Question 1

Some of the characteristics of capital investments include the following: nature of commitment is durable, expenditure can be capitalized, has a significant financial impact.

Accepted Answer

Capital investments are characterized by their long-term nature, the ability to capitalize the expenditure (i.e., record it as an asset on the balance sheet rather than an expense on the income statement), and their significant financial impact on a company's financial statements.

Question 2

An expense investment is considered small and the cash turnover is done once and it is immediate.

Accepted Answer

An expense investment is considered small and the cash turnover is done once and it is immediate.

Question 3

The two major types of capital projects are capital investments and expense investments.

Accepted Answer

Capital projects typically refer to capital investments and not expense investments. Expense investments are usually categorized under operational expenses rather than capital projects.

Question 4

A compulsory investment is done primarily to respond to an opportunity.

Accepted Answer

A compulsory investment is typically made to comply with legal requirements, maintain current operations, or for safety and environmental reasons, rather than to respond to an opportunity.

Question 5

Opportunity investments are strategic in nature and usually have far-reaching financial implications.

Accepted Answer

Opportunity investments are strategic because they are made with the intention of achieving long-term benefits and often involve significant financial commitments that can have wide-ranging implications for an organization's financial health.

Question 6

Some of the more important steps involved in capital budgeting include environmental analysis, formulation of capital expenditure portfolio, project measurement and ranking, weighted average cost of capital and project approval.

Accepted Answer

These steps are integral to the capital budgeting process, which involves evaluating and selecting long-term investments that are in line with the firm's goal of wealth maximization. Environmental analysis helps in understanding external factors, formulation of capital expenditure portfolio involves deciding on the mix of projects, project measurement and ranking prioritize projects based on certain criteria, the weighted average cost of capital is used to evaluate the cost of funding the projects, and finally, project approval is the step where decisions are made on which projects to implement.

Question 7

Cash inflow is usually considered as the initial cash commitment required for launching a capital project.

Accepted Answer

Cash inflow refers to the money received by a business, typically from operations, investments, or financing, not the initial cash spent to start a project.

Question 8

A cash outflow may include the purchase of land, buildings and machinery.

Accepted Answer

Cash outflow refers to the movement of money out of a business, and purchasing assets such as land, buildings, and machinery involves spending cash, thus constituting a cash outflow.

Question 9

Working capital should NOT be considered as a cash outflow when evaluating capital projects.

Accepted Answer

Working capital is considered a cash outflow because it represents funds tied up in the project that could otherwise be used elsewhere.

Question 10

A new project will generate additional cash because of increased revenue or produce savings resulting from more efficient operations.

Accepted Answer

A new project can indeed generate additional cash either through increased revenue, such as from sales or services, or through cost savings achieved by more efficient operations, which reduce expenses.

Question 11

In capital budgeting, the "residual value" represents the sale of an asset or a business at the end of its physical life.

Accepted Answer

Residual value, in the context of capital budgeting, refers to the estimated value that an asset or a business is expected to realize upon its sale at the end of its useful life.

Question 12

One way that the residual value of an asset can be ascertained is by asking engineers to make their assessment based on historical experience.

Accepted Answer

Engineers can use their expertise and historical data on similar assets to estimate the residual value, considering factors like wear and tear, technological obsolescence, and market conditions.

Question 13

The economic life span of a project does NOT play a key role in determining the financial return of a project.

Accepted Answer

The economic life span of a project is crucial in determining its financial return as it affects the total revenue generated, operational costs, and the period over which the investment is recovered and profits are made.

Question 14

A sunk cost is an investment incurred prior to making the decision to proceed with a capital project.

Accepted Answer

A sunk cost refers to money that has already been spent and cannot be recovered, which is indeed an investment incurred prior to making the decision to proceed with a capital project.

Question 15

Some of the more important time-value-of money yardsticks are the accounting methods.

Accepted Answer

Time-value-of-money yardsticks, such as Net Present Value (NPV) and Internal Rate of Return (IRR), are financial metrics used to evaluate the profitability of investments or projects. They are distinct from accounting methods, which are used to record, summarize, and report financial transactions.

Question 16

In capital budgeting, the accounting methods make use of data presented on "his past financial statements to express the economic results of a capital project.

Accepted Answer

Capital budgeting primarily focuses on the future cash flows and potential returns of a project rather than relying on past financial statements. It uses techniques like Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period, which are forward-looking and project the future financial performance of an investment.

Question 17

There are different ways to calculate the accounting rates of return for capital projects.

Accepted Answer

The accounting rate of return (ARR) can be calculated using different methods, such as the average investment method or the initial investment method, and can consider variations in accounting practices, such as different depreciation methods, which affect the calculation of net income and, consequently, the ARR.

Question 18

One reason why the accounting methods are used to evaluate capital projects is that they take into consideration the fact that money has a time value.

Accepted Answer

Accounting methods, such as the payback period or accounting rate of return, do not take into account the time value of money. Techniques like Net Present Value (NPV) or Internal Rate of Return (IRR) are used for considering the time value of money in evaluating capital projects.

Question 19

One of the main arguments against the accounting methods is that the returns focus only on one specific year while a project usually has a longer physical life span.

Accepted Answer

Accounting methods often focus on annual financial statements, which can overlook the broader, long-term financial impacts and benefits of projects that span multiple years.

Question 20

The payback method measures the period of time it takes for the cash inflow of a project to be totally recovered by the anticipated cash outflow.

Accepted Answer

The payback method measures the period of time it takes for the anticipated cash inflow of a project to totally recover the initial cash outflow.

Quiz 11: Capital Budgeting

Some of the characteristics of capital investments include the following: nature of commitment is durable, expenditure can be capitalized, has a significant financial impact.

An expense investment is considered small and the cash turnover is done once and it is immediate.

The two major types of capital projects are capital investments and expense investments.

A compulsory investment is done primarily to respond to an opportunity.

Opportunity investments are strategic in nature and usually have far-reaching financial implications.

Some of the more important steps involved in capital budgeting include environmental analysis, formulation of capital expenditure portfolio, project measurement and ranking, weighted average cost of capital and project approval.

Cash inflow is usually considered as the initial cash commitment required for launching a capital project.

A cash outflow may include the purchase of land, buildings and machinery.

Working capital should NOT be considered as a cash outflow when evaluating capital projects.

A new project will generate additional cash because of increased revenue or produce savings resulting from more efficient operations.

In capital budgeting, the "residual value" represents the sale of an asset or a business at the end of its physical life.

One way that the residual value of an asset can be ascertained is by asking engineers to make their assessment based on historical experience.

The economic life span of a project does NOT play a key role in determining the financial return of a project.

A sunk cost is an investment incurred prior to making the decision to proceed with a capital project.

Some of the more important time-value-of money yardsticks are the accounting methods.

In capital budgeting, the accounting methods make use of data presented on "his past financial statements to express the economic results of a capital project.

There are different ways to calculate the accounting rates of return for capital projects.

One reason why the accounting methods are used to evaluate capital projects is that they take into consideration the fact that money has a time value.

One of the main arguments against the accounting methods is that the returns focus only on one specific year while a project usually has a longer physical life span.

The payback method measures the period of time it takes for the cash inflow of a project to be totally recovered by the anticipated cash outflow.