Question 31. When the present value a

29 Jun Question 31. When the present value a

Question
31. When the present value analysis of a proposed investment results in an indication that the proposal has a rate of return greater than the cost of capital, the investment might not be made because:

A. the quantitative analysis indicates that it should not be made.

B. management’s assessment of qualitative factors overrides the quantitative analysis.

C. the timing of the cash flows of the investment will not be as assumed in the present value calculation.

D. post-audits of prior investments have revealed that cash flow estimates were consistently less than actual cash flows realized.

32. Which of the following is not an important qualitative factor to consider in the capital budgeting decision?

A. Regulations that mandate investment to meet safety, environmental, or access requirements.

B. Technological developments within the industry may require new facilities to maintain customers or market share at the cost of lower ROI for a period of time.

C. Commitment to a segment of the business that requires capital investments to achieve or regain competitiveness even though that segment does not have as great an ROI as others.

D. All of the above are important qualitative factors to consider.

33. Which of the following is typically not important when calculating the net present value of a project?

A. Timing of cash flows from the project.

B. Income tax effect of cash flows from the project.

C. Method of financing the project.

D. Amount of cash flows from the project.

34. Depreciation expense is not a cash flow item but it will affect the calculation of which cash flow item?

A. Initial investment.

B. Income taxes.

C. Salvage value.

D. Working capital.

35. In order to calculate the net present value of a proposed investment, it is necessary to know:

A. the cash flows expected from the investment.

B. the net income expected from the investment.

C. the interest rate paid on funds borrowed to make the investment.

D. the cash dividends paid on the stock each year.

36. Discounting a future cash inflow at an 8% discount rate will result in a higher present value than discounting it at a:

A. 7% rate.

B. 8% rate.

C. 9% rate.

D. all of the above.

37. If a project promises to generate a higher rate of return than the firm’s cost of capital, accepting the project will:

A. increase ROI.

B. decrease ROI.

C. increase payback.

D. decrease payback.

38. If the net present value of the investment is $8,510, then:

A. the rate of return is less than the cost of capital.

B. the present value of the cash flows are more than the investment.

C. the cost of capital is higher than the internal rate of return.

D. the present value of the cash flows is $8,510 less than the investment.

39. If the net present value of a proposed investment is positive:

A. the investment not will be made.

B. the cost of capital is higher than the internal rate of return.

C. the cost of capital is positive.

D. the cost of capital is lower than the internal rate of return.

40. The present value ratio of a proposed investment will be:

A. less than 1.0 if the net present value is positive.

B. negative if the proposed investment meets the cost of capital target.

C. less than 1.0 if the net present value is negative.

D. greater than 1.0 if the cost of capital exceeds the internal rate of return.

41. The principal weakness of the payback method for evaluating proposed investments is that it does not:

A. provide a way of ranking projects in order of desirability.

B. consider cash flows that continue after the investment has been recovered.

C. result in an easily understood “answer”.

D. recognize the time value of money.

42. The accounting rate of return method for evaluating proposed investments:

A. is based on cash receipts and disbursements related to the investment.

B. uses accounting net income from the operating budget.

C. does not recognize the time value of money.

D. is easier to use than the net present value method.

43. The capital budgeting analytical technique that calculates the rate of return on the investment based on the impact of the investment on the financial statements is known as the:

A. internal rate of return.