Managerial Accounting 4th Edition By Stacey Whitecotton – Test Bank

Chapter 11 Capital Budgeting

1) Preference decisions compare an investment with some minimum criteria.

Answer: FALSE
Explanation: Preference decisions require managers to choose among a set of alternative capital investment opportunities. Screening decisions compare an investment with some minimum criteria.
Difficulty: 1 Easy
Topic: Capital Investment Decisions
Learning Objective: 11-01 Calculate the accounting rate of return and describe its major weaknesses.
Bloom’s: Remember
AACSB: Analytical Thinking
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2) Independent projects are unrelated to one another, so that investing in one project does not affect the choice about investing in another project.

Answer: TRUE
Explanation: An independent project is one that is unrelated to other projects, so that investing in it does not affect the choice about investing in another.
Difficulty: 1 Easy
Topic: Capital Investment Decisions
Learning Objective: 11-01 Calculate the accounting rate of return and describe its major weaknesses.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

3) The accounting rate of return is the only method that focuses on net income rather than cash flow.

Answer: TRUE
Explanation: The accounting rate of return is net income as a percentage of investment, while payback period, net present value, and internal rate of return focus on cash flows.
Difficulty: 1 Easy
Topic: Accounting Rate of Return
Learning Objective: 11-01 Calculate the accounting rate of return and describe its major weaknesses.
Bloom’s: Understand
AACSB: Analytical Thinking
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4) The payback period is defined as the average net income divided by the initial investment.

Answer: FALSE
Explanation: Assuming there are equal projected cash flows each year, the payback period is the initial investment divided by the annual net cash flow.
Difficulty: 1 Easy
Topic: Payback Period
Learning Objective: 11-02 Calculate the payback period and describe its major weaknesses.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

5) The payback period method ignores the time value of money.

Answer: TRUE
Explanation: The payback period is calculated using undiscounted cash flows.
Difficulty: 1 Easy
Topic: Payback Period
Learning Objective: 11-02 Calculate the payback period and describe its major weaknesses.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

6) The net present value method compares a project’s future net income to the initial investment.

Answer: FALSE
Explanation: The net present value method compares the present value of a project’s future cash flows to the initial investment.
Difficulty: 1 Easy
Topic: Net Present Value
Learning Objective: 11-03 Calculate net present value and describe why it is superior to the other capital budgeting techniques.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

7) The internal rate of return is the rate of return that yields a zero net present value.

Answer: TRUE
Explanation: Internal rate of return is calculated as the rate of return that yields a zero net present value.
Difficulty: 1 Easy
Topic: Internal Rate of Return
Learning Objective: 11-04 Predict the internal rate of return and describe its relationship to net present value.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

8) The internal rate of return method uses cash flows rather than net income.

Answer: TRUE
Explanation: The internal rate of return is calculated using cash flows, not net income.
Difficulty: 1 Easy
Topic: Internal Rate of Return
Learning Objective: 11-04 Predict the internal rate of return and describe its relationship to net present value.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

9) The profitability index is calculated as the present value of future cash flows divided by the initial investment.

Answer: TRUE
Explanation: The formula for the profitability index is the present value of future cash flows divided by the initial investment.
Difficulty: 1 Easy
Topic: Profitability Index
Learning Objective: 11-04 Predict the internal rate of return and describe its relationship to net present value.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

10) Sensitivity analysis helps determine whether changing the underlying assumptions would affect the decision.

Answer: TRUE
Explanation: The purpose of sensitivity analysis is to determine whether changing the underlying assumptions would affect the decision.
Difficulty: 1 Easy
Topic: Evaluating Mutually Exclusive Projects
Learning Objective: 11-05 Use the net present value method to analyze mutually exclusive capital investments.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation