Question_DOC1_Dec11_3rd
81. Capital investment decisions involve investments in longterm operational assets.
82. Capital investments differ from stock and bond investments in that stock and bond investments can be sold in organized markets.
83. A capital investment decision is essentially a decision to exchange current cash outflows for future cash inflows.
84. The time value of money concept recognizes the fact that the present value of a dollar to be received in the future is worth less than a
dollar.
85. A dollar to be received in the future is subject to the effects of risk and inflation.
86. The compensation a company receives for investing in capital assets is referred to as a return on investment.
87. The cost of capital represents the minimum acceptable rate of return that a capital investment should earn.
88. The cost of capital is sometimes referred to as the hurdle or discount rate.
89. Stephanie needs to have $10,000 one year from today. The formula to compute the amount of money that must be invested today is future
value/(1 + interest rate).
90. The present value of $1 table should be used to discount lump sum cash flows expected to occur in the future.
91. Martin needs to compute the present value of $5,000 to be received four years from now. He should divide $5,000 by the appropriate
Page 12 of 55
True False
True False
True False
True False
True False
True False
True False
True False
True False
True False
True False
True False
True False
True False
True False
True False
True False
True False
present value interest factor obtained from the present value of $1 table.
92. The present value of an annuity of $1 table could be constructed using the factors contained in the present value of $1 table.
93. An annuity is a series of equal payments over equal time intervals that earn a constant rate of return.
94. The instantaneous computation power of spreadsheet software makes it ideal for answering "whatif" questions regarding present values.
95. The assumption regarding ordinary annuities is that cash flows occur at the beginning of each period.
96. In doing a capital budgeting analysis that takes time value of money into account, cash flows generated by a capital project are assumed to
be reinvested at the desired rate of return.
97. Because of the expense of applying multiple techniques, managers should use a single capital budgeting technique to analyze potential
capital investments.
98. A project's net present value can be found by dividing the cost of the project by the total present value of the future cash flows generated
by the project.
99. If a project has a positive net present value, its internal rate of return will exceed the firm's hurdle rate.
100. Investment projects A and B offer equal cash inflows over their lives, but the cash inflows for project A occur sooner than those for
project B. The two projects are otherwise identical (the cost is the same, for example) Based on this information, the internal rate of
return for A is higher than for B.
101. If the net present value for a capital investment is equal to zero, the internal rate of return for the investment is less than the required rate
of return.
102. A capital investment with an internal rate of return equal to or greater than the required rate of return is considered to be an acceptable
investment.
103. Sources of cash inflows from capital investments include incremental revenues and installation costs.
104. Cash outflows from a capital investment may include the purchase price for capital assets and increases in operating expenses.
105. When the effect of income taxes is considered in a capital budgeting analysis, the amount of depreciation expense must be added back to
aftertax income to calculate the annual cash inflow.
106. Depreciation on a capital investment (such as equipment) has the effect of increasing the amount of income taxes that the company
owning the asset must pay.
107. The amount of the depreciation tax shield can be calculated by multiplying the amount of depreciation expense by the tax rate.
108. Generally, a company should use the straightline method to calculate depreciation on its income tax return, due to the effects of the time
value of money.
Page 13 of 55
True False
True False
True False
True False
True False
True False
True False
True False
109. If a company has to pay a given amount of income taxes over the life of a capital investment, managers of the company should seek to
pay the taxes as early as possible in the investment's life.
110. The unadjusted rate of return shows how long will be required to recover the cost of an investment in a capital asset.
111. The payback method of evaluating capital investments measures the recovery of the investment, but it does not measure profitability.
112. When a capital investment is expected to provide unequal annual cash inflows, the payback period can be calculated by accumulating the
incremental cash inflows until the sum equals the amount of the original investment.
113. When a capital investment is expected to provide unequal annual cash inflows, the payback period can be calculated using the average
annual cash inflow from the capital investment.
114. The unadjusted rate of return is found by dividing the average incremental increase in annual net cash flow by the cost of the
investment.
115. Generally, the unadjusted rate of return should be calculated based on the average investment rather than the amount of the original
investment in a depreciable asset such as equipment.
116. A postaudit should be performed at the end of a capital investment project to determine whether the expected results were actually
achieved.
117. Why is the time value of money often taken into account in analyzing a capital investment?
118. Why does a company use its cost of capital as the minimum required rate of return for its capital investment decisions?
119. Describe what is meant by the time value of money.
120. What is the reinvestment assumption, and how does the assumption affect capital investment analyses?

Rating:
5/