[Chapter 5] Capital Investment Flashcards
_______________ decisions are concerned with the process of planning, setting goals and priorities, arranging financing, and using certain criteria to select long-term assets.
A. Limited resources
B. Sell now or process further
C. Capital investment
D. Make-or-buy
Capital investment
_______________ are projects that if accepted or rejected, do NOT affect the cash flows of projects.
A. Independent projects
B. Mutually exclusive projects
C. Dependent projects
D. Both b and c
Independent projects
_______________ are projects that, if accepted, preclude the acceptance of all other competing projects.
A. Independent projects
B. Mutually exclusive projects
C. Dependent projects
D. Both b and c
Mutually exclusive projects
Which of the following is an example of an independent project?
A. A manufacturing plant considering a major overhaul of an existing machine or replacing the existing machine with a new model.
B. A hospital considering the purchase of a new MRI machine and a new cardiac monitoring system.
C. A bank deciding between keeping a manual check sorting process or an automated sort process.
D. A retailer deciding between an inventory management system offered by two different vendors.
A hospital considering the purchase of a new MRI machine and a new cardiac monitoring system.
Which of the following is NOT an example of information the payback period can provide to management?
A. Minimize the impact of an investment on a firm’s liquidity performance.
B. Help control the risks associated with the uncertainty of future cash flows.
C. Help control the risk of obsolescence.
D. Helps determine the project’s total profitability.
Helps determine the project’s total profitability.
Profitability is considered by accounting rate of return methods but not by payback method. True or False?
TRUE
Time value of money is ignored by payback method but considered by accounting rate of return method.
FALSE. Time value of money is ignored by both methods.
The accounting rate of return on original investment is calculated as
A. original investment/net income.
B. net income/debt.
C. average income/original investment.
D. assets/debt.
average income/original investment.
Which of the following methods uses income instead of cash flows?
A. payback
B. accounting rate of return
C. internal rate of return
D. net present value
accounting rate of return
The accounting rate of return on original investment is calculated as
A. original investment/net income.
B. net income/debt.
C. average income/original investment.
D. assets/debt.
average income/original investment.
If the net present value is positive, it could signal
A. a return in excess of the initial investment or required rate of return has been received.
B. the required rate of return has not been achieved.
C. the initial investment has not been recovered.
D. a decrease in wealth for the firm.
a return in excess of the initial investment or required rate of return has been received.
A firm is evaluating a project that has a net present value of $0 when a discount rate of 8 percent is used. A discount rate of 6 percent will result in a
A. negative net present value.
B. positive net present value.
C. net present value of $0.
D. the question cannot be answered based upon the information provided.
positive net present value.
Which of the following methods consider the time value of money?
A. payback and accounting rate of return
B. payback and internal rate of return
C. internal rate of return and accounting rate of return
D. internal rate of return and net present value
internal rate of return and net present value
The internal rate of return is defined as
A. a blend of the costs of capital from all sources.
B. the minimal acceptable interest rate on investments.
C. the difference between the present value of the cash inflows and outflows associated with a project.
D. the interest rate that sets the present value of a project’s cash inflows equal to the present value of a project’s
cost.
the interest rate that sets the present value of a project’s cash inflows equal to the present value of a project’s
cost.
NPV differs from IRR:
A. NPV measures profitability in absolute terms, whereas the IRR method measures profitability in relative terms.
B. IRR should be used for choosing among competing, mutually exclusive projects.
C. NPV considers the time value of money and IRR does not.
D. Both NPV and IRR will generate the same decisions.
NPV measures profitability in ABSOLUTE terms, whereas the IRR method measures profitability in RELATIVE terms.
