### TRUE-FALSE STATEMENTS

1. Capital budgeting decisions usually involve large investments and often have a significant impact on a company's future profitability.

2. The capital budgeting committee ultimately approves the capital expenditure budget for the year.

3. For purposes of capital budgeting, estimated cash inflows and outflows are preferred for inputs into the capital budgeting decision tools.

4. The cash payback technique is a quick way to calculate a project's net present value.

5. The cash payback period is computed by dividing the cost of the capital investment by the net annual cash inflow.

6. The cash payback method is frequently used as a screening tool but it does *not* take into consideration the profitability of a project.

7. 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 stock.

8. Using the net present value method, a net present value of zero indicates that the project would not be acceptable.

9. 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.

10. By ignoring intangible benefits, capital budgeting techniques might incorrectly eliminate projects that could be financially beneficial to the company.

11. To avoid accepting projects that actually should be rejected, a company should ignore intangible benefits in calculating net present value.

12. 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.

13. The profitability index is calculated by dividing the total cash flows by the initial investment.

14. The profitability index allows comparison of the relative desirability of projects that require differing initial investments.

15. Sensitivity analysis uses a number of outcome estimates to get a sense of the variability among potential returns.

16. A well-run organization should perform an evaluation, called a post-audit, of its investment projects before their completion.

17. Post-audits create an incentive for managers to make accurate estimates, since managers know that their results will be evaluated.

18. A post-audit is an evaluation of how well a project's actual performance matches the projections made when the project was proposed.

19. The internal rate of return method is, like the NPV method, a discounted cash flow technique.

20. 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.

21. 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.

22. 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.

23. The annual rate of return method requires dividing a project's annual cash inflows by the economic life of the project.

24. A major advantage of the annual rate of return method is that it considers the time value of money.

25. An advantage of the annual rate of return method is that it relies on accrual accounting numbers rather than actual cash flows.

### MULTIPLE CHOICE QUESTIONS

26. The capital budget for the year is approved by a company's

a. board of directors.

b. capital budgeting committee.

c. officers.

d. stockholders.

27. All of the following are involved in the capital budgeting evaluation process *except* a company's

a. board of directors.

b. capital budgeting committee.

c. officers.

d. stockholders.

28. Most of the capital budgeting methods use

a. accrual accounting numbers.

b. cash flow numbers.

c. net income.

d. accrual accounting revenues.

29. The first step in the capital budgeting evaluation process is to

a. request proposals for projects.

b. screen proposals by a capital budgeting committee.

c. determine which projects are worthy of funding.

d. approve the capital budget.

30. The capital budgeting decision depends in part on the

a. availability of funds.

b. relationships among proposed projects.

c. risk associated with a particular project.

d. all of these.

31. Capital budgeting is the process

a. used in sell or process further decisions.

b. of determining how much capital stock to issue.

c. of making capital expenditure decisions.

d. of eliminating unprofitable product lines.

32. Net annual cash flow can be estimated by

a. deducting credit sales from net income.

b. adding depreciation expense to net income.

c. deducting credit purchases from net income.

d. adding advertising expense to net income.

33. Which of the following is *not* a typical cash flow related to equipment purchase and replacement decisions?

a. Increased operating costs

b. Overhaul of equipment

c. Salvage value of equipment when project is complete

d. Depreciation expense

34. Capital expenditure proposals are initially screened by the

a. board of directors.

b. executive committee.

c. capital budgeting committee.

d. stockholders.

35. Capital budgeting decisions depend in part on all of the following *except* the

a. relationships among proposed projects.

b. profitability of the company.

c. company’s basic decision making approach.

d. risks associated with a particular project.

36. The corporate capital budget authorization process consists of how many steps?

a. 4

b. 3

c. 2

d. 1

37. Which of the following is *not* a capital budgeting decision?

a. Constructing new studios

b. Replacing old equipment

c. Scrapping obsolete inventory

d. Remodeling an office building

38. Which of the following is a disadvantage of the cash payback technique?

a. It is difficult to calculate

b. It relies on the time value of money

c. It can only be calculated when there are equal annual net cash flows

d. It ignores the expected profitability of a project

39. The payback period is often compared to an asset’s

a. estimated useful life.

b. warranty period.

c. net present value.

d. internal rate of return.

40. Which of the following ignores the time value of money?

a. Internal rate of return

b. Profitability index

c. Net present value

d. Cash payback

41. Brady Corp. is considering the purchase of a piece of equipment that costs $20,000. Projected net annual cash flows over the project’s life are:

Year Net Annual Cash Flow

1 $ 3,000

2 8,000

3 15,000

4 9,000

The cash payback period is

a. 2.29 years.

b. 2.60 years.

c. 2.40 years.

d. 2.31 years.

42. Bradshaw Inc. is contemplating a capital investment of $88,000. The cash flows over the project’s four years are:

Expected Annual Expected Annual

Year Cash Inflows Cash Outflows

1 $30,000 $12,000

2 45,000 20,000

3 60,000 25,000

4 50,000 30,000

The cash payback period is

a. 3.59 years.

b. 3.50 years.

c. 2.37 years.

d. 3.20 years.

43. Jordan Company is considering the purchase of a machine with the following data:

Initial cost $150,000

One-time training cost 12,000

Annual maintenance costs 15,000

Annual cost savings 75,000

Salvage value 20,000

The cash payback period is

a. 2.70 years.

b. 2.50 years.

c. 2.37 years.

d. 2.17 years.

44. If project A has a lower payback period than project B, this may indicate that project A may have a

a. lower NPV and be less profitable.

b. higher NPV and be less profitable.

c. higher NPV and be more profitable.

d. lower NPV and be more profitable.

45. Which of the following does *not* consider a company’s required rate of return?

a. Net present value

b. Internal rate of return

c. Annual rate of return

d. Cash payback

46. The cash payback technique

a. considers cash flows over the life of a project.

b. cannot be used with uneven cash flows.

c. is superior to the net present value method.

d. may be useful as an initial screening device.

47. If an asset costs $240,000 and is expected to have a $40,000 salvage value at the end of its ten-year life, and generates annual net cash inflows of $40,000 each year, the cash payback period is

a. 7 years.

b. 6 years.

c. 5 years.

d. 4 years.

48. If a payback period for a project is greater than its expected useful life, the

a. project will always be profitable.

b. entire initial investment will not be recovered.

c. project would only be acceptable if the company's cost of capital was low.

d. project's return will always exceed the company's cost of capital.

49. The cash payback technique

a. should be used as a final screening tool.

b. can be the only basis for the capital budgeting decision.

c. is relatively easy to compute and understand.

d. considers the expected profitability of a project.

50. The cash payback period is computed by dividing the cost of the capital investment by the

a. annual net income.

b. net annual cash inflow.

c. present value of the cash inflow.

d. present value of the net income.

**157 Questions Answered**

*Item #:*705