MCQ chapter 12 -The capital budgeting decisions

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1. Which of the following is not a time-adjusted method for ranking investment proposals? A. Net present value method B. Payback period C. Internal rate of return method D. Profitability index 2. Which of the following statements about the "payback period" is true? A. The payback period considers cash flows after the payback has been reached. B. The payback period does not consider the time value of money. C. The payback period uses discounted cash-flow techniques. D. The payback period generally leads to the same decision as other investment selection 3. Cash flow can be said to equal: A. income before amortization and taxes minus taxes. B. income before amortization and taxes plus taxes. C. income before amortization and taxes plus amortization. D. income after taxes minus amortization. 4. If projects are mutually exclusive: A. they can only be accepted under capital rationing. B. the selection of one alternative precludes the selection of other alternatives. C. the payback method should be used. D. the net present-value should be used. 5. The _________ assumes returns are reinvested at the cost of capital. A. payback period B. internal rate of return C. net present value D. capital rationing Capital rationing: 6. A. is a way of preserving the assets of the firm over the long term. B. is a less than optimal way to arrive at capital budgeting decisions. C. assures shareholder wealth maximization.

D. assures maximum potential profitability. 7. Using higher discount rates,: A. accelerated amortization is more valuable than straight line amortization. B. straight-line amortization is more valuable than accelerated amortization. C. amortization policy makes no difference. D. later year amortization has a higher net present value. 8. For acceptable investments, the discount rate assumption under the internal rate of return is generally: A. higher than under the net present-value method. B. lower than under the net present-value method. C. at the cost of capital. D. below the cost of capital 9. A firm is selling an old asset below book value in a replacement decision. As the firm's tax rate is raised, the net cash outflow (purchase price less proceeds from the sale of the old asset plus CCA effects) would: A. go up. B. go down. C. remain the same. D. More information required. 10. The longer the life of an investment: A. the more significant the discount rate. B. the less significant the discount rate. C. Makes no difference. D. the easier it is to determine the discount rate. 11. The reason cash flow is used in capital budgeting is because: A. income is used to purchase new machines. B. cash outlays need to be evaluated in terms of the present value of the resultant cash inflows. C. to include the tax shield provided from amortization ignores the cash flow provided by the machine which should be reinvested to replace old worn out machines. D. cash includes all accounting accruals

12. The net present value method is a better method of evaluation than the internal rate of return method because: A. the NPV method discounts cash flows at the internal rate of return. B. the NPV method is a more liberal method of analysis. C. the NPV method discounts cash flows at the firm's more conservative cost of capital. D. the NPV method includes accruals and other accounting discounts. 13. Under the capital cost allowance system: A. the life span over which an asset may be amortized is fixed at five years. B. all assets are amortized down to their salvage value. C. recovery periods for different types of assets are broken down into categories. D. the tax effect of accounting depreciation is included. 14. The payback period has several disadvantages, which include: A. payback optimizes the most economical solution to a capital budgeting problem. B. payback includes cash inflows after the payback period. C. payback fails to choose the optimum or most economical solution to a capital budgeting problem. D. payback ignores liquidity concerns. 15. The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method: A. discounts cash flows at the project's internal rate of return. B. concentrates on the liquidity aspects of investment projects. C. discounts cash flows at the firm's weighted average cost of capital. D. ignores cash flows after the payback period. 16. If the capital budgeting decision includes a replacement analysis, then: A. a gain from the sale of the old asset will represent a tax savings inflow. B. only incremental cash flows should be considered. C. the sale price and tax savings will increase the cash inflows throughout the asset's life. D. only initial cash in-flow should be considered.

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17. The Wet Corp. has an investment project that will reduce expenses by $15,000 per year for 3 years. The project's cost is $20,000, with a 20% CCA rate. Using a 40% tax rate, calculate the net operating cash flow at the end of year 1? A. $-15,000 B. $+11,000 C. $+9,000 D. $+9,800 Particulars Year 0 Year 1 Initial cost $ (20,000.00) $ - Savings in expenses $ - $ 15,000.00 Less- Depreciation at 10% $ (2,000.00) Net income $ 13,000.00 Less- Taxes at 40% $ 5,200.00 Net income after taxes $ 7,800.00 Add - Depreciation $ 2,000.00 Net operating cash flow $ 9,800.00 18. An investment tax credit (ITC): A. increases the amortization base for tax purposes. B. decreases the amortization base for tax purposes. C. does not affect the amortization base for tax purposes. D. may increase or decrease the amortization base for tax purposes. An equipment replacement decision, under resultant cash flow analysis, requires: 19. A. calculating the present value of all cash flows associated with the new equipment minus the salvage value of the old asset. B. calculating the present value of all changes in cash flows from the old equipment to the new equipment. C. subtracting the purchase price of the old equipment from the purchase price of the new equipment.

D. recalculating the amortization schedule of the old equipment. 20. The investment tax credit: A. increases the tax bill for the year in which the asset is purchased. B. has a provision for a cash refund. C. increases the base upon which CCA is calculated. D. increases the amount of CCA write-off available each year. 21. An investment tax credit (ITC) of $100 in comparison to CCA expense of $100 provides: A. the same tax shield benefits. B. less tax shield benefits. C. greater tax shield benefits. D. Cannot determine with the information given. 22. An asset just purchased, qualifies for a 20% CCA rate and qualifies for a 5% ITC. If the asset cost $60,000 what is the amortization base (UCC) in the second year before CCA is taken? A. $54,000 B. $51,000 C. $56,000 D. $48,000 =60,000*20%/2=6,000 =60,000-6,000-5%(60000)=51,000 23. With non-mutually exclusive projects: A. the payback period will select the best project. B. the net present value method will always select the best project. C. the internal rate of return method will always select the best project. D. the net present value and the internal rate of return methods will always accept or reject the same project. 24. If an old asset sells below book value (UCC) and the asset pool ends, from a tax standpoint: A. there is a decrease in cash flow. B. there is an increase in cash flow. C. there is no effect on cash flow.

D. there is a decrease in net present value. 25. The internal rate of return (IRR) assumes that funds are reinvested at the: A. cost of capital. B. yield on the investment. C. minimal acceptable rate to the firm. D. yield to maturity 26. The internal rate of return (IRR) and net present value (NPV) methods: A. always give the same investment decision. B. never give the same investment decision. C. usually give the same investment decision. D. always give a decision different from the payback period method 27. The modified internal rate of return (MIRR) assumes: A. inflows are invested at the traditional interest rate of return. B. inflows are reinvested at the cost of capital. C. outflows are funded with debt. D. outflows are funded with equity. 28. The reason cash flow is used in capital budgeting is because: A. income rather than cash is used to purchase new machines. B. cash outlays need not be evaluated in terms of the present value of the resultant cash inflows. C. the tax shield provided from amortization ignores the cash flow provided by the machine which should be reinvested to replace old worn out machines. D. cash flow includes accounting accruals. 29. The net present value method is a better method of evaluation than the internal rate of return method because: A. the NPV method discounts cash flows at the internal rate of return. B. the NPV method is a more liberal method of analysis. C. the NPV method discounts cash flows at higher than the firm's cost of capital. D. the NPV method allows the financial manager to select between mutually exclusive projects. 30. Assume a project has earnings before depreciation and taxes of $15,000, depreciation of $25,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project?

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A. $18,000 B. $19,000 C. A loss of $21,000 D. $25,000 Earnings before tax=15,000-25,000= (10,000) Tax=(10,000)*30%=(3000) Earnings after tax=10,000-3000=7000 After tax cash flow=(7000)+25000=18000 31. A long term investment: A. may use various discount rates. B. may ignore the discount rate. C. is easier to determine the discount rate than a short term investment. D. should use lower discount rates than a short term investment.