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Unformatted text preview: Chapter 12  Capital Budgeting Decisions Chapter 12 Capital Budgeting Decisions True / False Questions 1. The net present value method assumes that cash flows from a project are immediately reinvested at a rate of return equal to the discount rate. True False 2. In preference decision situations, a project with a high net present value will always be preferable to a project with a lower net present value. True False 3. An investment project with a project profitability index of less than zero should ordinarily be rejected. True False 4. Screening decisions follow preference decisions and seek to rank investment proposals in order of their desirability. True False 5. The payback period is the length of time it takes for an investment to recoup its initial cost out of the cash receipts it generates. True False 6. The payback method of making capital budgeting decisions gives full consideration to the time value of money. True False 121 Chapter 12  Capital Budgeting Decisions 7. One strength of the simple rate of return method is that it takes into account the time value of money in computing the return on an investment project. True False 8. In capital budgeting decisions, a $10,000 decrease in annual cash outflows can be treated as if it is a $10,000 increase in annual cash inflows. True False Multiple Choice Questions 9. The net present value method assumes that the project's cash flows are reinvested at the: A. internal rate of return. B. the simple rate of return. C. the discount rate used in the net present value calculation. D. the payback rate of return. 10. The totalcost approach and the incrementalcost approach to evaluating two competing investment opportunities: A. are dissimilar in that one deals with net present value and the other deals with internal rate of return. B. are similar in that they will recommend the same alternative as the best. C. are dissimilar in that one uses the cost of capital as a discount rate and the other does not. D. are similar in that neither considers the time value of money. 11. Cresol Corporation has a large number of potential investment opportunities that are acceptable. However, Cresol does not have enough investment funds to invest in all of them. Which calculation would be the best one for Cresol to use to determine which projects to choose? A. payback period B. simple rate of return C. net present value D. project profitability index 122 Chapter 12  Capital Budgeting Decisions 12. The payback method measures: A. how quickly investment dollars may be recovered. B. the cash flow from an investment. C. the economic life of an investment. D. the project profitability of an investment....
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 Spring '11
 Bauser
 Managerial Accounting

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