Chapter 12 - The Capital Budgeting Decision
Chapter 12
The Capital Budgeting Decision
True / False Questions
1. Capital budgeting decisions involve a minimum time horizon of five years.
True False
2. A good capital budgeting program requires that a number of steps be taken in the decision
making process. The first step is the explanation of data.
True False
3. Possibly the most overlooked part of the capital budgeting process is the search for new
opportunities through innovation and creative thinking.
True False
4. In most capital budgeting decisions the emphasis should be on reported earnings rather than
cash flows.
True False
5. Even though one project may have superior cash flows, top management may sometimes
choose a project that inflates earnings instead of cash flow.
True False
6. The first administrative consideration in any capital budgeting process is collection of data.
True False
7. It is not unusual for a corporate president, who deals with security analysts, to be as
sensitive to after-tax income as to cash flow.
True False
12-1
,Chapter 12 - The Capital Budgeting Decision
8. Capital budgeting is only a concern of finance and accounting personnel.
True False
9. We add depreciation to net income to arrive at a true earnings picture.
True False
10. The payback method is Basic to understand and places a heavy emphasis on liquidity.
True False
11. The payback method is not really a theoretically correct approach.
True False
12. A rapid payback may be important to firms having rapid technological development.
True False
13. The payback method considers all cash inflows.
True False
14. Using the payback method can be appropriate when the time value of money is very low.
True False
15. Depreciation is important in calculating projected cash flows because it generates a tax
deduction.
True False
12-2
,Chapter 12 - The Capital Budgeting Decision
16. To find the exact internal rate of return for projects with uneven cash flows, we can
interpolate between two present value annuity factors from Appendix D.
True False
17. With non-mutually exclusive events and no capital rationing, we will usually arrive at the
same conclusions using either the net present value or internal rate of return methods.
True False
18. The internal rate of return is the interest rate that equates the cash outflows of an
investment with the subsequent inflows.
True False
19. The net present value profile's primary advantage over the internal rate of return method is
that it does not require the time consuming trial and error calculations of the IRR.
True False
20. Non-mutually exclusive alternatives can be accepted at the same time.
True False
21. The selection of a mutually exclusive project means that all other projects with a positive
net present value may also be selected.
True False
22. The profitability index is calculated by dividing the project's net present value by the
present value of the projected cash outflows.
True False
12-3
, Chapter 12 - The Capital Budgeting Decision
23. It is the difference in the reinvestment assumptions that can be significant in determining
when to use the net present value or internal rate of return methods.
True False
24. Under the net present value method, cash flows are assumed to be reinvested at the firm's
weighted average cost of capital.
True False
25. For high-IRR investments, it is perfectly acceptable to assume that reinvestment will
occur at an equally high, if not higher, rate.
True False
26. The modified internal rate of return assumes that inflows are reinvested at 80 percent of
the internal rate of return.
True False
27. Under capital rationing, a firm will maximize profitability.
True False
28. The net present value profile allows a firm to examine the project's net present value over
time.
True False
29. The net present value profile examines the relationship of the discount rate to the net
present value.
True False
12-4
Chapter 12
The Capital Budgeting Decision
True / False Questions
1. Capital budgeting decisions involve a minimum time horizon of five years.
True False
2. A good capital budgeting program requires that a number of steps be taken in the decision
making process. The first step is the explanation of data.
True False
3. Possibly the most overlooked part of the capital budgeting process is the search for new
opportunities through innovation and creative thinking.
True False
4. In most capital budgeting decisions the emphasis should be on reported earnings rather than
cash flows.
True False
5. Even though one project may have superior cash flows, top management may sometimes
choose a project that inflates earnings instead of cash flow.
True False
6. The first administrative consideration in any capital budgeting process is collection of data.
True False
7. It is not unusual for a corporate president, who deals with security analysts, to be as
sensitive to after-tax income as to cash flow.
True False
12-1
,Chapter 12 - The Capital Budgeting Decision
8. Capital budgeting is only a concern of finance and accounting personnel.
True False
9. We add depreciation to net income to arrive at a true earnings picture.
True False
10. The payback method is Basic to understand and places a heavy emphasis on liquidity.
True False
11. The payback method is not really a theoretically correct approach.
True False
12. A rapid payback may be important to firms having rapid technological development.
True False
13. The payback method considers all cash inflows.
True False
14. Using the payback method can be appropriate when the time value of money is very low.
True False
15. Depreciation is important in calculating projected cash flows because it generates a tax
deduction.
True False
12-2
,Chapter 12 - The Capital Budgeting Decision
16. To find the exact internal rate of return for projects with uneven cash flows, we can
interpolate between two present value annuity factors from Appendix D.
True False
17. With non-mutually exclusive events and no capital rationing, we will usually arrive at the
same conclusions using either the net present value or internal rate of return methods.
True False
18. The internal rate of return is the interest rate that equates the cash outflows of an
investment with the subsequent inflows.
True False
19. The net present value profile's primary advantage over the internal rate of return method is
that it does not require the time consuming trial and error calculations of the IRR.
True False
20. Non-mutually exclusive alternatives can be accepted at the same time.
True False
21. The selection of a mutually exclusive project means that all other projects with a positive
net present value may also be selected.
True False
22. The profitability index is calculated by dividing the project's net present value by the
present value of the projected cash outflows.
True False
12-3
, Chapter 12 - The Capital Budgeting Decision
23. It is the difference in the reinvestment assumptions that can be significant in determining
when to use the net present value or internal rate of return methods.
True False
24. Under the net present value method, cash flows are assumed to be reinvested at the firm's
weighted average cost of capital.
True False
25. For high-IRR investments, it is perfectly acceptable to assume that reinvestment will
occur at an equally high, if not higher, rate.
True False
26. The modified internal rate of return assumes that inflows are reinvested at 80 percent of
the internal rate of return.
True False
27. Under capital rationing, a firm will maximize profitability.
True False
28. The net present value profile allows a firm to examine the project's net present value over
time.
True False
29. The net present value profile examines the relationship of the discount rate to the net
present value.
True False
12-4
