1. Which of the following is correct?
All capital budgeting methods produce the same decision andtheir use is based on the information available.
Payback period ignores the cash flows after the originalinvestment is recovered.
The accounting rate of return method considers the time value ofmoney.
The cost of capital is the company’s desired rate of return.
Which of the following capital budgeting methods uses accrualaccounting rather than net cash flows, as a basis forcalculations?
Payback method
Internal rate of return
Net present value
Accounting rate of return
Which of the following may be useful when comparing potentialinvestments of different sizes?
Accounting rate of return
Profitability index
Future value of net cash inflows
Payback method
The internal rate of return is:
the interest rate at which the net present value of theinvestment equals the cost of the investment.
the interest rate at which the net present value of theinvestment exceeds the company’s desired rate of return.
equal to the accounting rate of return.
none of the above
Which of the following capital budgeting methods ignores thetime value of money?
Accounting rate of return
Internal rate of return
Net present value
Profitability index
Eagle Corporation is considering the purchase of a new machine.The machine cost $550,000 and will generate an annual net cashinflow of $100,000. What is the payback period?
4 years and 6 months
5 years
5 years and 6 months
6 years and 1 month
7. CardinalCompany purchased a new machine for $125,000. The machine will lasteight years and will be depreciated using the straight-line method.The estimated residual value of the machine is zero and shouldgenerate a yearly cash inflow of $30,000. Ignoring taxes, what isthe accounting rate of return?
3.65%
11.50%
23.00%
24.00%
8. Which ofthe following decision rules is a correct statement?
If the net present value is positive, do not invest in thecapital asset.
If the internal rate of return is less than the required rate ofreturn, invest in the asset.
Investments with longer payback periods are more desirable, allelse being equal.
If the net present value is positive, invest in the capitalasset.
9. Which ofthe following is NOT a factor when considering the time value ofmoney?
The interest rate
The principal amount
The payback period
The number of periods
10. The final step inthe capital budgeting process is to:
identify potential capital investments.
engage in capital rationing, if necessary, to choose amongalternative investments.
utilize decision rules when screening out undesirableinvestments.
perform post-audits after making capital investments.
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