Question 81. Capital investment decisions involve investments in long-term operational as

81. Capital investment decisions involve investments in long-term operational assets.

82. Capital investments differ from stock and bond investments in that stock and bond investments can be sold in organized markets.

83. A capital investment decision is essentially a decision to exchange current cash outflows for future cash inflows.

84. The time value of money concept recognizes the fact that the present value of a dollar to be received in the future is worth less than a

dollar.

85. A dollar to be received in the future is subject to the effects of risk and inflation.

86. The compensation a company receives for investing in capital assets is referred to as a return on investment.

87. The cost of capital represents the minimum acceptable rate of return that a capital investment should earn.

88. The cost of capital is sometimes referred to as the hurdle or discount rate.

89. Stephanie needs to have $10,000 one year from today. The formula to compute the amount of money that must be invested today is future

value/(1 + interest rate).

90. The present value of $1 table should be used to discount lump sum cash flows expected to occur in the future.

91. Martin needs to compute the present value of $5,000 to be received four years from now. He should divide $5,000 by the appropriate

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present value interest factor obtained from the present value of $1 table.

92. The present value of an annuity of $1 table could be constructed using the factors contained in the present value of $1 table.

93. An annuity is a series of equal payments over equal time intervals that earn a constant rate of return.

94. The instantaneous computation power of spreadsheet software makes it ideal for answering “what-if” questions regarding present values.

95. The assumption regarding ordinary annuities is that cash flows occur at the beginning of each period.

96. In doing a capital budgeting analysis that takes time value of money into account, cash flows generated by a capital project are assumed to

be reinvested at the desired rate of return.

97. Because of the expense of applying multiple techniques, managers should use a single capital budgeting technique to analyze potential

capital investments.

98. A project’s net present value can be found by dividing the cost of the project by the total present value of the future cash flows generated

by the project.

99. If a project has a positive net present value, its internal rate of return will exceed the firm’s hurdle rate.

100. Investment projects A and B offer equal cash inflows over their lives, but the cash inflows for project A occur sooner than those for

project B. The two projects are otherwise identical (the cost is the same, for example) Based on this information, the internal rate of

return for A is higher than for B.

101. If the net present value for a capital investment is equal to zero, the internal rate of return for the investment is less than the required rate

of return.

102. A capital investment with an internal rate of return equal to or greater than the required rate of return is considered to be an acceptable

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