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The document discusses various financial concepts related to capital budgeting, including out-of-pocket costs, depreciation, relevant cash flows, and the payback method. It highlights the importance of considering tax consequences, sunk costs, and the implications of different depreciation methods on investment decisions. Additionally, it outlines the advantages of the average rate of return method and the characteristics of nondiscounted cash flow models.

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Lucy Heartfilia
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3 views3 pages

9

The document discusses various financial concepts related to capital budgeting, including out-of-pocket costs, depreciation, relevant cash flows, and the payback method. It highlights the importance of considering tax consequences, sunk costs, and the implications of different depreciation methods on investment decisions. Additionally, it outlines the advantages of the average rate of return method and the characteristics of nondiscounted cash flow models.

Uploaded by

Lucy Heartfilia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Out-of-pocket costs

45. Which of the following is a cost that requires a future outlay of cash that is
which relevant for
future decision-making?
A. Opportunity cost C. Sunk costs
B. Out-of-pocket cost D. Relevant benefits
Depreciation & Tax
22. If there were no income taxes,
A. depreciation would be ignored in capital budgeting.
B. the NPV method would not work.
C. income would be discounted instead of cash flow.
D. all potential investments would be desirable.
21. Relevant cash flows for net present value (NPV) models include all of the
following except
A. outflows to purchase new equipment
B. depreciation expense on the newly acquired piece of equipment
C. reductions in operating cash flows as a result of using the new equipment.
D. cash outflows related to purchasing additional inventories for another retail store.
55. When evaluating depreciation methods, managers who are concerned about
capital
investment decisions will:
A. choose straight line depreciation so there is minimum impact on the decision.
B. use units of production so more depreciation expense will be allocated to the
later years.
C. use accelerated methods to have as much depreciation in the early years of an
asset’s
life.
D. choice of depreciation method has no impact on the capital investment decision.
70. The tax consequences should be considered under which circumstances when
making capital
investment decisions?
A. Positive net income C. Depreciation
B. Disposal of an asset D. All of the above
Irrelevant cash flows
Loan financing
43. In addition to incremental revenues, cash inflows from capital investments can
be generated

from all of the following sources except:


A. debt financing
B. cost savings
C. salvage value
D. reduction in the amount of working capital
10. If Helena Company expects to get a one-year bank loan to help cover the initial
financing of
one of its capital projects, the analysis of the project should
A. offset the loan against any investment in inventory or receivables required by the
project.
B. show the loan as an increase in the investment.
C. show the loan as a cash outflow in the second year of the project’s life.
D. ignore the loan
Sunk cost
29. In deciding whether to replace a machine, which of the following is NOT a sunk
cost?
A. The expected resale price of the existing machine.
B. The book value of the existing machine.
C. The original cost of the existing machine.
D. The depreciated cost of the existing machine.
Accounting rate of return
54. The primary advantages of the average rate of return method are its ease of
computation and
the fact that:
A. It is especially useful to managers whose primary concern is liquidity
B. There is less possibility of loss from changes in economic conditions and
obsolescence
when the commitment is short-term
C. It emphasizes the amount of income earned over the life of the proposal
D. Rankings of proposals are necessary
Nondiscounted cash flow method
Payback method
36. There are several capital budgeting decision models that do not use discounted
cash flows.
What is the name of the simple technique that calculates the total time it will take
to recover,
using cash inflows from operations, the amount of cash invested in a project?
A. Recovery period C. External rate of return
B. Payback model D. Accounting rate of return

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