Chapter 13 true and False Flashcards
(25 cards)
1
Q
- Capital budgeting decisions usually involve large investments and often have a significant impact on a company’s future profitability
A
t
2
Q
- The capital budgeting committee ultimately approves the capital expenditure budget for the year
A
f
3
Q
- For purposes of capital budgeting, estimated cash inflows and outflows are preferred for inputs into the capital budgeting decision tools
A
t
4
Q
- The cash payback technique is a quick way to calculate a project’s net present value
A
f
5
Q
- The cash payback period is calculated by dividing the cost of the capital investment by the annual cash inflow
A
t
6
Q
- The cash payback method is frequently used as a screening tool but it does not take into consideration the profitability of a project
A
t
7
Q
- The cost of capital is a weighted average of the rates paid on borrowed funds, as well as on funds provided by investors in the company’s shares.
A
t
8
Q
- Using the net present value method, a net present value of zero indicates that the project would not be acceptable
A
f
9
Q
- The net present value method can only be used in capital budgeting if the expected cash flows from a project are an equal amount each year
A
f
10
Q
- By ignoring intangible benefits, capital budgeting techniques might incorrectly eliminate projects that could be beneficial to the company
A
t
11
Q
- To avoid accepting projects that actually should be rejected, a company should ignore intangible benefits in calculating net present value.
A
f
12
Q
- One way of incorporating intangible benefits into the capital budgeting decision is to project conservative estimates of the value of the intangible benefits and include them in the NPV calculation.
A
t
13
Q
- The profitability index is calculated by dividing the total cash flows by the initial investment
A
f
14
Q
- The profitability index allows comparison of the relative desirability of projects that require differing initial investments.
A
t
15
Q
- Sensitivity analysis uses a number of outcome estimates to get a sense of the variability among potential returns
A
t
16
Q
- A well-run organization should perform an evaluation, called a post-audit, of its investment projects before their completion.
A
f
17
Q
- Post-audits create an incentive for managers to make accurate estimates, since managers know that their results will be evaluated
A
t
18
Q
- A post-audit is an evaluation of how well a project’s actual performance matches the projections made when the project was proposed
A
t
19
Q
- The internal rate of return method is, like the NPV method, a discounted cash flow technique
A
t
20
Q
- The interest yield of a project is a rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected annual cash inflows.
A
t
21
Q
- Using the internal rate of return method, a project is rejected when the rate of return is greater than or equal to the required rate of return
A
f
22
Q
- Using the annual rate of return method, a project is acceptable if its rate of return is greater than management’s minimum rate of return
A
t
23
Q
- The annual rate of return method requires dividing a project’s annual cash inflows by the economic life of the project
A
f
24
Q
- A major advantage of the annual rate of return method is that it considers the time value of money
A
f
25
25. An advantage of the annual rate of return method is that it relies on accrual accounting numbers rather than actual cash flows.
f
