Chapter 12
1. Projects that do not affect the cash flows of other projects are called mutually exclusive projects.
a. True
b. False
2. The process of planning, setting goals and priorities, arranging financing, and using certain criteria to select long-term
assets is called capital investment decisions.
a. True
b. False
3. Projects that if accepted preclude the acceptance of all other competing projects are called mutually exclusive projects.
a. True
b. False
Chapter 12
4. In capital investment decision making, it is usually assumed that managers should select projects that attempt to
maximize the wealth of the owners of the firm.
a. True
b. False
5. Taxes are important consideration in forecasting cash flows.
a. True
b. False
Chapter 12
6. Before-tax cash flows must be forecasted and used in capital investment decision making.
a. True
b. False
7. The two major categories of capital investment decision models are independent and mutually exclusive.
a. True
b. False
Chapter 12
8. In order to use the payback period model, the proposed investment must have even cash inflows.
a. True
b. False
9. If cash flows are uneven, the payback period assumes that the inflows during the last fraction of a year occur evenly.
a. True
b. False
10. One way to use the payback period is to set a maximum payback period for all projects and to reject any project that
exceeds this level.
a. True
Chapter 12
b. False
11. Sometimes firms require riskier projects to have longer payback periods.
a. True
b. False
12. Companies considering projects with shorter lives are interested in longer payback periods.
a. True
b. False
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13. A disadvantage of the payback period is that it ignores a project’s total profitability.
a. True
b. False
14. A disadvantage of the payback period is that it ignores the time value of money.
a. True
b. False
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15. Only accounting rate of return ignores the time value of money.
a. True
b. False
16. The payback period considers the profitability of a project over its entire life span.
a. True
b. False
Chapter 12
17. Two discounting models for capital investment decision making are net present value and internal rate of return.
a. True
b. False
18. The difference between the present value of the cash inflows and outflows associated with a project is the internal rate
of return model.
a. True
b. False
19. The minimum acceptable rate of return for a project is the required rate of return.
a. True
b. False
Chapter 12
20. In practice, managers often choose a discount rate that is higher than the cost of capital.
a. True
b. False
21. Suppose that the actual cost of capital is 10%, but the firm chooses a discount rate of 18%. Managers of that company
will be more likely to choose relatively short term investments.
a. True
b. False
Chapter 12
22. If the net present value of an investment is zero, the investment earns less than the minimum required rate of return.
a. True
b. False
23. The interest rate that sets the present value of a project’s cash inflows equal to the present value of the project’s cost is
called the internal rate of return.
a. True
b. False
Chapter 12
24. The internal rate of return is the least widely used of the capital investment techniques.
a. True
b. False
25. One drawback to the internal rate of return model is that cash inflows must occur evenly over the life of the
investment.
a. True
b. False
26. The internal rate of return is the most widely used of the capital investment techniques.
Chapter 12
a. True
b. False
27. A postaudit evaluates the overall outcome of the investment and proposes corrective action if needed.
a. True
b. False
28. In general, it is best if postaudits are done by company management, since they understand the actual operating
conditions.
a. True
b. False
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29. A disadvantage of postaudits is that they are costly.
a. True
b. False
30. A postaudit is an analysis of a capital project before it is implemented.
a. True
b. False
Chapter 12
31. A key element in the capital investment process is called a postaudit.
a. True
b. False
32. Companies that perform postaudits of capital projects experience a number of benefits.
a. True
b. False
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33. Postaudits ensure that resources are used wisely by evaluating profitability.
a. True
b. False
34. Because of the postaudit, managers are more likely to make capital investment decisions in the best interests of the
firm.
a. True
b. False
Chapter 12
35. Postaudits supply feedback to managers that should help improve future decision making.
a. True
b. False
36. Less objective results are obtainable if an independent party performs the postaudit of a capital investment.
a. True
b. False
37. The internal audit staff is usually the best choice for performing a postaudit of a capital investment.
a. True
b. False
Chapter 12
38. An obvious problem with postaudits is that the assumptions driving the original analysis may often be invalidated by
changes in the actual operating environment.
a. True
b. False
39. Net present value analysis and internal rate of return analysis can sometimes produce erroneous choices because they
ignore the time value of money.
a. True
b. False
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40. For independent projects, net present value analysis and internal rate of return analysis yield the same decision.
a. True
b. False
41. The internal rate of return model does not consistently result in choices that maximize firm wealth.
a. True
b. False
Chapter 12
42. _______________________ are concerned with the process of planning, setting goals and priorities, arranging
financing, and using certain criteria to select long-term assets.
43. The process of making capital investment decisions often is referred to as ________________.
44. The two types of capital budgeting projects are ________________ and _______________.
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45. ______________________ are projects that, if accepted or rejected, do not affect the cash flows of other projects.
46. _____________________ explicitly consider the time value of money.