Question 1

If a project does not have constant incremental revenues and expenses over its useful life,the simple rate of return will fluctuate from year to year.

Accepted Answer

The simple rate of return is calculated by dividing the average annual incremental net income by the initial investment. If the project does not have constant incremental revenues and expenses, then the average annual incremental net income will fluctuate, which will in turn cause the simple rate of return to fluctuate from year to year.

Question 2

Discounted cash flow techniques do not take into account recovery of initial investment.

Accepted Answer

Discounted cash flow techniques do take into account recovery of initial investment through the calculation of the net present value (NPV) which subtracts the initial investment from the total discounted cash flows.

Question 3

The required rate of return is the minimum rate of return that an investment project must yield to the acceptable.

Accepted Answer

This statement is true. The required rate of return is also known as the hurdle rate or the minimum acceptable rate of return (MARR). It is the rate of return that must be achieved by an investment project to justify the investment of resources, taking into consideration factors such as risk, opportunity cost, and inflation.

Question 4

One criticism of the payback method is that it ignores cash flows that occur after the payback point has been reached.

Accepted Answer

The payback method only considers the time it takes for an initial investment to be paid back, and does not take into account any cash flows that occur after that point. This means that it does not fully consider the long-term profitability or return on investment of a project or investment.

Question 5

An investment project with a project profitability index of less than one should ordinarily be rejected.

Accepted Answer

The answer of An investment project with a project profitability...

Question 6

For capital budgeting decisions,the simple rate of return method is superior to the net present value method.

Accepted Answer

The net present value method is generally considered superior to the simple rate of return method for capital budgeting decisions. This is because the net present value method takes into account the time value of money and considers all future cash flows, while the simple rate of return method only looks at the initial investment and average annual cash flows.

Question 7

When considering a number of investment projects,the project that has the shortest payback period does not necessarily have the highest net present value.

Accepted Answer

The payback period only considers the time it takes to recoup the initial investment, while the net present value considers the present value of all cash flows over the project's lifetime. Therefore, a project with a longer payback period may have a higher present value of cash flows and thus a higher net present value.

Question 8

The project profitability index is computed by dividing the present value of the cash inflows of the project by present value of the cash outflows of the project.

Accepted Answer

The answer of The project profitability index is computed by...

Question 9

In the payback method,depreciation is deducted from net operating income when computing the annual net cash flow.

Accepted Answer

The answer of In the payback method,depreciation is deducted from...

Question 10

In calculating the payback period where new equipment is replacing old equipment,any salvage value to be received on disposal of the old equipment should be added to the cost of the new equipment.

Accepted Answer

The answer of In calculating the payback period where new...

Question 11

If taxes are ignored,all of the following items are included in a discounted cash flow analysis except:
A)future operating cash savings.
B)depreciation expense.
C)future salvage value.
D)investment in working capital.

Accepted Answer

Depreciation expense is not included in a discounted cash flow analysis if taxes are ignored because depreciation is a non-cash expense and does not affect the cash flows of a project. The other items - future operating cash savings, future salvage value, and investment in working capital - all affect the cash flows and are included in the analysis.

Question 12

Preference decisions follow screening decisions and seek to rank investment proposals in order of their desirability.

Accepted Answer

Preference decisions involve comparing and ranking investment proposals based on their desirability after screening decisions have been made.

Question 13

The basic premise of the payback method is that the more quickly the cost of an investment is recovered the more desirable is the investment.

Accepted Answer

The statement accurately describes the payback method, which focuses on the length of time it takes for an investment to recover its initial cost. The shorter the payback period, the more attractive the investment is considered to be.

Question 14

The simple rate of return method does not take into account the time value of money.

Accepted Answer

The simple rate of return method calculates the percentage return on an investment based on the initial investment and the resulting cash inflows, without taking into account the time value of money.

Question 15

The payback method of making capital budgeting decisions does not give full consideration to the time value of money.

Accepted Answer

The payback method simply looks at the time it takes to recover the initial investment and does not factor in the time value of money, which means that the method does not account for the fact that money today is worth more than the same amount of money in the future due to inflation and potential investment opportunities.

Question 16

When discounted cash flow methods of capital budgeting are used,the working capital required for a project is ordinarily counted as a cash inflow at the beginning of the project and as a cash outflow at the end of the project.

Accepted Answer

Working capital required for a project is not counted as a cash inflow, but rather as a cash outflow at the beginning of the project and as a cash inflow at the end of the project. This is because the working capital is needed to finance the project's operational needs at the beginning, but can be recouped at the end when the project is completed and the assets are sold.

Question 17

In capital budgeting computations,discounted cash flow methods:
A)automatically provide for recovery of initial investment.
B)can't be used unless cash flows are uniform from year to year.
C)assume that all cash flows occur at the beginning of a period.
D)ignore all cash flows after the payback period.

Accepted Answer

Discounted cash flow methods, such as net present value and internal rate of return, take into account the time value of money and provide for the recovery of the initial investment through discounting future cash flows. B is incorrect as discounted cash flow methods can be used with uneven cash flows. C is incorrect as discounted cash flow methods can assume cash flows occur at the end of a period or even throughout a period. D is incorrect as discounted cash flow methods consider all cash flows beyond the payback period.

Question 18

The project profitability index is used to compare the net present values of two investments that require different amounts of investment funds.

Accepted Answer

The project profitability index (PPI) is calculated as the present value of future cash flows divided by the initial investment. It helps to evaluate and compare the profitability of different projects that require different initial investment amounts. A higher PPI indicates a more profitable investment.

Question 19

Which of the following will have the largest dollar effect on the net present value of a 10 year investment project?
A)a decrease of $20,000 in the initial investment required with no effect on the expected salvage value in 10 years.
B)an increase of $20,000 in the expected salvage value in 10 years with no effect on the initial investment.
C)a decrease of $20,000 in both the working capital needed to start the project and the amount being released at the end of the 10 years.
D)an increase of $2,000 in the annual cash inflows from this project.

Accepted Answer

The answer of Which of the following will have the...

Question 20

In preference decision situations,a project with a lower net present value may be preferable to a project with a higher net present value.

Accepted Answer

This may happen if the project with a lower net present value has other benefits or advantages such as shorter duration, higher social or environmental impact, or higher strategic value. Ultimately, the decision should be based on the specific needs and goals of the organization or individual making the decision.

Quiz 12: Performance Measurement in Decentralized Organizations