Module 24 Capital Budgeting Decisions

Module 24: Capital Budgeting Decisions True/False Topic: Post-Audits LO: 1 1. A well run organization should perform an evaluation, called a post audit, of its investment projects before their completion. Answer: False Rationale: After completion of the project, the post-audit is conducted for comparison with project expectations. Topic: Post-Audits LO: 1 2. Post-audits create an incentive for managers to make accurate estimates, since managers know their results will be evaluated. Answer: True Rationale: When managers know they will be held accountable for the results of the projects they initiate, they are likely to put more care into the development of capital expenditure proposals and take a greater interest in approved projects. Topic: Post-Audits LO: 1 3. A post audit is an evaluation of how well a project’s actual performance matches the projections made when the project was proposed. Answer: True Rationale: A post-audit involves the development of project performance reports comparing planned and actual results. Topic: Cost of Capital LO: 2 4. The cost of capital is the average cost an organization pays to obtain the resources (i.e., borrowed funds, as well as on funds provided by investors in the company’s stock) necessary to make investments. Answer: True Rationale: The average rate considers such items as the effective interest rate on debt (notes or bonds), the effective dividend rate on preferred stock, and the discount rate that equates the present value of all dividends expected on common stock over the life of the organization to the current market value of the organization’s common stock.