Which of the four methods of evaluating capital projects would you prefer to use, and why? How would the type of capital investment decision you were making affect your choice of method? | Homework.Study.com (2024)

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• Of the four methods of capital budgeting analysis, select one of the two that are used for investments with short life spans and describe that method and how it is used.
• Management uses several capital budgeting methods in evaluating projects for possible investment. Identify those methods that are more desirable from a conceptual standpoint, and briefly explain what features these methods have that make them more desirab
• Which of the following is not a characteristic of the payback method for making capital budgeting decisions? a. It is easy to calculate and comprehend. b. It focuses primarily on liquidity, rather than profitability of an investment project. c. It can be
• There are two types of capital budgeting decisions, screening decisions, and preference decisions. What is the difference between the two?
• 1. Summarize the pros and cons of the six capital budgeting methods. 2. In what types of situations would capital budgeting decisions be made solely on the basis of the project's Net Present Value (N
• Financial management involves decisions about which of the following: A. Which projects to fund. B. How to minimize taxation. C. What type of capital should be raised. D. All of these. E. Only A and C above.
• Consider the following three mutually exclusive cash flows. Using a MARR of 14% and a rate of return method, determine which option should be selected. YearProject AProject BProject C 0-3000-4000-5000 1100016001800 2100016001800 3100015002
• Which of the following does not represent an advantage of the unadjusted rate of return over the payback method for evaluating capital projects? (a) The unadjusted rate of return method considers the investment's profitability (b) The unadjusted rate of r
• Choose the two capital investment analysis methods below that disregard the time value of money: is it accounting, rate of return, or payback methods?
• The cash flow for four projects is described below of which you can invest in one project only. In all, an upfront investment is made in year 0. All projects are for five years and the MARR to be used in the evaluations is 10%. a. Which should be chosen
• Discuss how the concept of the time value of money is critical when making capital investment decisions. Discuss cost of capital and its relevance when making capital investment decisions. Suppose that a firm must choose between two mutually exclusive p
• Select one of the two methods that incorporate the time value of money and describe that method and how it is used.
• Identify two simplifying assumptions associated with discounted cash flow methods of making capital budgeting decisions.
• Which is the best capital investment evaluation technique for ranking investment opportunities?
• Capital budgeting is the process: a. of determining how much capital stock to issue b. used in sell or process further decisions c. of determining special orders d. of making capital expenditure decisions
• Capital budgeting is the process: a. of determining how much capital stock to issue. b. that is used in sell or process further decisions. c. of determining special orders d. of making capital expenditure decisions.
• Determine two to three (2-3) methods of using stocks and options to create a risk-free hedge portfolio can be created. Support your answer with examples of these methods being used to create a risk-fr
• We know all about Capital budgeting and the different procedures used for screening projects. But, if the IRR rule and the NPV rule lead to different decisions for a stand-alone project, which would you follow, and why?
• Differential analysis is a common method used when making which decisions? a. long-term capital project decisions b. short-term business decisions c. sunk cost decisions d. long-term business decisions
• Capital budgeting is the process by which long-term fixed assets are evaluated and possibly selected or rejected for investment purposes. The purpose of capital budgeting is to evaluate potential proj
• What are the different types of project risks in capital budgeting (with examples)? How can these risks be mitigated?
• Consider the two mutually exclusive investment alternatives given in the table below. What is the IRR on incremental investment? Which project would be selected based on the rate of return decision c
• What is capital budgeting? What are the differences between screening decisions and preference decisions? Do you ever have occasion to make capital budgeting decisions in your personal life?
• Determine the term being described by the following statement: Project valuation method that does not consider the time value of money. Choose from the following terms: | Accounting rate of return | Time | Real option theory | Maintenance phase | NPV
• A) In your own words, define capital investments. B) Discuss the financial and non-financial aspects of capital investment decisions.
• Discuss several factors that would decrease the risk associated with a company's capital investment decision. Explain which factors decrease the risk more than others.
• In acquiring funds to finance major projects, how should the management choose from among the alternatives?
• In acquiring funds to finance major projects, how should management choose from among the alternatives?
• The differential approach is often considered superior to the total project approach to capital budgeting: a) because it can more easily accommodate multiple investment opportunities b) because it is faster when analyzing fewer than three alternatives c)
• The process of analyzing alternative investments and deciding which assets to acquire or sell is known as: a. Planning and Control b. Capital budgeting c. Variance analysis d. Master budgeting e. M
• If a company is practicing capital rationing, which of the following is an appropriate decision rule, for a choice between two projects? A. Select the project, for which the payback period is greater.
• What is capital budgeting? Please identify four reasons that capital budgeting decisions by managers are risky.
• What are the three methods of depreciation? Develop a chart using an example of your choice and calculate the depreciation for 4 years. How do the three methods affect the income statement and the balance sheet?
• Between the net present value (NPV) and internal rate of return (IRR), which do you think is a more effective method of profitability analysis in evaluating investment decisions? Explain.
• Which of the following factors is not included in the analysis of capital investment? a. Lowest acceptable rate of return on the investment. b. Impact of income taxes. c.Sunk cost of the old equipment. d. Economic life of the project.
• What are the payback and NPV (net present value) methods of evaluating capital projects? Which is considered the best evaluation method, and why is one better than the other?
• _____ is the process of making long-run planning decisions for investments in projects. a) Capital budgeting b) Predictions c) Obtain information d) Initial investment e) Payback
• Compare strengths and weaknesses of capital investment evaluation methods.
• Which of the following statements is correct regarding the payback method as a capital budgeting technique? a. The payback method considers the time value of money. b. An advantage of the payback method is that it indicates if an investment will be profit
• Suppose a company has five different capital budgeting projects from which to choose, but has constrained funds and cannot implement all of the projects. Explain why comparing the projects' NPVs is better than comparing their IRRs. How is the IRR determin
• The process of choosing among two or more alternatives is called? a. Contingency Planning. b. Decision Making. c. PMI Analysis. d. Autocratic Leadership.
• How would you conduct the capital budgeting process, such as the calculation of NPV and IRR, for a global project from the perspective of the host country? How would you conduct the capital budgeting process from the perspective of the home country?
• Which of the following techniques is most useful for a special order decision? a. Accounting rate-of-return method b. Payback method c. Incremental analysis d. Present value method
• Some nonfinancial factors included in capital investment decisions are more important now than they were 20-25 years ago. Give examples of the types of nonfinancial factors that managers would consid
• Which of the following investments does a rational risk averse investor prefer? (s = standard deviation) a. Investment B: E(R) = 10%, s = 5% b. Investment A: E(R) = 10%, s = 3% c. None of the given options, as a rational investor would require more inform
• Which of the following should be the main determinant in the selection of the depreciation method for long-term operational assets? A) The method that best matches the pattern of asset use. B) The method that is most convenient to compute. C) The method t
• Which of the following methods is used to account for long-term investments in equity securities when the investor has a significant influence? A. Market value method B. Investment method C. Equity method D. Consolidation method
• Which of the depreciation methods is called an accelerated depreciation method? A. Straight-line method B. Double-declining-balance method C. Units-of-activity method D. All of these choices are correct.
• Evaluate which of the following options would be your best investment based solely on the yield to maturity criterion. Option #1: Purchase a $120,000 coupon bond with a 5.5% coupon rate selling for $1
• Suppose you have 3 million dollars in capital to spend in 4 months. What types of investment would you choose? What if there is a higher chance that you will need the funds earlier? Will you change the type of investment you chose in the beginning?
• Capital investment decisions are often incremental, involving cash flows over multiple periods. Therefore, procedures must be in place to monitor the progress of projects. One such procedure is the Milestone approach. Conduct a preliminary search to expla
• Financial statements may be either be translated or remeasured. How does management determine which method to use? A. The method selected should be the one that is less detrimental to reporting earnings. B. The method selected is based on currency used
• Which method for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value?
• Discuss the principal objections to the use of the cash payback method for evaluating capital investment proposals.
• What method can be used to determine a project's valuation, other than discounted cash flow?
• Which of the following statements is CORRECT? a. The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. b. The payback method is generally regarded by academic
• Which of the following categories/methods would be used to account for an investment, where the intent of the investment was primarily for short-term profits? A) Trading securities B) Available-for-sale securities C) Held to maturity securities D) Equity
• Think about the different methods of depreciation. What kind of assets do you think each method would be best suited for? Why?
• What level of management would be involved in making capital investment decisions? Why? Why are these decisions more critical than day-to-day decisions made by individuals and companies?
• Which one of the following statements is true regarding the decision-model approach to research? A) A premise underlying this research approach is that decision makers may need to be taught how to use information they are unfamiliar with. B) This approach
• Which is not a GAAP for investment securities? A. Equity Method B. Consolidation C. Market Value Method D. Replacement Value Method
• METHOD COMPARISON Compare methods of capital investment analysis below to begin your evaluation of the three capital investment proposals Alpha, Beta, and Gamma. You decide to compare four methods: t
• What types of projects require the least detailed and the most detailed analysis in the capital budgeting process?
• What is differential analysis? How is it used in decision-making? What are the different types of differential analysis? Choose one or two types and explain how they are used in making better decisions?
• Under what circ*mstances would a business firm drop a project chosen through the new capital budgeting approach?
• Information on four investment proposals is given below: 1. Compute the project profitability index for each investment proposal. 2. Rank the proposals in terms of preference.
• Which of the following statements is correct regarding the payback method as a capital budgeting technique? (a) The payback method considers the time value of money (b) An advantage of the payback method is that it indicates if an investment will be profi
• 1) If you are using the payback period to make your decision among investment, what is a major assumption you are making? a) That the balance sheet is reflective of the investment choice. b) That th
• Identify and briefly describe the types of practices and tools that are used in the selection process.
• When is incremental analysis most useful? a. in choosing between capital budgeting methods b. in evaluating the profitability of a company c. in developing relevant information for management decisions d. after a decision has been made to determine its ef
• Which one of the following activities best exemplify working capital management? For this exercise, you will be choosing more than one option for your answer: -Identify three good investment opportunities for the firm. -Obtain a short-term loan to purc
• The capital budgeting method that allows comparison of the relative desirability of projects that require different initial investments is the: a. cash payback method b. internal rate of return method c. net present value method d. profitability index
• Discuss four different aspects of a decision that a business should evaluate in order to maximize profits and be a good corporate citizen.
• Some non-financial factors included in capital investment decisions are more important now than they were 20-25 years ago. Give some examples of the types of non-financial factors that managers would consider more important in today's capital investment d
• Consider where you currently work, where you have previously worked, or a well-known company where you would like to work. How might this company make capital investment decisions? What capital investment decisions do you see evidence of at this company?
• What are five different types of decisions that could use incremental analysis? What are the factors to be considered in retaining or replacing equipment?
• Which of the following accounting research areas is based on the efficient-markets hypothesis? A) The decision-model approach B) Behavioral research C) Critical accounting D) Capital markets research
• Analyze the components of a capital structure in general, and predict at least two (2) factors that could make a capital structure vary for different types of industries.
• Which of the following categories/methods would be used to account for an investment where the intent of the investment was primarily for short-term profits? a. trading securities b. available-for-sale securities c. equity method d. held to maturity secur
• Select the incorrect statement concerning the internal rate of return (IRR) method of evaluating capital projects. (a) The higher the IRR, the better (b) A project whose IRR is less than the cost of capital should be rejected (c) If a project has a positi
• Think of all the information on a financial statement and the ways to analyze it. Select an analysis method and state one advantage and one disadvantage of that analysis method in a specific business situation. Describe your business situation briefly but
• Capital investment analysis involves all of the following except A. preparing formal requests for capital investments. B. selecting the best alternative. C. analyzing the sales mix. D. dividing av
• The final step in the capital budget process is: a) to identify potential capital investments. b) to engage in capital rationing, if necessary, to choose among alternative investments. c) to utilize decision rules when screening out undesirable investment
• Which type of real option allows a project to be expanded if demand turns out to be greater than expected? a. Flexibility option b. Abandonment option c. Growth option d. Investment timing option
• When is incremental analysis most useful? a. After a decision has been made to determine its effectiveness b. In choosing between capital budgeting methods c. In evaluating the profitability of a company d. In developing relevant information for managemen
• The project profitability index and the internal rate of return: a. will always result in the same preference ranking for investment projects. b. will sometimes result in different preference rankings for investment projects. c. are less dependable than t
• Which method for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value? a. Net present value b. Average rate of return c. Internal rate
• Compare and contrast the Equity Method, Initial Value Method, and the Partial Equity Method. What are the differences and how do those differences affect reporting of the investment and income account?
• Assess decision-making approaches to forecasting results using different techniques.
• Determine one of the two ways a sinking fund can be set up. Discuss the advantages and disadvantages of each procedure from the viewpoint of both the firm and bondholder.
• Choose the correct answer. When the investor has control over the investee, the reporting model to be used is the: a. equity method. b. cost model. c. consolidation model. d. market value model.
• Select the best investment proposal using the net present value criteria. Assume that the organization's cost of capital is 14%.
• What are the reasons why a firm's management should not continually evaluate projects with the net present value (NPV) method by direct cash flow discounting methods using a risk-free interest rate?
• Analyze the factors that should be considered in determining the required rate of return for evaluating projects, in global markets and how this impacts decision making.
• When making screening decisions using the net present value method, a project is acceptable if: a. the NPV is greater than the hurdle rate. b. the NPV is greater than the IRR. c. the NPV is positive. d. the NPV is negative.
• The process by which management allocates available investment funds among competing capital investment proposals is referred to as: a. capital rationing. b. capital expenditure budgeting. c. leasing. d.capital assignment
• What factors should influence Big in its decision to apply the equity method in 2013?
• The management of Revco Products is exploring four different investment opportunities. Information on the four projects under study follows. 1. Compute the project profitability index for each invest
• Under which one of the following situations should a project be accepted? a) The internal rate of return is less than the cost of capital. b) The hurdle rate is greater than the required rate of ret
• Compare and contrast the equity method, the initial value method, and the partial equity method for internal investment accounting. What are the differences? How do those differences affect reporting of the investment and income account?