Deck 15: Capital Budgeting

Question 1

The tax benefit from depreciation expense is the depreciation amount multiplied by the tax rate.

Answer 1

True

Question 2

The decision concerning which assets to acquire to achieve an organization's objectives is an investing decision.

Answer 2

True

Question 3

The profitability index gauges the efficiency of a firm's use of capital.

Answer 3

True

Question 4

Depreciation expense provides a tax shield against the payment of taxes.

Question 5

An organization's hurdle rate should be at least equal to the organization's cost of capital.

Question 6

The payback period typically ignores the time value of money.

Question 7

If the net present value is positive, the actual return on a project exceeds the required rate of return.

Question 8

An organization's discount rate should be equal to or exceed the organization's cost of capital.

Question 9

If a project's internal rate of return is greater than or equal to an organization's hurdle rate, the project is considered to be an acceptable investment.

Question 10

The tax benefit from depreciation expense is the depreciation amount divided by the tax rate.

Question 11

Most capital budgeting techniques focus on cash flows.

Question 12

An organization's discount rate should be less than the organization's cost of capital.

Question 13

Using MACRS depreciation for tax purposes and straight-line depreciation for book purposes will affect after-tax cash flows during the life of a project.

Question 14

Project funding is an investing decision.

Question 15

The net present value method provides the actual rate of return for a project.

Question 16

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

Question 17

Capital budgeting uses financial criteria exclusively when evaluating projects.

Question 18

If a project's internal rate of return is greater than or equal to an organization's hurdle rate, the project is considered to be an unacceptable investment.

Question 19

Capital budgeting uses both financial and non-financial criteria when evaluating projects.

Question 20

Project funding is a financing decision.

Question 21

In a mutually inclusive project situation, if one project is chosen, all related projects are eliminated from further consideration.

Question 22

For an ordinary annuity, the first cash flow occurs at the end of the period.

Question 23

The accounting rate of return considers the salvage value of an asset.

Question 24

In a mutually inclusive project situation, if one project is chosen, all related projects are also chosen.

Question 25

For an annuity due, the first cash flow occurs at the end of the period.

Question 26

A decision in which projects are ranked according to their impact on achieving company objectives is a preference decision.

Question 27

Managers must often use multiple measures to effectively rank capital projects.

Question 28

Reinvestment assumptions are different under each method of ranking capital projects.

Question 29

A capital budgeting method that measures the time required for a project's cash inflows to equal the original investment is referred to as the _________________________.

Question 30

When using the risk-adjusted discount rate method, a manager increases the rate used for discounting future cash outflows.

Question 31

Postinvestment audits can provide feedback of the accuracy of original cash flow estimates.

Question 32

A judgment regarding which assets an entity should acquire to achieve its stated objectives is considered to be a(n) _______________________ decision.

Question 33

When using the risk-adjusted discount rate method, a manager increases the rate used for discounting future cash inflows.

Question 34

The evaluation of future long-range projects to allocate resources effectively and efficiently is referred to as ______________________________________.

Question 35

Accounting rate of return is based on cash flows.

Question 36

The accounting rate of return considers the time value of money.

Question 37

When considering risk, a manager will often use a judgmental method of risk adjustment.

Question 38

A decision in which projects are ranked according to their impact on achieving company objectives is a screening decision.

Question 39

Present value and future value computations assume the use of compound interest.

Question 40

A judgment regarding an entity's method of funding an investment is considered to be a(n) _______________________ decision.

Question 41

The rate of return specified as the lowest acceptable return on an investment is referred to as the ________________________________.

Question 42

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

A) cost savings resulting from the investment.
B) sum of all future revenues from the investment.
C) net increase in cash receipts over cash payments.
D) net increase in cash payments over cash receipts.

Question 43

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

A) net present value
B) internal rate of return
C) payback period
D) profitability index

Question 44

The weighted average cost of capital represents the

A) cost of bonds, preferred stock, and common stock divided by the three sources.
B) equivalent units of capital used by the organization.
C) overall cost of capital from all organization financing sources.
D) overall cost of dividends plus interest paid by the organization.

Question 45

A firm's discount rate is typically based on

A) the interest rates related to the firm's bonds.
B) a project's internal rate of return.
C) its cost of capital.
D) the corporate Aa bond yield.

Question 46

A decision regarding whether a capital project is desirable based upon some previously established minimum criteria is referred to as a(n) ___________________________________.

Question 47

The process of determining the amount of change that must occur in a variable before a different decision would be made is referred to as _________________________________.

Question 48

When a project is chosen from a group and all other projects are excluded from further consideration, the project is referred to as _________________________________.

Question 49

A capital budget is used by management to determine

A) no no
B) no yes
C) yes no
D) yes yes

Question 50

In a _________________________________ project situation, if one project is chosen, all related projects are also chosen.

Question 51

When information on actual project results is gathered and compared to actual results, the process is referred to as a(n) ______________________________________.

Question 52

The rate of return required by a company that is used to determine the imputed interest portion of future cash receipts and disbursements is referred to as the _______________________.

Question 53

The capital budgeting technique that divides average annual profits from an investment by the average investment in a project is referred to as the _____________________________________.

Question 54

The weighted average cost of an organization's various sources of funds is referred to as ______________________________.

Question 55

A ratio comparing the present value of a project's net cash inflows to the project's net investment is referred to as the ____________________________________.

Question 56

A capital budgeting technique that compares a project's rate of return with the desired rate of return for an organization is known as the _______________________________ method.

Question 57

A decision in which projects are ranked according to their impact on the achievement of company objectives is referred to as a(n) ___________________________________.

Question 58

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

A) payback period
B) net present value
C) internal rate of return
D) profitability index

Question 59

The discount rate that causes the present value of a project's net cash inflows to equal the present value of the cash outflows is referred to as the ________________________________________.

Question 60

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

A) prime rate.
B) discount rate.
C) cutoff rate.
D) internal rate of return.

Question 61

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

A) net present value.
B) payback period.
C) internal rate of return.
D) profitability index.

Question 62

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?

A) increasing the expected amount for cash outflows
B) increasing the discounting period for expected cash inflows
C) increasing the discount rate for cash outflows
D) decreasing the amount for expected cash inflows

Question 63

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

A) assuming equal annual cash flow patterns.
B) investing only in short-term projects.
C) assigning greater value to more immediate cash flows.
D) ignoring depreciation and tax implications of the investment.

Question 64

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

A) payback period
B) net present value
C) internal rate of return
D) discount rate

Question 65

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

A) interpolating.
B) discounting.
C) annuitizing.
D) budgeting.

Question 66

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?

A) method of financing the project under consideration
B) timing of cash flows relating to the project
C) impact of the project on income taxes to be paid
D) amounts of cash flows relating to the project

Question 67

The payback period is the

A) length of time over which the investment will provide cash inflows.
B) length of time over which the initial investment is recovered.
C) shortest length of time over which an investment may be depreciated.
D) shortest length of time over which the net present value will be positive.

Question 68

In capital budgeting, a firm's cost of capital is frequently used as the

A) internal rate of return.
B) accounting rate of return.
C) discount rate.
D) profitability index.

Question 69

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?

A) internal rate of return
B) net present value
C) profitability index
D) payback period

Question 70

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

A) cost of capital.
B) net present value.
C) payback rate.
D) internal rate of return.

Question 71

The payback method measures

A) how quickly investment dollars may be recovered.
B) the cash flow from an investment.
C) the economic life of an investment.
D) the profitability of an investment.

Question 72

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

A) value of the common stock.
B) current budget for capital expansion.
C) cost of debt outstanding.
D) proposed mix of debt, equity, and existing funds used to implement the project.

Question 73

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

A) mix of capital components that was used to finance a project from last year.
B) overall capital structure of the corporation.
C) cost of capital for other corporations with similar investments.
D) mix of capital components for all capital acquired in the most recent fiscal year.

Question 74

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

A) callable.
B) participating.
C) cumulative.
D) convertible.

Question 75

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

A) cost of capital.
B) discount rate.
C) cutoff rate.
D) internal rate of return.

Question 76

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) a screening decision
B) a trial-and-error approach
C) a post investment audit
D) a time line

Question 77

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

A) increase the discount rate for the cash flow.
B) decrease the discounting period for the cash flow.
C) increase the expected value of the future cash flow before it is discounted.
D) extend the acceptable length for the payback period.

Question 78

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

A) a decrease in the marginal tax rate
B) a decrease in the discount rate
C) a decrease in the rate of depreciation
D) an increase in the life expectancy of the depreciable asset

Question 79

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

A) cost of capital.
B) discount rate.
C) internal rate of return.
D) rate on the corporation's short-term debt.

Question 80

Assume that a project consists of an initial cash outlay of $100,000 followed by equal annual cash inflows of $40,000 for 4 years. In the formula X = $100,000/$40,000, X represents the

A) payback period for the project.
B) profitability index of the project.
C) internal rate of return for the project.
D) project's discount rate.