lOMoARcPSD|28964921
09-Capital Budgeting Techniques
Management Accounting (Foundation University (Philippines))
Studocu is not sponsored or endorsed by any college or university
Downloaded by john gatheca ()
, lOMoARcPSD|28964921
Chapter 9
Capital Budgeting
Techniques
LEARNING GOALS
LG1 Understand the role of capital budgeting techniques in the capital budgeting process.
LG2 Calculate, interpret, and evaluate the payback period.
LG3 Calculate, interpret, and evaluate the net present value (NPV).
LG4 Calculate, interpret, and evaluate the internal rate of return (IRR).
LG5 Use net present value profiles to compare NPV and IRR techniques.
LG6 Discuss NPV and IRR in terms of conflicting rankings and the theoretical and
practical strengths of each approach.
Downloaded by john gatheca ()
, lOMoARcPSD|28964921
TRUE / FALSE QUESTIONS
Capital Budgeting Techniques
1. In capital budgeting, the preferred approaches in assessing whether a project is acceptable
or to rank projects are those that integrate time value procedure, risk, return, valuation
concept, and the cost of capital.
2. In the case of an annuity cash inflows, the payback period can be found by dividing the
initial investment by the annual cash inflow.
3. The payback period is the exact amount of time required for the firm to recover the
installed cost of a new asset.
4. The payback period is generally viewed as an unsophisticated capital budgeting
technique, because it does not explicitly consider the time value of money by discounting
cash flows to find present value.
5. By measuring how quickly the firm recovers its initial investment, payback period gives
some implicit consideration to the timing of cash flows and therefore to the time value of
money.
6. One strength of payback period is that it takes fully into account the time factor in the
value of money.
7. One weakness of payback is its failure to recognize cash flows that occur after the
payback period.
8. A project must be rejected if its payback period is less than the maximum acceptable
payback period.
9. Since the payback period can be viewed as a measure of risk exposure, many firms use it
as a decision criterion or as a supplement to sophisticated decision techniques.
10. The major weakness of payback period in evaluating projects is that it cannot specify the
appropriate payback period in light of the wealth maximization goal.
11. Net present value is considered a sophisticated capital budgeting technique since it gives
explicit consideration to the time value of money.
12. The discount rate, required return, cost of capital, or opportunity cost is the minimum
return that must be earned on a project to leave the firm’s market value unchanged.
13. If net present value of a project is greater than zero, the firm will earn a return greater
than its cost of capital. Such a project should enhance the wealth of the firm's owners.
Downloaded by john gatheca ()
09-Capital Budgeting Techniques
Management Accounting (Foundation University (Philippines))
Studocu is not sponsored or endorsed by any college or university
Downloaded by john gatheca ()
, lOMoARcPSD|28964921
Chapter 9
Capital Budgeting
Techniques
LEARNING GOALS
LG1 Understand the role of capital budgeting techniques in the capital budgeting process.
LG2 Calculate, interpret, and evaluate the payback period.
LG3 Calculate, interpret, and evaluate the net present value (NPV).
LG4 Calculate, interpret, and evaluate the internal rate of return (IRR).
LG5 Use net present value profiles to compare NPV and IRR techniques.
LG6 Discuss NPV and IRR in terms of conflicting rankings and the theoretical and
practical strengths of each approach.
Downloaded by john gatheca ()
, lOMoARcPSD|28964921
TRUE / FALSE QUESTIONS
Capital Budgeting Techniques
1. In capital budgeting, the preferred approaches in assessing whether a project is acceptable
or to rank projects are those that integrate time value procedure, risk, return, valuation
concept, and the cost of capital.
2. In the case of an annuity cash inflows, the payback period can be found by dividing the
initial investment by the annual cash inflow.
3. The payback period is the exact amount of time required for the firm to recover the
installed cost of a new asset.
4. The payback period is generally viewed as an unsophisticated capital budgeting
technique, because it does not explicitly consider the time value of money by discounting
cash flows to find present value.
5. By measuring how quickly the firm recovers its initial investment, payback period gives
some implicit consideration to the timing of cash flows and therefore to the time value of
money.
6. One strength of payback period is that it takes fully into account the time factor in the
value of money.
7. One weakness of payback is its failure to recognize cash flows that occur after the
payback period.
8. A project must be rejected if its payback period is less than the maximum acceptable
payback period.
9. Since the payback period can be viewed as a measure of risk exposure, many firms use it
as a decision criterion or as a supplement to sophisticated decision techniques.
10. The major weakness of payback period in evaluating projects is that it cannot specify the
appropriate payback period in light of the wealth maximization goal.
11. Net present value is considered a sophisticated capital budgeting technique since it gives
explicit consideration to the time value of money.
12. The discount rate, required return, cost of capital, or opportunity cost is the minimum
return that must be earned on a project to leave the firm’s market value unchanged.
13. If net present value of a project is greater than zero, the firm will earn a return greater
than its cost of capital. Such a project should enhance the wealth of the firm's owners.
Downloaded by john gatheca ()
