Capital Budgeting

1. Which of the following statements is false about long-term assets?

• Long-term assets are committed for extended periods of time.

• Acquiring long-term assets creates significant financial risks for organizations.

• Acquiring long-term assets creates technological risks for organizations.

• Flexible budgeting is the primary tool that planners use in evaluating the financial desirability of long-term assets.

Although it ignores the time value of money, what is the most common method used in practice for capital budgeting?

• internal rate of return

• net present value

• payback

• accounting rate of return

What is the present value of $1 received five years from now if the annual rate of return is 12%?

• $1.76

• $0.57

• $1.00

• $1.60

The payback capital budgeting technique considers (Time Value of Money, Income over entire life of project)

• Yes Yes

• Yes No

• No Yes

• No No

If the algebraic sum of the present values of all cash flows related to a proposed capital expenditure discounted at the company’s required rate of return is positive, it indicates that the

• resultant amount is the maximum that should be paid for the asset.

• discount rate used is not the proper required rate of return for this company

• investment is the best alternative.

• return on the investment exceeds the company’s required rate of return.

Capital budgeting techniques are least likely to be used in evaluating the

• Adoption of a new method of allocating non-traceable costs to product lines

• Design and implementation of a major advertising program

• Acquisition of a new aircraft by a cargo company.

• Trade for a star quarterback by a football team

The payback method assumes that all cash inflows are reinvested to yield a return equal to

• The internal rate of return

• zero

• The discount rate

• The hurdle rate

Which mutually exclusive project would you select, if both are priced at P 1000 and your discount rate is 15%; Project A with three annual cash flows of P 1000, or Project B, with three years of zero cash flow followed by three years of P 1,500 annually?

• Project A

• Project B

• The IRRs are equal, hence you are indifferent

• The NPVs are equal, hence you are indifferent

Capital budgeting methods are often divided into two classifications: project screening and project ranking. Which one of the following is considered a ranking method rather than a screening method?

• Accounting rate of return

• Net present value

• Profitability index

• Time-adjusted rate of return

Which of the following is always true with regard to the net present value (NPV) approach?

• The NPV and the IRR approaches will always rank projects in the same order

• The NPV and Payback approaches will always rank projects in the same approaches

• If a project is found to be acceptable under the NPV approach, it would also be acceptable under the internal rate of return (IRR) approach

• If a project is found to be acceptable under the NPV approach, it would also be acceptable under the payback approach