A. it is veryA disadvantage of the average rate of return method of capital investment analysis is thatcomplex to compute B. it does not include the entire amount of income earned over the life of a project C.it does not emphasize accounting income, which is often used by investors and creditors in evaluatingmanagement performance D. it does not directly consider the timing of the expected cash flows

Average rate of return method of capital investment analysis:The average rate of return is the…

Answered: . A. it is very A disadvantage of the…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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In capital budgeting, the Payback Method suffers from the problem of: No consideration to sunk costs No regard for the time value of money No consideration for simple computation No regard for capital expenditure
3. In a comparison of the NPV and IRR techniques, which of the following is true? statements A. Both methods give the same accept or reject decision, regardless of the pattern of the cash flows. B. IRR is technically superior to NPV and easier to calculate. C. The NPV approach is superior if discount rates are expected to vary over the life of the project. D. NPV and accounting ROCE can be confused.
“Explain the reasons why the net present value (NPV) method of investment appraisal is likely to be more reliable than the accounting rate of return method (ARR).”
Which of the following statements is true? O The salvage value of new equipment should not be considered when using the internal rate of return method to evaluate a project. O The internal rate of return method assumes that the cash flows generated by a project are reinvested at a rate of return that equals the company's cost of capital. O The profitability index and the internal rate of return will always result in the same preference ranking for investment projects. O In calculating the profitability index, the initial investment in the project should be reduced by any proceeds from the sale of old equipment. O None of the above statements is true.
A unique feature of the analysis of a replacement decision is that Group of answer choices a. the analysis considers total rather than differential costs. b. the amount used as the cost of the investment is not likely to equal the price to be paid for the new asset. c. the time value of money is ignored. d. such decisions seldom involve cash flows.
All of the following are weaknesses of the payback period EXCEPT Select one: a. only an implicit consideration of the timing of cash flows. b. the difficulty of specifying the appropriate payback period. c. a disregard for cash flows after the payback period. d. that it uses cash flows, not accounting projects.
To find NPV, it requires Choices: A.none of the choices B.discount rate and estimated cash flows C.investment amount plus discount rate D.discount rate and inflation rate E.estimated cash flow and capital structure
6. Which of the following is NOT a relevant cash flow and thus should NOT be reflected in the analysis of a capital budgeting project? a. Changes in net operating working capital. b. Shipping and installation costs for machinery acquired. c. Cannibalization effects. d. Opportunity costs. e. Sunk costs that have been expensed for tax purposes.
Which of the following are problems in using net present value to appraise an investment?1. The difficulty of estimating future cash flows2. The difficulty of selecting an appropriate discount rate3. It does not take account of inflation.4. The concept of net present value is difficult for non-accountants to understand. 1, 2, 3 and 4 1 and 2 only 1, 2 and 3 only 1, 2 and 4 only
Residual income is better measure for performance evaluation of an investments center manager than return on investments because The problems associated with measuring the assets base are eliminated Desirable investments decisions will not be neglected by high-return divisions The arguments about the implicit cost of interest are eliminated Only gross book value of assets needs to be calculated
An investment with a positive total cash flow will always outperform an investment that shows negative cash flow in the first years of operation. A. True B. False
None

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