Unit Vi - : CAPITAL BUDGETING - No Time Value of Money

UNIT VI - CAPITAL BUDGETING – No Time Value of Money
Multiple Choice
1. Which of the following capital budgeting techniques ignores the time value of
money?
a. payback period
b. net present value
c. internal rate of return
d. profitability index
2. Which of the following capital budgeting techniques may potentially ignore part of a project's
relevant cash flows?
a. net present value
b. internal rate of return
c. payback period
d. profitability index
3. In comparing two projects, the ___________ is often used to evaluate the relative
riskiness of the projects.
a. payback period
c. internal rate of return
d. discount rate
4. Which of the following capital budgeting techniques does not routinely rely on the
assumption that all cash flows occur at the end of the period?
a. internal rate of return
c. profitability index
d. payback period
5. Assume that a project consists of an initial cash outlay of P100,000 followed by equal
annual cash inflows of P40,000 for 4 years. In the formula X = P100,000/P40,000, X
represents the
a. payback period for the project.
b. profitability index of the project.
c. internal rate of return for the project.
d. project's discount rate.
6. All other factors equal, a large number is preferred to a smaller number for all capital
project evaluation measures except
a. net present value.
b. payback period.
c. internal rate of return.
d. profitability index.
7. The payback method assumes that all cash inflows are reinvested to yield a return
equal to a. the discount rate.
b. the hurdle rate.
c. the internal rate of return.
d. zero.
8. The payback method measures
a. how quickly investment dollars may be recovered.
b. the cash flow from an investment.
c. the economic life of an investment.
d. the profitability of an investment.
9. If investment A has a payback period of three years and investment B has a payback
period of four years, then
a. A is more profitable than B.
b. A is less profitable than B.
c. A and B are equally profitable.
d. the relative profitability of A and B cannot be determined from the information given.
10. The payback period is the

a. length of time over which the investment will provide cash inflows.
b. length of time over which the initial investment is recovered.
c. shortest length of time over which an investment may be depreciated.
d. shortest length of time over which the net present value will be positive.
11. Which of the following capital budgeting techniques has been criticized because it fails to
consider investment profitability?
a. payback method
b. accounting rate of return
c. net present value method
d. internal rate of return
12. Calculating the payback period for a capital project requires knowing which of the
following?
a. Useful life of the project.
b. The company's minimum required rate of return.
c. The project's NPV.
d. The project's annual cash flow.
13. The payback criterion for capital investment decisions a. is

conceptually superior to the IRR criterion.
b. takes into consideration the time value of money.
c. gives priority to rapid recovery of cash.
d. emphasizes the most profitable projects.
14. Which of the following is NOT relevant in calculating annual net cash flows for an
investment?
a. Interest payments on funds borrowed to finance the project.
b. Depreciation on fixed assets purchased for the project.
c. The income tax rate.
d. Lost contribution margin if sales of the product invested in will reduce sales of other
products.
14. Which of the following capital budgeting methods does NOT consider the time value of
money?
a. IRR.
b. Book rate of return.
c. Time-adjusted rate of return.
d. NPV.
15. Cost of capital is
a. the amount the company must pay for its plant assets.
b. the dividends a company must pay on its equity securities.
c. the cost the company must incur to obtain its capital resources.
d. the cost the company is charged by investment bankers who handle the issuance of equity
or long-term debt securities.
16. Which of the following is NOT a defect of the payback method?
a. It ignores cash flows because it uses net income.
b. It ignores profitability.
c. It ignores the present values of cash flows.
d. It ignores the pattern of cash flows beyond the payback period.
17. The technique most concerned with liquidity is
a. payback.
b. NPV.
c. IRR.
d. book rate of return.
18. The technique that does NOT use cash flows is
a. payback.
b. NPV.
c. IRR.
d. book rate of return.
19. Investment A has a payback period of 5.4 years, investment B one of 6.7 years. From
this information we can conclude
a. that investment A has a higher NPV than B.
b. that investment A has a higher IRR than B.
c. that investment A's book rate of return is higher than B's.
d. none of the above.
20. Which statement describes the relevance of depreciation in calculating cash flows?
a. Depreciation is relevant only when income taxes exist.
b. Depreciation is always relevant.
c. Depreciation is never relevant.
d. Depreciation is relevant only with discounted cash flow methods.
21. Cost of capital is

a. the interest rate an entity must pay to borrow money.
b. the return an entity's stockholders expect on their investment.
c. the rate of return the entity can earn from investing available cash.
d. a concept of managerial finance incorporating all of the above ideas.
22. In deciding whether to replace a machine, which of the following is NOT a sunk cost?
a. The expected resale price of the existing machine.
b. The book value of the existing machine.
c. The original cost of the existing machine.
d. The depreciated cost of the existing machine.
23. A major difference between an investment in working capital and one in depreciable
assets is that
a. an investment in working capital is never returned, while most depreciable assets
have some residual value.
b. an investment in working capital is returned in full at the end of a project's life, while an
investment in depreciable assets has no residual value.
c. an investment in working capital is not tax-deductible when made, nor taxable when
returned, while an investment in depreciable assets does allow tax deductions.
d. because an investment in working capital is usually returned in full at the end of the project's
life, it is ignored in computing the amount of the investment required for the project.
24. Which of the following makes investments more desirable than they had been?
a. An increase in the income tax rate.
b. An increase in interest rates.
c. An increase in the number of years over which assets must be depreciated.
d. None of the above.
25. Which of the following statements is true?
a. All revenue is taxed.
b. All expenses are tax-deductible.
c. Some revenues and expenses have no tax effects.
d. Income taxes are based solely on revenues and expenses.
25. A unique feature of the analysis of a replacement decision is that

a. the analysis considers total rather than differential costs.
b. the amount used as the cost of the investment is not likely to equal the price to be paid for
the new asset.
c. the time value of money is ignored.
d. such decisions seldom involve cash flows.
26. XYZ Co. is adopting just-in-time principles. When evaluating an investment project that
would reduce inventory, how should XYZ treat the reduction?
a. Ignore it.
b. Decrease the cost of the investment and decrease cash flows at the end of the project's
life.
c. Decrease the cost of the investment.
d. Decrease the cost of the investment and increase the cash flow at the end of the
project's life.
27. In connection with a capital budgeting project, an investment in working capital is normally
recovered
a. at the end of the project's life.
b. in the first year of the project's life.
c. evenly through the project's life.
d. when the company goes out of business.
28. For investments that have only costs (no revenues or cost savings), an appropriate
decision rule is to accept the project that has the
a. longest payback period.
b. lowest present value of cash outflows.
c. higher present value of future cash outflows.
d. lowest internal rate of return.
29. The cash inflow from the return of an investment in working capital is
a. adjusted for taxes due.
b. discounted to present value.
c. ignored if any depreciable assets also involved in the project have no expected residual
value.
d. not real.
30. If X Co. expects to get a one-year bank loan to help cover the initial financing of capital
project Q, the analysis of Q should
a. offset the loan against any investment in inventory or receivables required by the project.
b. show the loan as an increase in the investment.
c. show the loan as a cash outflow in the second year of the project's life.
d. ignore the loan.
31. The replacement decision is

a. an example of a decision among mutually exclusive alternatives.
b. best arrived at by using the total-project rather than the differential approach.
c. devoid of qualitative issues.
d. none of the above.
32. As to a capital investment, net cash inflow is equal to the
a. cost savings resulting from the investment.
b. sum of all future revenues from the investment.
c. net increase in cash receipts over cash payments.
d. net increase in cash payments over cash receipts.
33. A firm's discount rate is typically based on
a. the interest rates related to the firm's bonds.
b. a project's internal rate of return.
c. its cost of capital.
d. the corporate Aa bond yield.
34. In capital budgeting, a firm's cost of capital is frequently used as the
a. internal rate of return.
b. accounting rate of return.
c. discount rate.
d. profitability index.
35. Which of the following would be included in net income but not in annual cash
flows?
A. Sales revenue
B. Depreciation
C. Initial investment
D. Direct labor
36. Which of the following methods is calculated as annual net income as a percentage
of the original investment in assets?
A. Accounting rate of return
B. Payback period
C. Net present value
D. Internal rate of return
37. Which of the following is the formula for accounting rate of return?
A. Initial investment/net income
B. Annual net cash flow/Initial investment
C. Initial investment/Annual net cash flow
D. Net income/Initial investment
38. Which of the following capital budgeting methods focuses on net income rather than cash
flows
a. Payback period
b. Accounting rate of return
c. Net present value
d. Internal rate of return

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UNIT VI - CAPITAL BUDGETING – No Time Value of Money

10. The payback period is the

13. The payback criterion for capital investment decisions a. is

21. Cost of capital is

25. A unique feature of the analysis of a replacement decision is that

31. The replacement decision is

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