Chapter 10 Capital Budgeting Techniques (with Questions Answers)

Principles of Managerial Finance, Brief Ed., 8e (Zutter/Smart)
Chapter 10 Capital Budgeting Techniques

10.1 Overview of capital budgeting

1) Capital budgeting techniques are used to evaluate a firm's fixed asset investments which
provide the basis for the firm's earning power and value.
Answer: TRUE
Diff: 1
Topic: Overview of Capital Budgeting
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking

2) The purchase of additional physical facilities, such as additional property or a new factory, is
an example of a capital expenditure.
Answer: TRUE
Diff: 1
Topic: Overview of Capital Budgeting
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Reflective Thinking

3) Capital budgeting is the process of evaluating and selecting short-term investments that are
consistent with the firm's goal of maximizing owners' wealth.
Answer: FALSE
Diff: 1
Topic: Overview of Capital Budgeting
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking

4) A capital expenditure is an outlay of funds invested only in fixed assets that is expected to
produce benefits over a period of time less than one year.
Answer: FALSE
Diff: 1
Topic: Overview of Capital Budgeting
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking




1
Copyright © 2019 Pearson Education, Inc.

,5) An outlay for advertising and management consulting is considered to be a fixed asset
expenditure.
Answer: FALSE
Diff: 1
Topic: Overview of Capital Budgeting
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Reflective Thinking

6) Capital expenditure proposals are reviewed to assess their appropriateness in light of a firm's
overall objectives and plans, and to evaluate their economic validity.
Answer: TRUE
Diff: 1
Topic: Overview of Capital Budgeting
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Reflective Thinking

7) The basic motives for capital expenditures are to expand operations, to replace or renew fixed
assets, or to obtain some other, less tangible benefit over a long period.
Answer: TRUE
Diff: 1
Topic: Motives for Capital Expenditure
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking

8) The primary motive for capital expenditures is to refurbish fixed assets.
Answer: FALSE
Diff: 1
Topic: Motives for Capital Expenditure
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking

9) Research and development is considered to be a motive for making capital expenditures.
Answer: TRUE
Diff: 1
Topic: Motives for Capital Expenditure
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking




2
Copyright © 2019 Pearson Education, Inc.

,10) The capital budgeting process consists of five distinct but interrelated steps: proposal
generation, review and analysis, decision making, implementation, and follow-up.
Answer: TRUE
Diff: 1
Topic: Steps in the Process
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking

11) The capital budgeting process consists of four distinct but interrelated steps: proposal
generation, review and analysis, decision making, and termination.
Answer: FALSE
Diff: 1
Topic: Steps in the Process
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking

12) Independent projects are projects that compete with one another for a firm's resources, so that
the acceptance of one eliminates the others from further consideration.
Answer: FALSE
Diff: 2
Topic: Basic Terminology
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking

13) If a firm has unlimited funds to invest in capital assets, all independent projects that meet its
minimum investment criteria should be implemented.
Answer: TRUE
Diff: 1
Topic: Basic Terminology
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking

14) In capital budgeting, the preferred approaches in assessing whether a project is acceptable
are those that integrate time value procedures, risk and return considerations, and valuation
concepts.
Answer: TRUE
Diff: 1
Topic: Capital Budgeting Techniques
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking



3
Copyright © 2019 Pearson Education, Inc.

, 15) A $60,000 outlay for a new machine with a usable life of 15 years is an operating
expenditure that would appear as a current asset on a firm's balance sheet.
Answer: FALSE
Diff: 1
Topic: Capital Budgeting Techniques
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking

16) A nonconventional cash flow pattern associated with capital investment projects consists of
an initial outflow followed by a series of inflows.
Answer: FALSE
Diff: 1
Topic: Capital Budgeting Techniques
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking

17) Time value of money should be ignored in capital budgeting techniques to make accurate
decisions.
Answer: FALSE
Diff: 2
Topic: Basic Terminology
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Reflective Thinking

18) If a firm has limited funds to invest, all the mutually exclusive projects that meet its
minimum investment criteria should be implemented.
Answer: FALSE
Diff: 1
Topic: Basic Terminology
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking

19) Mutually exclusive projects are projects whose cash flows are unrelated to one another; the
acceptance of one does not eliminate the others from further consideration.
Answer: FALSE
Diff: 1
Topic: Basic Terminology
Learning Obj.: LG 1
Learning Outcome: F-08
AACSB: Analytical Thinking




4
Copyright © 2019 Pearson Education, Inc.