Managerial Accounting 7th Edition By John Wild – Test Bank

Chapter 11 Capital Budgeting and Investment Analysis

1) Capital budgeting is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

Answer: TRUE
Difficulty: 1 Easy
Topic: Payback Period
Learning Objective: 11-P1 Compute payback period and describe its use.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Decision Making

2) The payback period is the amount of time for the investment to generate enough net cash flow to return the initial cost of investment.

Answer: TRUE
Difficulty: 1 Easy
Topic: Payback Period
Learning Objective: 11-P1 Compute payback period and describe its use.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Decision Making

3) Net cash flow can be calculated by adjusting the projected net income from a project for any non-cash revenues and expenses.

Answer: TRUE
Difficulty: 1 Easy
Topic: Payback Period
Learning Objective: 11-P1 Compute payback period and describe its use.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Decision Making

4) Projects with shorter payback periods have higher risk, as the company has less time to respond to unanticipated changes.

Answer: FALSE
Difficulty: 1 Easy
Topic: Payback Period
Learning Objective: 11-P1 Compute payback period and describe its use.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Decision Making
5) If the internal rate of return (IRR) of an investment is lower than the hurdle rate, the project should be accepted.

Answer: FALSE
Difficulty: 1 Easy
Topic: Internal Rate of Return
Learning Objective: 11-P4 Compute internal rate of return and explain its use.
Bloom’s: Remember
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Decision Making

6) If the internal rate of return (IRR) of an investment is lower than the hurdle rate, the project should be rejected.

Answer: TRUE
Difficulty: 1 Easy
Topic: Internal Rate of Return
Learning Objective: 11-P4 Compute internal rate of return and explain its use.
Bloom’s: Remember
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Decision Making

7) Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.

Answer: TRUE
Difficulty: 1 Easy
Topic: Payback Period; Accounting Rate of Return
Learning Objective: 11-P1 Compute payback period and describe its use.; 26-P2 Compute accounting rate of return and explain its use.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Decision Making

8) An advantage of the break-even time (BET) method over the payback period method is that it recognizes the time value of money.

Answer: TRUE
Difficulty: 1 Easy
Topic: Break-Even Time
Learning Objective: 11-A1 Analyze a capital investment project using break-even time.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Resource Management; FN Decision Making

9) In ranking choices with the break-even time (BET) method, the investment with the longest BET gets the highest rank.

Answer: FALSE
Difficulty: 1 Easy
Topic: Break-Even Time
Learning Objective: 11-A1 Analyze a capital investment project using break-even time.
Bloom’s: Remember
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Decision Making

10) In ranking choices with the break-even time (BET) method, the investment with the longest BET gets the lowest rank.

Answer: TRUE
Difficulty: 1 Easy
Topic: Break-Even Time
Learning Objective: 11-A1 Analyze a capital investment project using break-even time.
Bloom’s: Remember
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Resource Management; FN Decision Making