Question 1

When a capital investment is expected to provide unequal annual cash inflows,the payback period can be calculated by accumulating the incremental cash inflows until the sum equals the amount of the original investment.

Accepted Answer

The statement accurately describes the payback period method of evaluating capital investments with unequal annual cash inflows.

Question 2

The payback method of evaluating capital investments measures the recovery of the investment,but it does not measure profitability.

Accepted Answer

The payback method only considers the time required to recover the initial investment and doesn't take into account any profits earned after the payback period. It is a good method for evaluating the liquidity of an investment, but not its profitability.

Question 3

Generally,the unadjusted rate of return should be calculated based on the average investment rather than the amount of the original investment in a depreciable asset such as equipment.

Accepted Answer

The unadjusted rate of return is calculated based on the average investment which takes into consideration the changes in the value of the investment over its useful life due to factors such as depreciation, repair and maintenance costs, and salvage value. Therefore, it is more accurate to use the average investment rather than the amount of the original investment when calculating the unadjusted rate of return.

Question 4

Describe what is meant by the time value of money.

Accepted Answer

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Question 5

The amount of the depreciation tax shield can be calculated by multiplying the amount of depreciation expense by the tax rate.

Accepted Answer

The amount of the depreciation tax shield is equal to the depreciation expense multiplied by the tax rate, which represents the tax savings resulting from the deduction of the depreciation expense from taxable income.

Question 6

Why is the time value of money often taken into account in analyzing a capital investment?

Accepted Answer

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Question 7

When the effect of income taxes is considered in a capital budgeting analysis,the amount of depreciation expense must be added back to after-tax income to calculate the annual cash inflow.

Accepted Answer

This is because depreciation expense reduces taxable income, resulting in a lower income tax expense. Therefore, to calculate the true cash inflow, depreciation must be added back to after-tax income.

Question 8

Depreciation on a capital investment (such as equipment)has the effect of decreasing the amount of income taxes that the company owning the asset must pay.

Accepted Answer

Depreciation expenses can be deducted from taxable income, reducing the tax liability of the company. This is because the depreciation expense reflects the loss of value of the asset over time, which is considered an expense for the business.

Question 9

If the net present value for a capital investment is equal to zero,the internal rate of return for the investment is equal to the required rate of return.

Accepted Answer

When the net present value is zero, it means that the investment will neither generate nor lose money over time. This indicates that the internal rate of return for the investment is equal to the required rate of return.

Question 10

A capital investment with an internal rate of return equal to or greater than the required rate of return is considered to be an acceptable investment.

Accepted Answer

An internal rate of return (IRR) is the rate at which an investment can be expected to generate cash flows that have a net present value (NPV) of zero. If the IRR is equal to or greater than the required rate of return, the investment is considered acceptable because it is generating returns that meet or exceed the required level. Therefore, option A is true.

Question 11

Sources of cash inflows from capital investments include incremental expenses and installation costs.

Accepted Answer

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Question 12

What is the reinvestment assumption,and how does the assumption affect capital investment analyses?

Accepted Answer

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Question 13

If a company has to pay a given amount of income taxes over the life of a capital investment,managers of the company should seek to pay the taxes as early as possible in the investment's life.

Accepted Answer

It is usually beneficial for companies to delay paying income taxes as long as legally possible, as it allows them to have more cash on hand to finance other projects or investments. Paying taxes too early in a capital investment's life can hurt a company's cash flow and potential for growth.

Question 14

Generally,a company should use the MACRS method to calculate depreciation on its income tax return,due to the effects of the time value of money.

Accepted Answer

MACRS (Modified Accelerated Cost Recovery System) takes into account the time value of money by allowing for larger deductions earlier in the life of an asset, which results in tax savings over time. This is advantageous for companies in terms of cash flow and tax planning.

Question 15

Why does a company use its cost of capital as the minimum required rate of return for its capital investment decisions?

Accepted Answer

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Question 16

A postaudit should be performed at the end of a capital investment project to determine whether the expected results were actually achieved.

Accepted Answer

A postaudit helps to evaluate the effectiveness of the investment decision by comparing the expected results with the actual results achieved. This enables companies to learn from their mistakes and improve their investment decision-making process in the future.

Question 17

Cash inflows from a capital investment may include the terminal value of capital assets and increases in revenues.

Accepted Answer

Cash inflows from a capital investment may include the terminal value of capital assets, which is the expected resale value of the assets at the end of their useful life, as well as potential increases in revenues resulting from the investment.

Question 18

The unadjusted rate of return is found by dividing the average incremental increase in annual operating income by the cost of the investment.

Accepted Answer

The unadjusted rate of return is indeed calculated by dividing the average annual incremental increase in operating income by the cost of the investment.

Question 19

The payback method shows how long will be required to recover the cost of an investment in a capital asset.

Accepted Answer

The payback method is a technique used to determine the length of time it will take to recover the cost of an investment in a capital asset. It is calculated by dividing the cost of the asset by the expected annual cash inflows. The resulting number represents the number of years it will take to recover the initial investment.

Question 20

When a capital investment is expected to provide unequal annual cash inflows,the payback period cannot be calculated.

Accepted Answer

Payback period can still be calculated for investments with unequal annual cash inflows, it just may be more complex and require additional calculations such as discounted payback period or net present value.

Quiz 10: Planning for Capital Investments