Question 1

Two methods of analyzing potential capital investments-payback and accounting rate of return-ignore the time value of money.

Accepted Answer

Both payback and accounting rate of return focus solely on monetary returns without considering the impact of inflation or the time value of money.

Question 2

Which of the following two methods are typically used for initial screening of investments,rather than for detailed,in-depth analysis?

Accepted Answer

Payback and accounting rate of return are typically used for initial screening of investments because they are easy to calculate and provide a quick indication of the profitability of the investment. Net present value and internal rate of return are more detailed methods that require more data and analysis.

Question 3

Which of the following is a capital budgeting method?

Accepted Answer

Net present value is a capital budgeting method used to assess the profitability of an investment by calculating the present value of expected cash inflows and outflows. Return on assets and return on equity are profitability ratios used in financial analysis, while inventory turnover is a measure of a company's efficiency in managing its inventory.

Question 4

The last step in the capital budgeting process is control,which compares the actual results with the projected results.These comparisons are known as ________.

Accepted Answer

Post-audits are the process of comparing actual results with projected results to determine if the investment was successful. This helps managers to identify any deviations from the projected results and take corrective actions if necessary. Net cash inflows are the cash receipts minus cash payments during a specific period, which is not the same as comparing actual results with projected results. Rankings help in prioritizing and selecting projects but are not related to control. Variance analysis is a tool to measure the difference between actual and budgeted results, but it is not specific to the capital budgeting process.

Question 5

A post-audit in capital budgeting is a comparison of the actual results of capital investments with the projected results.

Accepted Answer

A post-audit in capital budgeting is a process of evaluating the actual outcomes of capital investments against the planned outcomes. This helps in determining the effectiveness of the decisions made during the capital budgeting process and making improvements in the future planning.

Question 6

Which of the following best describes the term capital rationing?

Accepted Answer

Capital rationing refers to the process of ranking and choosing among alternative capital investments based on the availability of funds. It involves allocating limited capital resources to the most promising projects that offer the highest returns. This approach is commonly used in situations where the company has limited funds to invest in new projects and must prioritize its investments.

Question 7

Which of the following is a capital budgeting method that ignores the time value of money?

Accepted Answer

The payback method simply calculates the amount of time it takes for a project to pay for itself, without taking into account the time value of money (i.e. inflation, interest rates, etc.). The other methods (including internal rate of return, return on assets, and net present value) all consider the time value of money.

Question 8

An operational asset used for a long period of time is known as a capital asset.

Accepted Answer

This statement is correct. A capital asset is an asset that is used for a long period of time and is typically not consumed during normal business operations. Examples of capital assets include buildings, equipment, and vehicles.

Question 9

The payback and accounting rate of return methods are often used to perform an initial screening of investments.

Accepted Answer

True, both payback and accounting rate of return methods are commonly used for initial investment screening.

Question 10

Capital budgeting is the ________.

Accepted Answer

Capital budgeting involves planning and evaluating investments in long-term assets such as property, equipment, and technology. It is a crucial process for businesses as it involves analyzing the potential profitability and risks of each investment opportunity. Choices B, C, and D are not accurate descriptions of capital budgeting.

Question 11

The payback method provides management with valuable information about the time period in which the cash invested will be recouped.

Accepted Answer

The payback method calculates the time it takes for the cash invested to be recovered, providing important information for management regarding the profitability and risk of investments.

Question 12

Which of the following best describes a capital budgeting post-audit?

Accepted Answer

A capital budgeting post-audit is a comparison of the actual results of a capital investment with the projected results. It is typically performed after the project has been completed to assess the effectiveness of the investment decision and identify any areas where improvements could be made for future investments.

Question 13

The net present value and internal rate of return methods are appropriate for longer-term investments because they ignore the time value of money.

Accepted Answer

The net present value and internal rate of return methods take into account the time value of money, making them appropriate for longer-term investments where the cash flows occur over time.

Question 14

Which of the following is a capital budgeting method used to screen potential investments?

Accepted Answer

The accounting rate of return (ARR) is a capital budgeting method used to evaluate potential investments by comparing the expected average annual accounting profit to the initial investment. It is an important tool for screening potential investments as it helps in identifying projects that are expected to generate a certain level of return. The other options, return on assets, acid test ratio, and debt-to-equity ratio, are not capital budgeting methods but rather financial ratios used for different purposes.

Question 15

Capital rationing is a process adopted when a company has limited resources,and it must find ways to reduce operating expenses in all of its divisions and units.

Accepted Answer

Capital rationing refers to the process of selecting the most profitable projects to invest in when a company has limited capital, not specifically to reducing operating expenses across divisions.

Question 16

The acquisition or construction of a capital asset is known as a capital investment.

Accepted Answer

Capital investments are typically long-term investments made by companies to acquire or construct assets that will help them in their business operations.

Question 17

The payback and accounting rate of return (ARR)methods are suitable for investments with a relatively short time span.

Accepted Answer

The payback and accounting rate of return methods are appropriate for investments with a short time span since they do not consider the time value of money or the entire lifetime of the investment.

Question 18

List the steps of the capital budgeting process and identify actions that relate to each step.

Accepted Answer

The answer of List the steps of the capital budgeting...

Question 19

The accounting rate of return shows the effect of the investment on the company's accrual-based income.

Accepted Answer

The accounting rate of return is a measure that shows the average annual accounting profit earned by an investment over its lifetime, expressed as a percentage of the initial investment. It takes into account the accrual-based income of the company and therefore reflects the effect of the investment on the company's profitability.

Question 20

Capital budgeting involves ________.

Accepted Answer

Capital budgeting is concerned with making decisions regarding long-term investments in assets that are expected to generate earnings over a number of years. This involves analyzing the expected cash flows, considering potential risks and uncertainties, and applying appropriate techniques to evaluate and compare different investment alternatives. Options A, B, and D do not directly relate to capital budgeting.

Quiz 26: Capital Investment Decisions