Ch 8 – LongTerm (Capital Investment) Decisions
SOLUTION
1.
Indicate whether the following statements are True (T) or False (F):
__
T
___
Longterm decisions involving either the purchase, lease, or expansion of longterm
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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View Full Document(Calculation of aftertax 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 aftertax benefit (cash inflow) from depreciation.
This positive
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 Spring '08
 Buckless
 Accounting, Depreciation, Net Present Value

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