31. When the present value analysis of a
proposed investment results in an indication that the proposal has a rate of
return greater than the cost of capital, the investment might not be made
because:
A. the quantitative analysis indicates that
it should not be made.
B. management’s assessment of qualitative
factors overrides the quantitative analysis.
C. the timing of the cash flows of the
investment will not be as assumed in the present value calculation.
D. post-audits of prior investments have
revealed that cash flow estimates were consistently less than actual cash flows
realized.
32. Which of the following is not an
important qualitative factor to consider in the capital budgeting decision?
A. Regulations that mandate investment to
meet safety, environmental, or access requirements.
B. Technological developments within the
industry may require new facilities to maintain customers or market share at
the cost of lower ROI for a period of time.
C. Commitment to a segment of the business
that requires capital investments to achieve or regain competitiveness even
though that segment does not have as great an ROI as others.
D. All of the above are important
qualitative factors to consider.
33. Which of the following is typically not
important when calculating the net present value of a project?
A. Timing of cash flows from the project.
B. Income tax effect of cash flows from the
project.
C. Method of financing the project.
D. Amount of cash flows from the project.
34. Depreciation expense is not a cash flow
item but it will affect the calculation of which cash flow item?
A. Initial investment.
B. Income taxes.
C. Salvage value.
D. Working capital.
35. In order to calculate the net present
value of a proposed investment, it is necessary to know:
A. the cash flows expected from the
investment.
B. the net income expected from the investment.
C. the interest rate paid on funds borrowed
to make the investment.
D. the cash dividends paid on the stock
each year.
36. Discounting a future cash inflow at an
8% discount rate will result in a higher present value than discounting it at
a:
A. 7% rate.
B. 8% rate.
C. 9% rate.
D. all of the above.
37. If a project promises to generate a
higher rate of return than the firm’s cost of capital, accepting the project
will:
A. increase ROI.
B. decrease ROI.
C. increase payback.
D. decrease payback.
38. If the net present value of the
investment is $8,510, then:
A. the rate of return is less than the cost
of capital.
B. the present value of the cash flows are
more than the investment.
C. the cost of capital is higher than the
internal rate of return.
D. the present value of the cash flows is
$8,510 less than the investment.
39. If the net present value of a proposed
investment is positive:
A. the investment not will be made.
B. the cost of capital is higher than the
internal rate of return.
C. the cost of capital is positive.
D. the cost of capital is lower than the
internal rate of return.
40. The present value ratio of a proposed
investment will be:
A. less than 1.0 if the net present value
is positive.
B. negative if the proposed investment
meets the cost of capital target.
C. less than 1.0 if the net present value
is negative.
D. greater than 1.0 if the cost of capital
exceeds the internal rate of return.
41. The principal weakness of the payback
method for evaluating proposed investments is that it does not:
A. provide a way of ranking projects in
order of desirability.
B. consider cash flows that continue after
the investment has been recovered.
C. result in an easily understood
“answer”.
D. recognize the time value of money.
42. The accounting rate of return method
for evaluating proposed investments:
A. is based on cash receipts and
disbursements related to the investment.
B. uses accounting net income from the
operating budget.
C. does not recognize the time value of
money.
D. is easier to use than the net present
value method.
43. The capital budgeting analytical
technique that calculates the rate of return on the investment based on the
impact of the investment on the financial statements is known as the:
A. internal rate of return.
B. accounting rate of return.
C. payback period.
D. net present value.
44. An advantage of the net present value
method for evaluating investment proposals over the internal rate of return
method is that:
A. only one set of present value
calculations using a required discount rate is made.
B. the actual rate of return on the project
is calculated.
C. projects can be ranked in order of
profitability using the net present value amount.
D. estimates of future cash flows do not
have to be made.
45. If an asset costs $16,000, has an
expected useful life of 8 years, is expected to have a $2,000 salvage value and
generates net annual cash inflows of $2,000 a year, the cash payback period is
A. 8 years.
B. 7 years.
C. 6 years.
D. 5 years.
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