Question 1

When using the accounting rate-of-return method,the net income has to be averaged over the life of the investment.

Accepted Answer

In the accounting rate-of-return method, the net income is averaged over the life of the investment to determine the average annual income. This average income is then divided by the average investment to determine the accounting rate of return.

Question 2

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

Accepted Answer

The accounting rate-of-return method does not take into account the time value of money; it calculates the return on an investment based on the expected annual income from the investment and the initial cost.

Question 3

The three techniques used to evaluate capital investment alternatives use the project's expected net income.

Accepted Answer

The three primary techniques used to evaluate capital investment alternatives are Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period, which primarily focus on cash flows rather than just the project's expected net income.

Question 4

A project with a net present value of zero should not be accepted.

Accepted Answer

A project with a net present value (NPV) of zero indicates that the project is expected to generate a return exactly equal to the discount rate used in the NPV calculation, meaning it should cover its cost of capital and not reduce the value of the firm. Therefore, it can be acceptable, especially if it aligns with strategic goals or other non-financial objectives.

Question 5

The payback period is based on a net present value of cash flows.

Accepted Answer

The payback period is based on the amount of time it takes for the initial investment to be recouped through cash flows, without considering the time value of money or the total amount of cash flows over the project's lifespan.

Question 6

Supporting poor-return proposals that fall below the minimum rate of return eventually lowers the entire company's profitability.

Accepted Answer

Supporting poor-return proposals means investing resources in projects or initiatives that do not generate enough returns to cover their costs. This not only results in losses for the individual projects but also lowers the overall profitability of the company. Over time, continued support of such proposals can harm the financial health of a company and its ability to attract investors and grow.

Question 7

While making capital investment decisions,companies set a minimum rate of return to

Accepted Answer

Companies set a minimum rate of return to guard their profitability. This helps them ensure that any capital investment decisions they make will result in returns that meet or exceed their expectations, and thus protect their profits.

Question 8

The accounting rate-of-return is calculated by dividing the cost of investment by annual net cash inflows.

Accepted Answer

The accounting rate-of-return (ARR) is calculated by dividing the average annual profit by the initial investment, not the net cash inflows. Therefore, the statement is false.

Question 9

The payback period equals the cost of the capital investment divided by net income.

Accepted Answer

The payback period equals the cost of the capital investment divided by the net annual cash inflows, not net income.

Question 10

The accounting rate of return is calculated by dividing the project's investment by its net income.

Accepted Answer

The accounting rate of return is calculated by dividing the average annual profit by the initial investment, not by net income.

Question 11

The alternative with the lowest payback period is the most desirable.

Accepted Answer

The payback period measures the length of time it takes for an investment to return its initial cost, therefore, the alternative with the lowest payback period is preferable as it recovers the investment quickly.

Question 12

Many management decisions are unique and hence incompatible with strict rules,steps,or timetables.

Accepted Answer

Management decisions often involve complex and unpredictable situations, requiring flexibility and creativity rather than strict adherence to predetermined steps or timelines. Therefore, it is true that many management decisions are unique and incompatible with rigid rules or schedules.

Question 13

Capital investment analysis involves all of the following except

Accepted Answer

Analyzing the sales mix is not typically considered a part of capital investment analysis, which is focused more on evaluating the financial feasibility of investment opportunities. The other answer choices are all typical aspects of capital investment analysis.

Question 14

The accounting rate-of-return method is difficult to comprehend and apply.

Accepted Answer

The accounting rate-of-return method is relatively straightforward, as it primarily involves calculating the average annual profit from an investment and comparing it to the initial investment cost.

Question 15

The purpose of establishing a desired rate of return on investment is to set a point above which the best alternative will be considered acceptable.

Accepted Answer

The desired rate of return on investment serves as a benchmark for evaluating different investment options. If an investment option can generate a rate of return that meets or exceeds the desired rate of return, it will be considered acceptable. Therefore, setting a desired rate of return helps in making informed investment decisions.

Question 16

The accounting rate-of-return method is widely used to measure the estimated performance of a capital investment,primarily because it uses time value of money concepts.

Accepted Answer

The accounting rate-of-return method does not incorporate the time value of money; it calculates the return on investment based on average annual profit and initial investment cost.

Question 17

The company's minimum rate of return is also referred to as its profit margin.

Accepted Answer

The company's minimum rate of return is not the same as its profit margin. The minimum rate of return is the minimum amount of profit or return on investment that the company expects to earn, while the profit margin is the percentage of revenue that is left after all expenses have been deducted from sales.

Question 18

When two or more capital investment proposals are being evaluated using the accounting rate-of-return method,the proposal that yields the lowest ratio of net income to average cost of investment is selected.

Accepted Answer

The accounting rate-of-return method selects the proposal that yields the highest ratio of net income to average cost of investment.

Question 19

The payback period method of evaluating proposed capital investment does not take into account the time value of money.

Accepted Answer

The payback period method focuses solely on the time it takes for the initial investment to be recovered, without considering the potential impacts of inflation or the opportunity cost of having that money tied up in the investment.

Question 20

Which of the following is true of cost-benefit analysis?

Accepted Answer

Cost-benefit analysis is a decision-making tool that compares the costs of undertaking a project or action with the benefits that are expected to result from it. The basic principle of cost-benefit analysis is that the benefits of a project should exceed its costs. This can be applied to both short-term and long-term decision making. Quantitative and qualitative factors should both be considered.

Quiz 25: Short-Run Decision Analysis and Capital Budgeting