Chapter 14

Managerial Accounting

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Unformatted text preview: Chapter 14 Capital Budgeting Decisions True/False Questions 1. When cash flows are uneven and vary from year to year, the internal rate of return method is easier to use than the net present value method. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2 Level: Hard 2. For capital budgeting decisions, the net present value method is superior to the simple rate of return method. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,6 Level: Easy 3. Depreciation is included as a cash flow in capital budgeting decisions to ensure that the original cost of the asset is fully recovered. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 4. Even when done properly, the total-cost and incremental-cost approaches to choosing between alternatives will sometimes yield different answers. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 5. An increase in the expected salvage value at the end of a capital budgeting project will have no effect on the internal rate of return for that project. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium 6. The intangible benefits of automation cannot be estimated with any accuracy and therefore should be ignored in capital budgeting decisions. Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 3 Level: Medium 7. When making preference decisions about competing investment proposals, the project profitability index is superior to the internal rate of return. Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 14-7 Chapter 14 Capital Budgeting Decisions 8. The project profitability index is computed by dividing the net present value of the project by the investment required by the project. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy 9. In calculating the investment required for the project profitability index, the amount invested should be reduced by any salvage recovered from the sale of old equipment. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Medium 10. The payback method is most appropriate for projects whose cash flows extend far into the future. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Medium 11. When using the payback method, any cash flows for a project that occur after the payback period are not considered in computing the payback period for that project....
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Chapter 14 - Chapter 14 Capital Budgeting Decisions...

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