Accounting 211 Exam 4 review –
(Missouri State University) Questions
And All Correct Answers.
CHAPTER 12 - Capital Investment Decisions
Capital Investment Decisions - Answer decisions are concerned with the process of planning, setting
goals and priorities, arranging financing, and using certain criteria to select long-term assets
Capital budgeting - Answer The process of making capital investment decisions
Independent projects - Answer projects that, if accepted or rejected, do not affect the cash flows of
other project's.
Ex: A decision by Hard Rock to develop a cafe in argentina is not affected by its decision to build a new
cafe in singapore. These are independent capital investment decisions
Mutually exclusive projects - Answer those projects that, if accepted, preclude the acceptance of all
other completing projects
Ex: Each time Hard Rock develops a new cafe, it installs kitchen and bar equipment. Some equipment
uses standard technology, while other options offer advanced technology for energy efficiency. Once a
type of equipment is chosen, the other type is excluded; they are mutually exclusive
A sound capital investment will earn what? - Answer It will earn back its orginal capital outlay over its
life and, at the same time, provide a reasonable return on the original investment.
To make a capital investment decision, a manger must do what? - Answer 1. Estimate the quantity and
timing of cash flows
2. Assess the risk of the investment
3. consider the impact of the project on the firm's profits
, What is the difference between independent and mutually exclusive investments? - Answer
Acceptance or rejection of an independent investment does not affect the cash flows of other
investments. Acceptance of mutually exclusive investment precludes the acceptance of any competing
project.
A sound capital investment must - Answer cover the opportunity cost of the funds invested
Nondiscouting models - Answer ignore the time value of money
Discounting models - Answer explicitly consider the time value of money
Payback period - Answer the time required for a firm to recover its original investment. It is often used
to assess things such as
1. financial risk
2. impact of an investment on liquidity
3. obsolescence risk
4. impact of investment on performance measures
Payback period Formula - Answer Payback period = Original Investment/Annual Cash Flow
What are the advantages of using payback period? - Answer 1. Simple to use and easy to understand
2. It's a quick solution
3. Preference for liquidity
4. Useful in case of uncertainty
What are the disadvantages of using payback period? - Answer 1. Ignores the time value of money
2. Not all Cash flows are covered
3. Not realistic
4. Ignores profitability
(Missouri State University) Questions
And All Correct Answers.
CHAPTER 12 - Capital Investment Decisions
Capital Investment Decisions - Answer decisions are concerned with the process of planning, setting
goals and priorities, arranging financing, and using certain criteria to select long-term assets
Capital budgeting - Answer The process of making capital investment decisions
Independent projects - Answer projects that, if accepted or rejected, do not affect the cash flows of
other project's.
Ex: A decision by Hard Rock to develop a cafe in argentina is not affected by its decision to build a new
cafe in singapore. These are independent capital investment decisions
Mutually exclusive projects - Answer those projects that, if accepted, preclude the acceptance of all
other completing projects
Ex: Each time Hard Rock develops a new cafe, it installs kitchen and bar equipment. Some equipment
uses standard technology, while other options offer advanced technology for energy efficiency. Once a
type of equipment is chosen, the other type is excluded; they are mutually exclusive
A sound capital investment will earn what? - Answer It will earn back its orginal capital outlay over its
life and, at the same time, provide a reasonable return on the original investment.
To make a capital investment decision, a manger must do what? - Answer 1. Estimate the quantity and
timing of cash flows
2. Assess the risk of the investment
3. consider the impact of the project on the firm's profits
, What is the difference between independent and mutually exclusive investments? - Answer
Acceptance or rejection of an independent investment does not affect the cash flows of other
investments. Acceptance of mutually exclusive investment precludes the acceptance of any competing
project.
A sound capital investment must - Answer cover the opportunity cost of the funds invested
Nondiscouting models - Answer ignore the time value of money
Discounting models - Answer explicitly consider the time value of money
Payback period - Answer the time required for a firm to recover its original investment. It is often used
to assess things such as
1. financial risk
2. impact of an investment on liquidity
3. obsolescence risk
4. impact of investment on performance measures
Payback period Formula - Answer Payback period = Original Investment/Annual Cash Flow
What are the advantages of using payback period? - Answer 1. Simple to use and easy to understand
2. It's a quick solution
3. Preference for liquidity
4. Useful in case of uncertainty
What are the disadvantages of using payback period? - Answer 1. Ignores the time value of money
2. Not all Cash flows are covered
3. Not realistic
4. Ignores profitability
