TRUE/FALSE

1. Capital budgeting focuses on projects over their entire lives to consider all the cash
flows or cash savings from investing in a single project.

Answer: True Difficulty: 2 Objective: 1

Terms to Learn: capital budgeting

2. A capital budget spans only a one-year period.

Answer: False Difficulty: 2 Objective: 1

Terms to Learn: capital budgeting
A capital budget normally is for a period of time greater than one year.

3. The identification stage of capital budgeting explores alternative capital investments

that will achieve the objectives of the organization.

Answer: False Difficulty: 1 Objective: 2

Terms to Learn: capital budgeting
This is the definition of the search stage.

4. The information-acquisition stage of capital budgeting considers the expected costs and
the expected benefits of alternative capital investments.

Answer: True Difficulty: 1 Objective: 2

Terms to Learn: capital budgeting

5. The selection stage of the capital budgeting process consists of choosing projects for
possible implementation.

Answer: True Difficulty: 1 Objective: 2

Terms to Learn: capital budgeting

6. Discounted cash flow methods measure all the expected future cash inflows and
outflows of a project as if they occurred at equal intervals over the life of the project.

Answer: False Difficulty: 2 Objective: 3

Terms to Learn: discounted cash flow (DCF) methods
As if they occurred at a single point in time.

7. Discounted cash flow methods focus on operating income.

Answer: False Difficulty: 2 Objective: 3

Terms to Learn: discounted cash flow (DCF) methods
Discounted cash flow methods focus on cash inflows and cash outflows.

8. The net present value method calculates the expected monetary gain or loss from a
project by discounting all expected future cash inflows and outflows to the present point
in time using the hurdle rate.
 Answer: True Difficulty: 2 Objective: 3
Terms to Learn: net present value (NPV) method, hurdle rate

9. Internal rate of return is a method of calculating the expected net monetary gain or loss
from a project by discounting all expected future cash inflows and outflows to the
present point in time.

Answer: False Difficulty: 2 Objective: 3

Terms to Learn: internal rate-of-return (IRR) method
The internal rate of return calculates the discount rate at which the present value of
expected cash inflows from a project equals the present value of expected cash
outflows.

10. A capital budgeting project is accepted if the required rate of return equals or exceeds
the internal rate of return.

Answer: False Difficulty: 2 Objective: 3

Terms to Learn: required rate of return (RRR), internal rate-of-return (IRR) method
A capital budgeting project is accepted if the internal rate of return equals or exceeds
the required internal rate of return.

11. The net present value method can be used in situations where the required rate of return
varies over the life of the project.

Answer: True Difficulty: 2 Objective: 3

Terms to Learn: net present value (NPV) method, required rate of return (RRR)

12. Unlike the net present value method and the internal rate-of-return method, the payback
method does not distinguish between the origins of the cash flows.

Answer: False Difficulty: 2 Objective: 4

Terms to Learn: net present value (NPV) method, internal rate-of-return (IRR)
method, payback
None of the three capital budgeting methods distinguish between the origins of the cash
flows.

13. The payback method is only useful when the expected cash flows in the later years of
the project are highly uncertain.

Answer: False Difficulty: 3 Objective: 4

Terms to Learn: payback
The payback method is only useful when the expected cash flows in the later years are
highly certain.

14. The payback method allows for managers to highlight liquidity.

Answer: True Difficulty: 2 Objective: 4

Terms to Learn: payback
15. The accrual accounting rate of return is the method that is based most closely on the
information in the financial statements.

Answer: True Difficulty: 2 Objective: 5

Terms to Learn: accrual accounting rate of return (AARR)

16. The accrual accounting rate-of-return method is similar to the internal rate-of-return
method because both methods calculate a rate-of-return percentage.

Answer: True Difficulty: 2 Objective: 5

Terms to Learn: accrual accounting rate of return (AARR)

17. Managers using discounted cash flow methods to make capital budgeting decisions
make the same decisions that they would make in using the accrual accounting rate-of-
return methods.

Answer: False Difficulty: 2 Objective: 5

Terms to Learn: discounted cash flow (DCF) methods, accrual accounting rate of
return (AARR)
Managers using discounted cash flow methods to make capital budgeting decisions
make different decisions that they would make in using the accrual accounting rate-of-
return methods.

18. A manager who uses discounted cash flow methods to make capital budgeting decisions
does not face goal-congruence issues if the accrual accounting rate of return is used for
performance evaluation.

Answer: False Difficulty: 2 Objective: 6

Terms to Learn: discounted cash flow (DCF) methods, capital budgeting
The manager does face goal-congruence issues.

19. Depreciation tax deductions result in tax savings that partially offset the cost of
acquiring the capital asset.

Answer: True Difficulty: 2 Objective: 7

Terms to Learn: capital budgeting

20. The use of an accelerated method of depreciation for tax purposes would usually
increase the present value of the investment.

Answer: True Difficulty: 3 Objective: 7

Terms to Learn: net present value (NPV) method

21. An example of an intangible asset would be a corporation’s customer base.

Answer: True Difficulty: 2 Objective: 7

Terms to Learn: net present value (NPV) method

22. Relevant cash flows are expected future cash flows that differ among the alternative
uses of investment funds.
 Answer: True Difficulty: 2 Objective: 7
Terms to Learn: capital budgeting

23. Deducting depreciation from operating cash flows would result in counting the initial
investment twice in a discounted cash flow analysis.

Answer: True Difficulty: 2 Objective: 7

Terms to Learn: discounted cash flow (DCF) methods

24. In determining whether to keep a machine or replace it, the original cost of the machine
is always a relevant factor.

Answer: False Difficulty: 2 Objective: 7

Terms to Learn: capital budgeting
In determining whether to keep a machine or replace it, the original cost of the machine
is a sunk cost and is not a relevant factor.

25. In the net present value (NPV) method, after-tax cash flows should be used instead of
pre-tax cash flows when taxes are a consideration.

Answer: True Difficulty: 2 Objective: 7

Terms to Learn: capital budgeting
26. In calculating the net initial investment cash flows, any increase in working capital
required for the project should be included.

Answer: True Difficulty: 2 Objective: 7

Terms to Learn: capital budgeting

27. Cash received from the disposal of old equipment is not relevant to a decision to buy a
replacement.

Answer: False Difficulty: 2 Objective: 7

Terms to Learn: capital budgeting
Cash received from the disposal of old equipment is relevant to a decision to buy a
replacement.

28. A decrease in the tax rate will decrease the net present value (NPV) for a given capital
budgeting project.

Answer: False Difficulty: 2 Objective: 7

Terms to Learn: capital budgeting
A decrease in the tax rate will increase the net present value (NPV) for a given capital
budgeting project.

29. It is possible to use the net present value in an analysis of customer profitability.

Answer: True Difficulty: 2 Objective: 7

Terms to Learn: capital budgeting

30. The nominal approach to incorporating inflation into the net present value method
predicts cash inflows in real monetary units and uses a real rate as the required rate of
return.

Answer: False Difficulty: 2 Objective: A

Terms to Learn: nominal rate of return, net present value (NPV) method, real rate of
return
This is the definition of the real approach.