Chapter 26 Capital Budgeting Answer Key
True / False Questions
1.
Capital investment refers to large expenditures to purchase plant assets, develop new
products, or sell more company stock.
2.
The acquiring of a subsidiary company by a publicly traded company would be an example
of a capital expenditure.
3.
Capital investments are difficult, if not impossible, to reverse once funds have been
invested.
4.
Capital budgeting estimates often involve a considerable degree of uncertainty.
5.
The impact of a capital budgeting decision upon the environment is an example of a
nonfinancial consideration.
6.
Non-financial factors are relevant in capital budgeting.
7.
Nonfinancial considerations are
not
accounted for in capital budgeting decisions.
8.
Most capital budgeting techniques involve analysis of net operating profits.
9.
The annual net cash flow of an investment refers to the excess revenue it generates over
its related expenses.
10.
The payback period can be determined by multiplying the amount invested by net cash
flows received annually.
11.
To determine the average investment over the life of an asset, divide the total depreciation
of the investment by two.
12.
The present value of a future cash flow is the amount you would pay today for the right to
receive that future amount.
13.
The payback period analysis fails to consider the cash flows over the entire life of the
investment.
14.
A failure of the return on average investment method is that no consideration is given to
the time value of money.
15.
The present value of money is always less than its future value.
16.
The difference between the present value and future value depends on the rate of interest
and the length of time that interest accumulates.
17.
The residual value of an asset should be subtracted from the cost of the asset when
determining the average amount invested.
18.
In capital budgeting, one may use estimates in making decisions.
19.
Perhaps the most important financial considerations in a capital budgeting decision are its
effects upon future cash flow and future profitability.
20.
The payback period considers total profitability over the life of an investment and takes
into consideration the timing of an investment’s future cash flows.
21.
When straight-line depreciation is used, the average carrying value of an asset with no
salvage value is equal to the asset’s original cost divided by its estimated useful life.
22.
The return on average investment computation ignores the timing of an investment’s future
cash flows.
23.
In capital budgeting, the investment proposal with the shortest payback period always has
the highest rate of return.
24.
In considering investment in new plant assets, the payback period is computed without
regard to the total useful life of the investment.
Topic: Capital Investment Decisions
25.
Topic: Capital Investment Decisions
A short payback period is preferred so that the investment’s costs can be put to other
uses.
26.
Topic: Capital Investment Decisions
The net present value of an investment proposal is the difference between the total
present value of future net cash flows and the cost of the investment.
27.
When the net present value is greater than zero, the investment’s rate of return is less than
the discount rate.
28.
The recognition of depreciation expense often causes the annual net income of an
investment to be less than the amount of its annual net cash flows.
29.
The discount rate used in discounting cash flows from proposed investments is usually the
rate of return required by the investor.
30.
When an investment fails to provide the desired rate of return, the investment should be
rejected.
31.
The higher the required rate of return of an investment, the less an investor will be willing
to pay for the investment.
32.
Results of capital budgeting processes may have serious implications for employees.
33.
The reliability of estimates is a critical factor in capital budget proposals.
34.
Capital budget audits are often undertaken to ensure the accuracy of cash flow estimates.
Multiple Choice Questions
35.
Which of the following is
not
considered a capital investment?
36.
Capital investments decisions are
not
affected by:
The Terme Corporation is contemplating the purchase of new equipment which may
potentially increase revenues by 25%. Currently, sales are $750,000 per year and variable
costs are 55% of sales. The equipment is expected to last for 5 years with no residual
value. The cash outflow expected at the beginning of the year is $357,500.
37.
Refer to the information above. By how much would Terme’s annual gross profit increase if
the investment is undertaken?
38.
Refer to the information above. What is the amount of depreciation deduction the company
could expense annually assuming the straight line depreciation method is used?
39.
Refer to the information above. Ignoring income taxes, what is the estimated annual net
operating income increase/decrease?
40.
Capital investment proposals may
not
be evaluated by using:
41.
When management considers an investment, they look for the payback period to be:
42.
If an investment costs $140,000 with no residual value, an expected increase in net income
of $35,000 and a 5 year useful life, the payback period would be:
43.
Which of the following is generally
not
considered a capital budgeting technique?
44.
A cost that has been incurred irrevocably by past actions is a (an):
45.
The selection of an appropriate discount rate for determining net present value of a
particular investment proposal does
not
depend upon:
46.
The payback period:
47.
Which of the following factors does the payback method consider?
48.
Of the following techniques of capital budgeting, which one explicitly incorporates an
estimate of an interest rate into the basic computation?
49.
The present value of money is always:
50.
Which method of project selection gives consideration to the time value of money in a
capital budgeting decision?
51.
Kenny Company is considering the possibility of investing $1,500,000 in a special project.
This venture will return $375,000 per year for 12 years in after tax cash flows. Depreciation
on the project will be $187,500 per year using straight-line depreciation. The payback
period for the project is: