Question 1

Cost allocations ignore the "lumpy" nature of capacity resources, and estimate costs as if we can match supply and demand continuously and smoothly.

Accepted Answer

Cost allocations often assume that resources can be matched smoothly and continuously with demand, which does not account for the real-world reality of sometimes "lumpy" capacity resources.

Question 2

Unlike the Cost-Volume-Profit method, the NPV method does not allow users to perform "what-if" sensitivity analysis with respect to various estimates and assumptions, and to examine alternative scenarios.

Accepted Answer

The statement is incorrect. The NPV method actually allows users to perform "what-if" sensitivity analysis and examine alternative scenarios by changing inputs such as discount rates, cash flow projections, and project timelines. In fact, this is one of the advantages of the NPV method over other capital budgeting techniques.

Question 3

The present value factor is also known as the discount factor.

Accepted Answer

This statement is true. The present value factor is the mathematical factor used to calculate the present value of a future sum of money, and it is also commonly referred to as the discount factor.

Question 4

Under the payback method to evaluate investments, we compute how long it takes to recoup the initial investment using discounted cash flows.

Accepted Answer

The statement is incorrect. Under the payback method, we calculate the time it takes to recoup the initial investment without considering discounted cash flows.

Question 5

The initial outlay for an asset does not include the cost of installation and training charges.

Accepted Answer

The initial outlay for an asset typically includes all costs associated with acquiring and installing the asset, including any necessary training charges.

Question 6

The greatest advantage of the payback method is that the payback period is easy to compute and to understand.

Accepted Answer

The statement is true. The payback period is simply the amount of time it takes to recover the initial investment, making it easy to calculate and to interpret.

Question 7

The modified payback method accumulates the present value of future cash flows over time and compares the cumulative value with the initial cash outlay.

Accepted Answer

This is a correct definition of the modified payback method.

Question 8

Like the Net Present Value method, the Internal Rate of Return method assumes that the initial cash outflow takes place at the beginning of the period.

Accepted Answer

The Internal Rate of Return method assumes that the initial cash outflow occurs at the beginning of the project, just like the Net Present Value method.

Question 9

When analyzing capital investments using the NPV method, the first step is to discount the initial investment.

Accepted Answer

The first step in analyzing capital investments using the NPV method is to calculate the present value of all cash inflows and outflows over the life of the investment, not just to discount the initial investment. The initial investment is typically a cash outflow at time zero and does not need to be discounted.

Question 10

The salvage of an asset is the residual value from disposing of the asset at the end of its useful life.

Accepted Answer

This statement is true. Salvage value is the estimated value that an organization can receive for an asset at the end of its useful life. It is a part of the calculation to determine depreciation expense.

Question 11

The opportunity of cash is the time value of money.

Accepted Answer

The opportunity of cash refers to the benefits or profits that can be gained by having cash available now instead of in the future. This is based on the concept of time value of money, which states that money has a greater value today than in the future due to the potential earning power of invested funds. Therefore, option A is true.

Question 12

It is not difficult to match the supply and demand for capacity resources over a period of months or even years.

Accepted Answer

It can be difficult to match the supply and demand for capacity resources over a period of months or years, as demand can be highly unpredictable and volatile, and supply may be constrained by factors such as maintenance, upgrades, or unexpected outages. Effective capacity planning and management strategies are necessary to ensure that resources are utilized effectively and efficiently.

Question 13

The two main discounted cash flow techniques used in capital budgeting are net present value (NPR) and cost-volume-profit (CVP).

Accepted Answer

The two main discounted cash flow techniques used in capital budgeting are net present value (NPV) and internal rate of return (IRR), not cost-volume-profit (CVP).

Question 14

Setting an estimated life expectancy of an asset too low understates the profitability of the investment and could result in the firm rejecting profitable opportunities.

Accepted Answer

If the estimated life expectancy of an asset is set too low, it means that the asset will be replaced sooner than necessary, resulting in higher replacement costs and lower profits. This would lead the firm to reject potentially profitable projects because they appear less profitable due to higher expected replacement costs.

Question 15

Money is not a productive asset because it is not a long-lived resource.

Accepted Answer

Money itself does not directly produce goods or services, but it can be used to purchase productive assets such as machinery, equipment, or labor, which in turn can generate income or value over time.

Question 16

As it relates to capital expenditure decisions, cost of capital is the opportunity cost of capital required for the proposed investment.

Accepted Answer

Cost of capital is the minimum return required by investors to accept a new investment opportunity. It represents the opportunity cost of capital, meaning the return that could be earned on the next best alternative investment with similar risk. Therefore, cost of capital is relevant in capital expenditure decisions as it helps determine whether the investment will generate enough return to meet or exceed the cost of capital.

Question 17

The greatest advantage of the modified payback method is that it considers all future cash flows from a project as does the NPV method.

Accepted Answer

The greatest advantage of the modified payback method is that it is simple and easy to understand. However, it does not consider all future cash flows like the NPV method does. It only considers the cash flows up until the point where the initial investment has been fully recovered.

Question 18

The cost of capital is measured as the total of all costs incurred to ready an asset for its intended use, including purchase price, shipping and delivery, taxes, and any installation and training costs.

Accepted Answer

The definition given in the statement is actually describing the concept of capitalized costs. The cost of capital refers to the cost of obtaining funds to finance an investment, such as interest payments on loans or returns to investors.

Question 19

The accounting rate of return is relatively straightforward to compute, but ignores the time value of money.

Accepted Answer

The accounting rate of return (ARR) measures a project's profitability by dividing the average annual accounting profit by the initial investment. While it is easy to calculate, the ARR does not take into account the time value of money, which means it fails to consider the fact that money received or spent at different points in time has different values. As a result, ARR may not accurately reflect a project's true profitability or potential return.

Question 20

Strategic plans specify how the company intends to achieve its long-term objectives, and dictate what resources the firm needs to execute its plans.

Accepted Answer

Strategic plans are designed to provide an overall direction to the organization and specifies how it aims to achieve its long-term objectives. It outlines specific actions required to accomplish those goals and the resources needed to execute those actions.

Quiz 11: Managing Long-Lived Resources: Capital Budgeting