Chapter 13 true and False

Question 1

1. Capital budgeting decisions usually involve large investments and often have a significant impact on a company’s future profitability

Answer 1

t

Question 2

2. The capital budgeting committee ultimately approves the capital expenditure budget for the year

Answer 2

f

Question 3

3. For purposes of capital budgeting, estimated cash inflows and outflows are preferred for inputs into the capital budgeting decision tools

Answer 3

t

Question 4

4. The cash payback technique is a quick way to calculate a project’s net present value

Answer 4

f

Question 5

5. The cash payback period is calculated by dividing the cost of the capital investment by the annual cash inflow

Answer 5

t

Question 6

6. The cash payback method is frequently used as a screening tool but it does not take into consideration the profitability of a project

Answer 6

t

Question 7

7. The cost of capital is a weighted average of the rates paid on borrowed funds, as well as on funds provided by investors in the company’s shares.

Answer 7

t

Question 8

8. Using the net present value method, a net present value of zero indicates that the project would not be acceptable

Answer 8

f

Question 9

9. The net present value method can only be used in capital budgeting if the expected cash flows from a project are an equal amount each year

Answer 9

f

Question 10

10. By ignoring intangible benefits, capital budgeting techniques might incorrectly eliminate projects that could be beneficial to the company

Answer 10

t

Question 11

11. To avoid accepting projects that actually should be rejected, a company should ignore intangible benefits in calculating net present value.

Answer 11

f

Question 12

12. One way of incorporating intangible benefits into the capital budgeting decision is to project conservative estimates of the value of the intangible benefits and include them in the NPV calculation.

Answer 12

t

Question 13

13. The profitability index is calculated by dividing the total cash flows by the initial investment

Answer 13

f

Question 14

14. The profitability index allows comparison of the relative desirability of projects that require differing initial investments.

Answer 14

t

Question 15

15. Sensitivity analysis uses a number of outcome estimates to get a sense of the variability among potential returns

Answer 15

t

Question 16

16. A well-run organization should perform an evaluation, called a post-audit, of its investment projects before their completion.

Answer 16

f

Question 17

17. Post-audits create an incentive for managers to make accurate estimates, since managers know that their results will be evaluated

Answer 17

t

Question 18

18. A post-audit is an evaluation of how well a project’s actual performance matches the projections made when the project was proposed

Answer 18

t

Question 19

19. The internal rate of return method is, like the NPV method, a discounted cash flow technique

Answer 19

t

Question 20

20. The interest yield of a project is a rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected annual cash inflows.

Answer 20

t

Question 21

21. Using the internal rate of return method, a project is rejected when the rate of return is greater than or equal to the required rate of return

Answer 21

f

Question 22

22. Using the annual rate of return method, a project is acceptable if its rate of return is greater than management’s minimum rate of return

Answer 22

t

Question 23

23. The annual rate of return method requires dividing a project’s annual cash inflows by the economic life of the project

Answer 23

f

Question 24

24. A major advantage of the annual rate of return method is that it considers the time value of money

Answer 24

f

Question 25

25. An advantage of the annual rate of return method is that it relies on accrual accounting numbers rather than actual cash flows.

Answer 25

f