Question 1

Capital expenditure is a:

Accepted Answer

long-term decision focussing on cash receipts

Question 2

Which of the following is NOT one of the steps a manager must complete to determine whether a capital expenditure proposal is acceptable?

Accepted Answer

only future cash flows should be considered, not past or sunk costs

Question 3

A business is evaluating a potential investment in a new machine that it will use for six years. The quoted price is $10 000. The business expects to pay transportation costs of $800 to get the machine to its factory, and an additional $400 to install the machine. What is the initial cost of this proposal?

Accepted Answer

include all costs to make the machine ready for use

Question 4

A business is evaluating a potential investment in a training program for employees that will cost $45 000 today. The training is expected to save $15 000 every year for the next 5 years. What cash flows would be evaluated for capital expenditure analysis?

Accepted Answer

initial cost must be included and savings can be considered as cash inflows

Question 5

Future cash flows that differ either in amount or timing depending upon which decision alternative is chosen, are:

Accepted Answer

relevant cash flows meet the definition of future cash flows

Question 6

Which of the following is ignored in capital expenditure analysis computations?

Accepted Answer

depreciation is not a cash flow

Question 7

The rate that measures a business' cost of obtaining cash for investments, and is used as a cut off to distinguish between acceptable and unacceptable investment proposals, is called the business':

Accepted Answer

cost of capital is the weighted-average cost of all sources of capital and used as a benchmark for distinguish between acceptable and unacceptable investment proposals

Question 8

A business' cost of capital is the ____________________ it must pay to all sources of capital.

Accepted Answer

cost of capital is the weighted-average cost of all sources of capital and used as a benchmark for distinguish between acceptable and unacceptable investment proposals

Question 9

A proposal with an initial investment of $1 million and a net present value of $1.2 million should be:

Accepted Answer

if NPV is positive, the proposal should be accepted as the proposal rate of return must be greater than the required rate of return.

Question 10

Which of the following is NOT a valid method of assessing a capital investment in shares?

Accepted Answer

negative dividend growth model does not exist

Question 11

A drill press costing $100 000, with a $10 000 residual value and a 10-year useful life, will reduce operating cash outflows by $25 000 per year. The payback period for the drill press is:

Accepted Answer

$100 000 / $25 000 = 4 years

Question 12

Which of the following is NOT a limitation of the payback period method?

Accepted Answer

the payback period can highlight some risks

Question 13

The net present value method is conceptually superior to the payback method because the payback method:

Accepted Answer

all options are true of the payback period, but the reason NPV is superior is that it does not ignore the time value of money as the payback period does

Question 14

Example 12.1
Use the information below to answer the following questions.
The Schroeder Business has identified the investment proposals shown below as acceptable.
 $$\begin{array} { c c c } 
\begin{array} { c } 
\text { Investment } \
\text { Proposal }
\end{array} & \begin{array} { c } 
\text { Required } \
\text { Investment }
\end{array} & \begin{array} { c } 
\text { Net Present } \
\text { Value }
\end{array} \
\hline\text { A } & \$ 20000 & \$ 10000\
\text { B } & 50000 &  16000  \
\text { C } & 30000 & 8000 \
\text { D } & 30000 &7000 \\
\text { E } & 20000 &11000 \
\end{array}$$
-Refer to Example 12.1. Assuming the proposals are mutually exclusive, which proposal should be chosen?

Accepted Answer

highest NPV

Question 15

Example 12.1
Use the information below to answer the following questions.
The Schroeder Business has identified the investment proposals shown below as acceptable.
 $$\begin{array} { c c c } 
\begin{array} { c } 
\text { Investment } \
\text { Proposal }
\end{array} & \begin{array} { c } 
\text { Required } \
\text { Investment }
\end{array} & \begin{array} { c } 
\text { Net Present } \
\text { Value }
\end{array} \
\hline\text { A } & \$ 20000 & \$ 10000\
\text { B } & 50000 &  16000  \
\text { C } & 30000 & 8000 \
\text { D } & 30000 &7000 \\
\text { E } & 20000 &11000 \
\end{array}$$
-Refer to Example 12.1. Assuming the business can invest up to a maximum of $100 000, which proposals should be chosen?

Accepted Answer

don't have to invest whole $100 000, and choice of A, B and E gives highest NPV combination

Question 16

Due to a legal requirement, a business must upgrade its manufacturing equipment, so must select only one of several machines that can be used in its manufacturing process. Investment proposals of this type are often called:

Accepted Answer

mutually exclusive proposals occur when selection of one proposal means another proposal is not needed

Question 17

Where a business cannot obtain sufficient cash to make all of the desired investments this is known as:

Accepted Answer

capital rationing means the business does not have enough to invest in all profitable projects

Question 18

The Spicket Business has the following three investment proposals available:
$\begin{array}{ccc}
& \text { initial investment } & \text { net present } \
\text { Proposal } & \text { Required } & \text { Value } \
\hline \text { A } & \$ 20000 & \$ 5000 \
\text { B } & 30000 & 8000 \
\text { C } & 50000 & 14000
\end{array}$ Assuming Spicket has $50 000 cash available and uses the maximum net present value method to evaluate investments, Spicket should select:

Accepted Answer

select highest NPV

Question 19

The value of proposals and initiatives drive by triple bottom line thinking are:

Accepted Answer

often not captured, although they should be and can be successfully integrated into capital budgeting

Question 20

Briefly explain the nature and purpose of capital expenditure decisions.

Accepted Answer

The answer of Briefly explain the nature and purpose of...

Quiz 12: Capital Expenditure Decisions