Question 1

A capital expenditure decision is a short-term decision in which a business determines whether or not to make an investment.

Accepted Answer

long-term decision

Question 2

Capital expenditure decisions are sometimes referred to as capital budgeting decisions.

Accepted Answer

Capital expenditure decisions involve the planning and allocation of funds for major investments or expenses, and this process is commonly known as capital budgeting in the context of corporate finance and accounting.

Question 3

As a general rule, a capital expenditure proposal is acceptable to a business when its return on investment is greater than the cost to the business of providing cash to make the investment.

Accepted Answer

A capital expenditure proposal is considered acceptable when the return on investment (ROI) exceeds the cost of capital, indicating that the investment will generate returns greater than its cost, thereby adding value to the business.

Question 4

The 'initial cost' of a capital expenditure proposal is the expected cash payment to be made to put the proposal into operation.

Accepted Answer

The 'initial cost' of a capital expenditure proposal refers to the total expected cash outlay required to make the investment operational, including the purchase price, installation costs, and any other upfront expenses necessary to bring the project to a functional state.

Question 5

If the cost of a machine is $40 000, machine transportation costs are $3200, the machine installation costs are $1600 and the annual insurance costs for the machine are $1000 then the 'initial cost' of the machine is $45 800.

Accepted Answer

annual insurance costs are not included in the initial cost, but are cash flows incurred in later years

Question 6

The 'working capital' of a capital expenditure proposal is the expected cash payment to be made to put the proposal into operation.

Accepted Answer

initial cost is the cash payment to put the proposal into operation

Question 7

The 'sunk cost' of a capital expenditure proposal is the expected cash payment to be made to put the proposal into operation.

Accepted Answer

initial cost is the cash payment to put the proposal into operation

Question 8

Future cash receipts may come in three forms; future cash receipts only, future cash receipts that are more than future cash payments, or savings of future cash payments.

Accepted Answer

Future cash receipts can indeed come in these three forms: as direct future cash receipts, as amounts that exceed future cash payments (resulting in a net cash inflow), or as savings of future cash payments, which effectively increase cash flow by reducing outflows.

Question 9

Some investments do not involve increasing future cash receipts but instead involve reducing future cash payments.

Accepted Answer

Some investments, particularly those in efficiency improvements or cost-saving technologies, aim to reduce future cash outflows rather than directly increasing future cash inflows.

Question 10

Future cash flows that differ, either in amount or timing, as a result of accepting a capital expenditure proposal are called relevant cash flows.

Accepted Answer

Relevant cash flows are those future cash flows that will change as a direct result of the decision to undertake a capital expenditure project, including both differences in amount and timing.

Question 11

Capital expenditure alternatives such as not buying a machine or not expanding a factory are referred to as the 'do-nothing' alternative.

Accepted Answer

The 'do-nothing' alternative in capital expenditure decisions represents the option of maintaining the status quo, such as not purchasing a new machine or not expanding a factory, to compare against the potential benefits and costs of proposed investments.

Question 12

Long-term capital expenditure proposals never have any relevant cash inflows at the end of their useful life.

Accepted Answer

receipt of a residual value can occur at the end of the life of the proposal

Question 13

A capital expenditure analysis of the purchase of a new machine should estimate the present value of all depreciation charges.

Accepted Answer

depreciation is not included as it is not a cash flow

Question 14

When the net present value of a project is zero or positive then the project should be rejected.

Accepted Answer

accepted, as the proposal's rate of return is equal to the required rate of return

Question 15

The internal rate of return is the rate of return at which the net present value of a project is zero.

Accepted Answer

The internal rate of return (IRR) is indeed the discount rate at which the net present value (NPV) of all the cash flows (both positive and negative) from a project or investment equals zero.

Question 16

A project may have a short payback period for a return of the investment but not contribute to the overall profitability of the business.

Accepted Answer

A short payback period indicates that the initial investment is recovered quickly, but it does not necessarily mean the project will contribute significantly to the business's net profit over its entire lifespan.

Question 17

The accounting rate of return method of evaluating capital expenditure projects is conceptually superior to the net present value method and the payback period method.

Accepted Answer

it is NPV which is conceptually superior

Question 18

If faced with mutually exclusive capital expenditure proposals, a business will choose the alternative with the highest net present value.

Accepted Answer

When faced with mutually exclusive capital expenditure proposals, businesses typically choose the alternative with the highest net present value (NPV) because it represents the option that is expected to add the most value to the firm, taking into account the time value of money.

Question 19

If faced with mutually exclusive capital expenditure proposals where one proposal must be selected, a business will choose the alternative with the highest net present value, even if it is a negative net present value.

Accepted Answer

The answer of If faced with mutually exclusive capital expenditure...

Question 20

In making capital expenditure decisions businesses need to consider all relevant factors, even the difficult-to-measure ones.

Accepted Answer

Considering all relevant factors, including those that are difficult to measure, is crucial in making informed and effective capital expenditure decisions, as it ensures a comprehensive evaluation of potential investments.

Quiz 12: Capital Expenditure Decisions