CHAPTER 11 MULTIPLE CHOICE Flashcards
Capital budgeting is the ________.
A) process of planning for investments in long-term assets
B) preparation of the budget for operating expenses
C) process of evaluating the profitability of a business
D) process of making pricing decisions for products
Answer A
Which of the following is a capital budgeting method used to screen potential investments?
A) return on assets
B) acid test ratio
C) accounting rate of return
D) debt-to-equity ratio
Answer C
Which of the following two methods are typically used for initial screening of investments, rather than for detailed, in-depth analysis?
A) payback and accounting rate of return
B) net present value and payback
C) internal rate of return and net present value
D) accounting rate of return and net present value
Answer A
Which of the following is a capital budgeting method that ignores the time value of money?
A) payback
B) internal rate of return
C) return on assets
D) net present value
Answer A
Which of the following describes the time value of money?
A) The time value of money has no effect on the timing of capital investments.
B) Money loses its purchasing power over time through inflation.
C) The fact that invested cash may not earn interest over time is called the time value of money.
D) A dollar received today is worth more than a dollar to be received in the future.
Answer D
Which of the following most accurately describes an annuity?
A) an investment which produces increasing cash flows over time
B) a series of unequal cash payments made at equal time intervals
C) a stream of equal cash payments made at equal time intervals
D) a term that does not apply to mortgage payable or bond payable
Answer C
Capital budgeting methods which incorporate the time value of money include the ________.
A) net present value method
B) accounting rate of return
C) average rate of return
D) payback method
Answer A
Which of the following situations suggests the acceptance of an investment proposal?
A) The present value of the net cash inflows exceeds the initial investment.
B) The IRR is lower than the hurdle rate.
C) The cash inflows are less than the initial investment.
D) The investment will have a residual value.
Answer: A
Net present value represents the difference between the ________.
A) total net income of the project and the initial investment
B) initial investment and the residual value
C) future value of the cash flows and the present value of the cash flows
D) present value of the investment’s net cash inflows and the investment’s initial cost
Answer: D
When comparing several investments with the same initial cost, the decision should be made on the basis of the ________.
A) highest total cash inflows
B) longest payback period
C) highest NPV
D) highest ARR
Answer: C
