Chapter 8 Lab Exercise Solutions

Chapter 8 Lab Exercise Solutions - Ch 8 Long-Term (Capital...

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Ch 8 – Long-Term (Capital Investment) Decisions SOLUTION 1. Indicate whether the following statements are True (T) or False (F): __ T ___ Long-term decisions involving either the purchase, lease, or expansion of long-term assets used in a business are called “capital investment decisions”. __ F ___ Capital investment decisions should only consider quantitative data. __ T ___ Capital investment decisions should take time value of money into account. __ T ___ Time value of money calculations are based on the concept that says a dollar received (paid) today is worth more (less) than a dollar received (paid) in the future. __ T ___ Screening decisions involve deciding whether an investment meets a predetermined company standard. __ F ___ For both the net present value (NPV) and internal rate of return (IRR) methods, two assumptions are made: (1) all cash flows occur at the beginning of the period, and (2) all cash flows are immediately reinvested in another project or investment. Cash flows occur at the end of period. __ F ___ If the net present value (NPV) of an investment is positive, then the actual rate of return of the investment is less than the minimum required rate of return. Actual rate of return is more than minimum rate of return. __ F ___ If the net present value (NPV) of an investment is zero, then the company should not make the investment. It should – the actual rate of return is equal to the minimum required rate of return. __ T ___ The internal rate of return (IRR) for a particular investment is the rate of return where the present value of the cash inflows is equal to the present value of the cash outflows. __ F ___ If an investment’s internal rate of return (IRR) is lower than the minimum required rate of return, the company should make the investment. __ F ___ If two projects have the exact same positive net present value, then they will also have the same profitability index. __ F ___ The payback period method takes into account time value of money.
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(Calculation of after-tax benefit of depreciation expense) As a reminder, depreciation expense lowers taxable income yet there is no cash outflow from depreciation. Since it lowers taxes without lowering cash, there is an after-tax benefit (cash inflow) from depreciation. This positive
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Chapter 8 Lab Exercise Solutions - Ch 8 Long-Term (Capital...

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