Identify the true statements about the impact of inflation on capital budgeting decisions. More than one answer may be correct. Multiple select question. Inflation does not affect capital investment projects with long lives. Inflation will affect all cash flows equally and hence its effect will cancel out. Inflation impact can be adjusted in the discount rate by accounting for inflation. Ignoring inflation in estimating the cash inflows would lead to a bias against accepting capital budgeting projects.

Identify the true statements about the impact of inflation on capital budgeting decisions. More than one answer may be correct. Multiple select question. Inflation does not affect capital investment projects with long lives. Inflation will affect all cash flows equally and hence its effect will cancel out. Inflation impact can be adjusted in the discount rate by accounting for inflation. Ignoring inflation in estimating the cash inflows would lead to a bias against accepting capital budgeting projects.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 20E

See similar textbooks

Similar questions

Explain how inflation impacts capital budgeting analysis. Why do we care? How is NPV impacted if you neglect to adjust for inflation in the cash flows when you use a discount rate based upon market (nominal) rates. Does it make the project look better or worse? Explain fully.
Identify the incorrect statement in connection to working capital management: A. Conservative financing policies use short-term funds to finance only part of fluctuating current assets. B. Long-term funds are more expensive and more risky than short-term funds . C. The objectives of working capital management are profitability and liquidity. D. Permanent current assets should be financed from long-term sources if a moderate policy is adopted.
How will a decrease in time preferences affect the loanable funds market? A. There will be an increase in the supply of loanable funds. B. There will be a decrease in the supply of loanable funds. C. There will be an increase in the demand of loanable funds. D. There will be a decrease in the demand of loanable funds.
Payback is considered an unsophisticated capital budgeting technique because it _______.
When evaluating projects using internal rate of return,? A. projects having lower early-year cash flows tend to be preferred at higher discount rates. B. projects having higher early-year cash flows tend to be preferred at higher discount rates. C. projects having higher early-year cash flows tend to be preferred at lower discount rates. D. the discount rate and magnitude of cash flows do not affect internal rate of return.
Sophisticated capital budgeting techniques do not A. examine the size of the initial outlay. B. use net profits as a measure of return. C. explicitly consider the time value of money. D. take into account an unconventional cash flow pattern.
Which are problems of the payback criterion? Check all that apply: It ignores cash flows after the cutoff date. It ignores the time value of money. It doesn't show the value created by a project. It doesn't fully reflect the risk of a project. It uses an arbitrary cutoff value. It is difficult to calculate.
Which of the following statements is false? A. Net incomes are not cash flows. Financial Managers should focus on the cash flows when making capital budgeting decisions. B. Incremental earnings are the amount by which the firm's earnings are expected to change as a result of the investment decision. C. To the extend that overhead costs are fixed and will be incurred in any case, they are not incremental to the project and should be excluded in the capital budgeting analysis. D. Depreciation is not a cash expense paid by the firm. E. None of the above.
Why the payback method is often considered inferior to discounted cash flow in capital investment appraisal? Select one: a. It is more difficult to calculate b. It does not calculate how long it will take to recoup the money invested c. It only takes into account the future income of a project d. None of the option e. It does not take account of the time value of money
Risk in cash flow estimating for capital budgeting can be defined as: a. the chance that a cash flow will turn out to be worse than the estimate. b. the chance that a cash flow will turn out to be different than the estimate, either better or worse. c. the chance that the cash flows that turn out to be more favorable than the estimate won't totally offset the cash flows that turn out to be worse than the estimate. d. the chance that the NPV and/or IRR will turn out to be worse than the estimate. e. all of the above describe the risk in cash flow estimating.
Based on your understanding of the fAactors that affect the cost of money, Identify which of the following statement is true. a. higher inflation leads to lower interest rates. b. Interest is the price paid to borrow funds. c. Higher risk leads to lower interest rates.
Explain what a discounted cash flow method of making capital budgeting decisions is. Why are discounted cash flow methods superior to other methods? What are the risks related to using discounted cash flow methods? What a project profitability index? What does it measure? Why is it used? What is the primary criticism of the payback and simple rate of return methods of making capital budget decisions? What are the benefits in using these methods? Should companies continue to use these methods? Why or why not? What role, if any, should qualitative factors play in capital budgeting decisions? Explain your reasoning for your answer Discuss some of the major benefits to be gained from budgeting.