Final

Question 1

Which of the following capital budgeting methods does not consider cash flows?

1. The net present value method
2. The simple rate of return method
3. The payback method
4. The internal rate of return method

Answer 1

2. The simple rate of return method

Question 2

Which of the following capital budgeting methods considers cash flows, but not the time value of money?

1. The net present value method
2. The simple rate of return method
3. The payback method
4. The internal rate of return method

Answer 2

3. The payback method

Question 3

Which of the following capital budgeting methods computes the discount rate at which the net present value of an investment project is zero?

1. The net present value method
2. The simple rate of return method
3. The payback method
4. The internal rate of return method

Answer 3

4. The internal rate of return method

Question 4

Which of the following statements is true regarding the profitability index?

1. It is used for preference decisions.
2. It considers cash flows, but not the time value of money.
3. It ignores cash flows after the payback period.
4. It is used for screening decisions.

Answer 4

1. It is used for preference decisions.

Question 5

Which of the following statements is true regarding the payback method?

1. It discounts all cash inflows and cash outflows to their present values.
2. It includes the annual incremental net operating income in its calculation.
3. It includes the cost of capital in its calculation.
4. It excludes depreciation expense from its calculation.

Answer 5

4. It excludes depreciation expense from its calculation.

Question 6

Which of the following statements is true regarding the payback period?

1. It measures the length of time that it takes for a project to recover its initial cost from the discounted net cash inflows that it generates.
2. It measures the length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates.
3. It measures the length of time that it takes for a project to recover its initial cost from the incremental net operating income that it generates.
4. It measures the length of time that it takes for a project to recover its initial cost from the discounted incremental net operating income that it generates.

Answer 6

2. It measures the length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates.

Question 7

Which of the following equations can be used in certain situations to calculate the payback period?

1. (Annual net cash inflow ÷ Investment required) × hurdle rate
2. (Investment required ÷ Annual net cash inflow) × hurdle rate
3. Investment required ÷ Annual net cash inflow
4. Annual net cash inflow ÷ Investment required

Answer 7

3. Investment required ÷ Annual net cash inflow

Question 8

The term capital budgeting describes how companies:

1. plan significant investments in projects that have long-term implications.
2. develop annual estimates that are used to create a budgeted income statement and balance sheet.
3. use budgets to evaluate the performance of investment center managers.
4. use activity-based costing to develop product and customer profitability projections.

Answer 8

1. plan significant investments in projects that have long-term implications.

Question 9

Which of the following is not an example of a typical capital budgeting decision?

1. The decision to lease or buy equipment.
2. The decision to reduce or maintain this year’s advertising budget.
3. The decision to build a new plant or expand an existing plant.
4. The decision to replace a piece of equipment now or later.

Answer 9

2. The decision to reduce or maintain this year’s advertising budget.

Question 10

A company’s cost of capital is usually regarded as:

1. a reliable estimate of its simple rate of return.
2. the hurdle rate it uses to compute capital investment payback periods.
3. the amount by which its current assets exceed its current liabilities.
4. its minimum required rate of return.

Answer 10

4. its minimum required rate of return.

Question 11

Which of the following equations is used to calculate the profitability index?

1. Present value of cash inflows ÷ Investment required
2. Investment required ÷ Present value of cash inflows
3. Investment required − Present value of cash inflows
4. (Investment required × Discount rate) − Present value of cash inflows

Answer 11

1. Present value of cash inflows ÷ Investment required

Question 11

A company’s cost of capital is:

1. equal to its simple rate of return.
2. the hurdle rate that it uses to compute a capital investment’s payback period.
3. the amount by which its current assets exceed its current liabilities.
4. the average rate of return it must pay to its long-term creditors and shareholders for the use of their funds.

Answer 11

4. the average rate of return it must pay to its long-term creditors and shareholders for the use of their funds.

Question 11

Which of the following equations is used to calculate the simple rate of return?

1. Initial investment ÷ Annual incremental net operating income
2. Annual incremental net operating income ÷ Initial investment
3. Annual incremental cash flows ÷ Initial investment
4. Initial investment ÷ Annual incremental cash flows

Answer 11

2. Annual incremental net operating income ÷ Initial investment