MCQ chapter 12 -The capital budgeting decisions

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1. Which of the following is not a time-adjusted method for ranking investment proposals? A. Net present value method B. Payback period C. Internal rate of return method D. Profitability index 2. Which of the following statements about the "payback period" is true? A. The payback period considers cash flows after the payback has been reached. B. The payback period does not consider the time value of money. C. The payback period uses discounted cash-flow techniques. D. The payback period generally leads to the same decision as other investment selection 3. Cash flow can be said to equal: A. income before amortization and taxes minus taxes. B. income before amortization and taxes plus taxes. C. income before amortization and taxes plus amortization. D. income after taxes minus amortization. 4. If projects are mutually exclusive: A. they can only be accepted under capital rationing. B. the selection of one alternative precludes the selection of other alternatives. C. the payback method should be used. D. the net present-value should be used. 5. The _________ assumes returns are reinvested at the cost of capital. A. payback period B. internal rate of return C. net present value D. capital rationing Capital rationing: 6. A. is a way of preserving the assets of the firm over the long term. B. is a less than optimal way to arrive at capital budgeting decisions. C. assures shareholder wealth maximization.

D. assures maximum potential profitability. 7. Using higher discount rates,: A. accelerated amortization is more valuable than straight line amortization. B. straight-line amortization is more valuable than accelerated amortization. C. amortization policy makes no difference. D. later year amortization has a higher net present value. 8. For acceptable investments, the discount rate assumption under the internal rate of return is generally: A. higher than under the net present-value method. B. lower than under the net present-value method. C. at the cost of capital. D. below the cost of capital 9. A firm is selling an old asset below book value in a replacement decision. As the firm's tax rate is raised, the net cash outflow (purchase price less proceeds from the sale of the old asset plus CCA effects) would: A. go up. B. go down. C. remain the same. D. More information required. 10. The longer the life of an investment: A. the more significant the discount rate. B. the less significant the discount rate. C. Makes no difference. D. the easier it is to determine the discount rate. 11. The reason cash flow is used in capital budgeting is because: A. income is used to purchase new machines. B. cash outlays need to be evaluated in terms of the present value of the resultant cash inflows. C. to include the tax shield provided from amortization ignores the cash flow provided by the machine which should be reinvested to replace old worn out machines. D. cash includes all accounting accruals

12. The net present value method is a better method of evaluation than the internal rate of return method because: A. the NPV method discounts cash flows at the internal rate of return. B. the NPV method is a more liberal method of analysis. C. the NPV method discounts cash flows at the firm's more conservative cost of capital. D. the NPV method includes accruals and other accounting discounts. 13. Under the capital cost allowance system: A. the life span over which an asset may be amortized is fixed at five years. B. all assets are amortized down to their salvage value. C. recovery periods for different types of assets are broken down into categories. D. the tax effect of accounting depreciation is included. 14. The payback period has several disadvantages, which include: A. payback optimizes the most economical solution to a capital budgeting problem. B. payback includes cash inflows after the payback period. C. payback fails to choose the optimum or most economical solution to a capital budgeting problem. D. payback ignores liquidity concerns. 15. The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method: A. discounts cash flows at the project's internal rate of return. B. concentrates on the liquidity aspects of investment projects. C. discounts cash flows at the firm's weighted average cost of capital. D. ignores cash flows after the payback period. 16. If the capital budgeting decision includes a replacement analysis, then: A. a gain from the sale of the old asset will represent a tax savings inflow. B. only incremental cash flows should be considered. C. the sale price and tax savings will increase the cash inflows throughout the asset's life. D. only initial cash in-flow should be considered.

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