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1
A capital-rationing decision involves cash flows beyond the current year.
A)True
B)False
2
The decision of whether to buy a new car that purportedly has less expensive operational costs than the old car it will replace is an example of an acceptance-or-rejection decision for capital investment.
A)True
B)False
3
A capital-rationing decision involves choosing which of several investment proposals to accept to make the best use of limited investment funds.
A)True
B)False
4
An approach to capital budgeting that takes into account the timing of the cash flows is discounted-cash-flow analysis.
A)True
B)False
5
One of the four steps in a net-present value analysis of an investment project is to compute the net present value.
A)True
B)False
6
The discount rate used in the net-present-value-method of discounted-cash flow analysis is called the hurdle rate.
A)True
B)False
7
When the net present value is equal to or less than zero, the investment proposal should be accepted.
A)True
B)False
8
Another term of the time-adjusted rate of return is the internal rate of return.
A)True
B)False
9
When the cash flows are evenly distributed over the life of the investment, the internal rate of return (IRR) can be determined by dividing the initial cash outflow by the annual cash inflow.
A)True
B)False
10
The decision rule when using the internal-rate-of-return method of discounted-cash-flow analysis is that if the internal rate of return is equal to or greater than the hurdle rate, the investment proposal is acceptable.
A)True
B)False
11
When comparing the net present value (NPV) method to the internal-rate-of-return (IRR) method in the decision to accept or reject an investment proposal, the hurdle rate is not a consideration in the NPV method.
A)True
B)False
12
One of the advantages of using the NPV approach is that adjustments can be made for risk considerations.
A)True
B)False
13
One assumption underlying the use of discounted-cash flow analysis is that all yearly cash flows occur at the end of the year.
A)True
B)False
14
One assumption underlying the use of discounted-cash-flow analysis is that under the net-present-value (NPV) method it is assumed that each cash inflow is immediately reinvested in another project that earns a return for the organization; and under the internal-rate-of-return (IRR) method, the cash inflows are held by the company.
A)True
B)False
15
One assumption underlying the use of discounted-cash-flow analysis is that a perfect capital market exists.
A)True
B)False
16
The rate of return an organization can earn on its best alternative investments that are of equivalent risk is called the investment opportunityrate.
A)True
B)False
17
Determining how to finance an acceptable capital-expenditure should be included in the discounted-cash-flow approach (NPV or IRR).
A)True
B)False
18
The cost of capital is equal to the current cost of borrowing.
A)True
B)False
19
Both the NPV and IRR methods ignore periodic depreciation charges on investment proposals.
A)True
B)False
20
The major difference between the total-cost approach and the incremental-cost approach in net-present-value (NPV) analysis is that depreciation is excluded from cash outflows in the total-cost approach and included in the incremental-cost approach.
A)True
B)False
21
The total-cost approach and incremental-cost approach seldom will yield equivalent conclusions.
A)True
B)False
22
Postaudits are used to evaluate and compare the outcomes of investment proposals accepted as a result of discounted-cash-flow analysis and the initial assumptions.
A)True
B)False
23
The cash flow expected after all tax implications have been taken into account is called the after-tax cash flow.
A)True
B)False
24
The after-tax cash inflow from revenues and the after-tax outflow from cash expenses can be computed by multiplying the pre-tax cash inflow or the pre-tax cash outflow times (1 - Tax rate).
A)True
B)False
25
If the income tax rate is 35% and the incremental sales revenue from an investment has been estimated at $120,000, the after-tax inflow will be $42,000.
A)True
B)False
26
Cash expenses have no affect on cash flows other than to reduce cash inflows by the gross amount of the cash expenses.
A)True
B)False
27
Noncash expenses have no affect on cash flows other than to reduce cash flows by the gross amounts of the noncash expenses.
A)True
B)False
28
The reduction in a firm's income-tax expense due to the depreciation expense associated with a depreciable asset is called a depreciation tax shield.
A)True
B)False
29
Multiplying the depreciation expense times the tax rate will yield the depreciation tax shield.
A)True
B)False
30
It is not realistic to assume that the cash outflow for taxes will occur in the same year as the tax shield is recognized.
A)True
B)False
31
MACRS is the five-letter acronym used to describe the depreciation schedule specified in the Internal Revenue Code, as modified by recent changes in the tax laws.
A)True
B)False
32
When using the MACRS depreciation tables for the determining the tax shield for net-present-value analysis, the cash inflow from the salvage value should be discounted by the present value factor for the year of the disposal of the asset.
A)True
B)False
33
Current tax law requires that the same depreciation method be used for both tax purposes and external reporting purposes.
A)True
B)False
34
When a taxpayer chooses the optional, straight-line depreciation method for preparing tax returns, the half-year convention does not have to be applied as it is in the MACRS depreciation tables.
A)True
B)False
35
The net cash-inflows from the proceeds of the sale of depreciable assets at a gain or a loss are not affected by the tax rates.
A)True
B)False
36
If the book value of a depreciable asset is $4,500 and the asset is sold for $6,000, the net cash flow from the sale will be $5,550 if the income tax rate is 30%.
A)True
B)False
37
If the book value of a depreciable asset is $4,500 and the asset is sold for $3,000, the net cash flow from the sale will be $3,600 if the income tax rate is 40%.
A)True
B)False
38
Current Assets - Liabilities = Working Capital.
A)True
B)False
39
Working capital should be included in a NPV analysis for an investment project.
A)True
B)False
40
A credit sale to a customer will increase accounts receivable and sales, thus there will be no change in working capital associated with credit sales.
A)True
B)False
41
This formula is used to define the profitability index.
A)True
B)False
42
If the present value of the cash inflows from a project is $75,000 and the initial investment is $60,000, the profitability index is 1.25.
A)True
B)False
43
If the initial investment of a project is $350,000 and the annual after-tax cash inflows will be $70,000 per year, the payback period will be 5 years.
A)True
B)False
44
The payback period can be determined for equal and unequal cash flows from a project.
A)True
B)False
45
A shortcoming of the payback method for ranking investment proposals is that it fails to consider the time value of money.
A)True
B)False
46
The following terms are synonymous: simple rate of return, rate of return on assets, unadjusted rate of return, and accounting rate of return.
A)True
B)False
47
The accounting rate of return does not consider the time value of money.
A)True
B)False
48
The accounting rate of return using the initial investment will be less than the accounting rate of return using the average investment.
A)True
B)False
49
If the average incremental revenue is $50,000, the average incremental expenses are $30,000, and the accounting rate of return is 15%, then the average investment is $133,333.
A)True
B)False
50
While activity-based-costing (ABC) systems are superior in providing information for making make or buy decisions, they are inferior to the traditional costing systems when a cash-flow analysis is made.
A)True
B)False
51
One of the difficulties of applying the net-present value (NPV) approach in a computer-integrated-manufacturing system (CIM) investment decision is setting time horizons that are too short.
A)True
B)False
52
One of the advantages of applying the NPV approach in a CIM investment decision is the certainty about operating cash flows.
A)True
B)False
53
One of the difficulties of applying the NPV approach in a CIM investment decision is that many benefits accruing from JIT and CIM systems are extensive and difficult to quantify.
A)True
B)False
54
Application of the net-present-value (NPV approach to discounted-cash-flow analysis of investments) in computer-integrated-manufacturing (CIM) is often difficult.
A)True
B)False





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