CAPITAL BUDGETING

Question 1

The first step in the decision-making process is to?

Answer 1

identify the problem and assign responsibility.

Question 2

Strategic planning is the process of deciding on an organization’

Answer 2

major programs and the approximate resources to be devoted to them

Question 3

The long-term planning process for making and financing investments that affect a company’s
financial results over a number of years is referred to as

Answer 3

capital budgeting

Question 4

Capital budgeting is the process

Answer 4

of making capital expenditure decisions

Question 5

A capital investment decision is essentially a decision to:

Answer 5

exchange current cash outflows for the promise of receiving future cash inflows

Question 6

The higher the risk element in a project, the

Answer 6

higher the discount rate is.

Question 7

Cost of capital is the

Answer 7

cost the company must incur to obtain its capital resources.

Question 8

How should the following projects be listed in order of increasing risk?

Answer 8

Replacement, expansion, new venture.

Question 9

Problems associated with justifying investments in high-tech projects often include discount
rates that are too

Answer 9

high and time horizons that are too short

Question 10

In evaluating high-tech projects,

Answer 10

both tangible and intangible benefits should be considered.

Question 11

A project that when accepted or rejected will not affect the cash flows of another project.

Answer 11

Independent projects

Question 12

The normal methods of analyzing investments

Answer 12

require forecasts of cash flows expected from the project.

Question 13

When disposing of an old asset and replacing it with a new one, tax effect on

Answer 13

gain on sale of the old asset increases the basis of the new asset
loss on sale of the old asset reduces the basis of the new asset

Question 14

A major difference between an investment in working capital and one in depreciable assets is
that

Answer 14

an investment in working capital is not tax-deductible when made, nor taxable when
returned, while an investment in depreciable assets does allow tax deductions.

Question 15

The proper treatment of an investment in receivables and inventory is to

Answer 15

add it to the investment in fixed assets and add the present value of the recovery to the
present value of the annual cash flows

Question 16

In connection with a capital budgeting project, an investment in working capital is normally
recovered

Answer 16

at the end of the project’s life

Question 17

XYZ Co. is adopting just-in-time principles. When evaluating an investment project that would
reduce inventory, how should XYZ treat the reduction?

Answer 17

Decrease the cost of the investment.

Question 18

Which of the following represents the biggest challenge in the decision to purchase new
equipment?

Answer 18

Estimating cash flows for the future.

Question 19

When a firm has the opportunity to add a project that will utilize factory capacity that is currently
not being used, which costs should be used to determine if the added project should be
undertaken?

Answer 19

Incremental costs

Question 20

The only future costs that are relevant to deciding whether to accept an investment are those
that will

Answer 20

be different if the project is accepted rather than rejected.

Question 21

Which of the following is not a typical cash inflow in capital investment decisions

Answer 21

Additional working capital

Question 22

Which of the following is a cost that requires a future outlay of cash that is which relevant for
future decision-making?

Answer 22

Out-of-pocket cost

Question 23

If there were no income taxes,

Answer 23

depreciation would be ignored in capital budgeting.

Question 24

Relevant cash flows for net present value (NPV) models include all of the following except

Answer 24

depreciation expense on the newly acquired piece of equipment

Question 25

When evaluating depreciation methods, managers who are concerned about capital investment
decisions will:

Answer 25

use accelerated methods to have as much depreciation in the early years of an asset’s life.

Question 26

The tax consequences should be considered under which circumstances when making capital
investment decisions?

Answer 26

Positive net income
Disposal of an asset
Depreciation

Question 27

In addition to incremental revenues, cash inflows from capital investments can be generated
from all of the following sources except:

Answer 27

debt financing

Question 28

If Helena Company expects to get a one-year bank loan to help cover the initial financing of one
of its capital projects, the analysis of the project should

Answer 28

ignore the loan

Question 29

In deciding whether to replace a machine, which of the following is NOT a sunk cost?

Answer 29

The expected resale price of the existing machine

Question 30

The primary advantages of the average rate of return method are its ease of computation and
the fact that:

Answer 30

It emphasizes the amount of income earned over the life of the proposal