Chapter 14 Capital Budgeting Decisions

Chapter 14 Capital Budgeting Decisions - Chapter 14 Capital...

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Chapter 14 Capital Budgeting Decisions Garrison, Managerial Accounting, 12th Edition 709 True/False Questions 1. An investment project with a project profitability index of -0.02 has an internal rate of return that is larger than the discount rate. Answer: False Level: Medium LO: 1,2,4 2. Both the net present value method and the internal rate of return method can be used as a screening tool in capital budgeting decisions. Answer: True Level: Easy LO: 1,2 3. When considering a number of investment projects, the project that has the best payback period will also always have the highest net present value. Answer: False Level: Medium LO: 1,5 4. When discounted cash flow methods of capital budgeting are used, the working capital required for a project is ordinarily counted as a cash outflow at the beginning of the project and as a cash inflow at the end of the project. Answer: True Level: Medium LO: 1 5. Discounted cash flow techniques automatically provide for recovery of initial investment. Answer: True Level: Medium LO: 1 6. The salvage value of new equipment should not be considered when using the internal rate of return method to evaluate a project. Answer: False Level: Medium LO: 2 7. Because of the uncertainty and large cost involved in investments in automated equipment, any intangible benefits from these projects should be ignored. Answer: False Level: Easy LO: 3 8. When the internal rate of return method is used to rank investment proposals, the lower the internal rate of return, the more desirable the investment. Answer: False Level: Easy LO: 4
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Chapter 14 Capital Budgeting Decisions 710 Garrison, Managerial Accounting, 12th Edition 9. When computing the project profitability index of an investment project, the investment required will include any investment made in working capital at the beginning of the project. Answer: True Level: Medium LO: 4 10. If investment funds are limited, the net present value of one project should not be compared directly to the net present value of another project unless the initial investments in these projects are equal. Answer: True Level: Medium LO: 4 11. In calculating payback where new equipment is replacing old equipment, any salvage value to be received on disposal of the old equipment should be deducted from the cost of the new equipment. Answer: True Level: Medium LO: 5 12. In the payback method, depreciation is added back to net operating income when computing the net annual cash flow. Answer: True Level: Medium LO: 5 13. The simple rate of return method is desirable because of its simplicity and the fact that it takes the time value of money into account. Answer: False Level: Medium LO: 6 14. The present value of a cash flow will never be greater than the future dollar amount of the cash flow. Answer: True
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This note was uploaded on 01/23/2012 for the course ADMS 2510 taught by Professor Beavis during the Fall '08 term at York University.

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Chapter 14 Capital Budgeting Decisions - Chapter 14 Capital...

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