 18

The cash payback technique is a quick way to calculate a project's net present value.

Accepted Answer

The cash payback technique only calculates the time it takes to recover the initial investment of a project, it doesn't account for the time value of money or other cash flows beyond the payback period. The net present value method takes into consideration all cash flows over the project's life and discounts them to their present value, allowing for a more accurate assessment of the project's profitability.

Question 19

One way of incorporating intangible benefits into the capital budgeting decision is to project conservative estimates of the value of the intangible benefits and include them in the NPV calculation.

Accepted Answer

Incorporating conservative estimates of the value of intangible benefits into the NPV calculation is an appropriate way to account for intangible benefits in capital budgeting decisions.

Question 20

Using the net present value method a net present value of zero indicates that the project would not be acceptable.

Accepted Answer

A net present value of zero indicates that the project is expected to generate a return exactly equal to the discount rate, meaning it should cover its cost of capital, making it acceptable as it meets the minimum criteria for investment.

Quiz 17: Cost-Volume Profit Analysis: Additional Issues