Chapter 17 - Multiple Choice Questions
23. The capital budget for the year is approved by a company's a. board of directors b. capital budgeting committee c. officers d. shareholders
A is correct. Section Capital budgeting Each year, the capital budget for a company is approved by the board of directors. 24. Most capital budgeting methods use a. accrual accounting numbers b. cash flow numbers c. net profit d. accrual accounting revenues
B is correct. Section Capital budgeting Cash flow numbers are used in most capital budgeting methods.
25.
The capital budgeting decision depends in part on the a. availability of funds b. relationships among proposed projects c. risk associated with a particular project d. all of these
D is correct. Section Capital budgeting Capital budgeting decisions depend in part on the availability of funds, relationships among the proposed projects and each projects associated risk. 26. Capital budgeting is the process a. used in sell or process further decisions b. of determining how much capital share to issue c. of making capital expenditure decisions d. of eliminating unprofitable product lines
C is correct. Section Capital budgeting The process of making capital expenditure decisions is called capital bidgeting. 27. A capital budgeting method that takes into consideration the time value of money is the a. annual rate of return method b. return on shareholders' equity method c. cash payback technique d. internal rate of return method
D is correct. Section Internal rate of return The internal rate of return considers the time value of money. 28. a. b. c. d. Under the net present value method of budgeting, discounted cash inflows are compared with the capital outlay required for the investment capital inflows coming from the project undiscounted net cash flows sunk costs of the investment A is correct. Section Internal rate of return The net present value method compares discounted cash inflows with the capital outlay required for the investment.
29. a. b. c. d.
The capital budgeting technique that determines the interest yield of a potential investment is the external rate of return internal rate of return differential analysis cash flow method B is correct. Section Internal rate of return The internal rate of return determines the interest yield of a potential investment.
a. b. c. d.
30 The objective under the net present value technique is to calculate the internal rate of return the undiscounted cash flows net present value of cash flows nominal value of money C is correct. Section Net present value The net present value technique calculates the net present value of cash flows. 31. In theory, when making capital budgeting decisions, all projects with positive NPVs should be
a. b. c. d.
rejected recalculated avoided accepted D is correct. Section Net present value In theory, all projects with a positive NPV should be accepted. 32. Cash payback is calculated using the following formula cost of capital investment less net annual cash inflow cost of capital investment plus net annual cash inflow cost of capital investment plus net annual cash outflow cost of capital investment less net annual cash outflow B is correct. Section Other capital budgeting techniques Cash payback is calculated by adding the net annual cash flow to the cost of the capital investment. 33. Expected annual profit divided by average investment, is the formula used to calculate return on average investment cash payback earnings per share sunk costs A is correct. Section Other capital budgeting techniques The return on average investment is calculated by dividing the expected annual profit by the average investment.
a. b. c. d.
a. b. c. d.
