Capital Budgeting Final Exam


Terms in this set (...)

What does it mean to have benefit-cost ratio greater than 1?
It means that the present value of benefits is greater than the present value of costs
You have to recommend one alternative from two or more alternatives. If you recommendation has to be based on the benefit-cost ratio, you would select the alternative with:
The highest benefit-cost ratio
One principal reason to finance capital improvement by borrowing instead of paying from resources on hand is:
Borrowing helps to distribute costs across generation and future residents
Governments use debt financing to:
Cover deficits of annual expenditures
State and local governments use many different debt instruments because:
They sometimes seek to evade statutory or constitutional debt limits
The fundamental difference between municipal and corporate bonds is that:
Municipal bonds are exempted from paying federal income taxes
Voter approval is almost always required before issuing:
General obligation bonds
General obligation bonds are pledged on the:
Full-faith-and-credit of the issuing government unit
Revenue bonds are backed by the:
The specific revenues generated by the project being financed
Revenue bonds generally require higher interest that full-faith-and-credit bonds because:
Revenue bonds pledge only revenue from the project being financed while full-faith-and-credit bonds pledge all revenue sources and unlimited taxes
A government unit makes periodic payments to an authority to cover a building's debt services and other incidentals related to project development, maintenance, and administration. The authority has built the project for the jurisdiction and operates it for a set number of years. In exchange for the periodic payments the jurisdiction uses the building and it will take title to the property after a number of agreed upon years. This is an example of using:
Lease-financing bonds to finance construction of the building
The best example of a type of bond used to promote economic development or to redevelop blighted areas is:
Tax increment financing bonds
A jurisdiction freezes assessed valuation of property within a designated district for a set number of years. Property owners within the district pay property taxes based on the frozen assessed valuation. New development is built within the designated district, which increases the assessed valuation of property and property owners pay additional property taxes. The additional revenues resulting from the higher assessed valuation are deposited into a special fund. The jurisdiction builds capital improvement within the designated district and pays for its debt service from the special fund. This scenario describes the following financing instrument:
Tax increment financing bonds
Among other considerations, capital assets (capital projects) are included in the capital budget if such assets:
Have an anticipated useful life of more than one year
One of the following statements is correct:
The capital budget is the first year of the capital improvement plan
What is capital budgeting?
Capital budgeting is the process by which capital budgets become planning and policy instruments used by states and local governments in guiding investment on long-life fixed assets
One important reason for capital budgeting is
Capital projects are expensive, long-lived, and their financing places a significant burden on the jurisdiction's future budgets
One important reason local governments need a separate capital budget is:
The size and long-life nature of capital projects as well as the fact that most projects are financed through borrowing mechanisms impact the operating budget in a number of related ways
Local government jurisdictions regardless of their size and availability of staff resources follow similar capital budgeting and capital planning procedures.
One statement is true:
Not all state and local governments follow the same capital budgeting process
In seeking to identify the financial implications of approving a jurisdiction's capital budget, financial analysts are fundamentally concerned with answering the following questions:
Can the government jurisdiction afford the proposed capital budget?
The capital budget process entails the following steps:
• Organizing a capital budgeting process
• Preparing a capital improvement plan
• Determining to what extent the capital budget can be paid for
• Developing a strategy to finance the approve capital budget
Why have a capital budgeting process?
The capital budgeting process is used as a tool by elected officials to help select the best and most appropriate policy alternative (capital project) from many competing choices
One purpose of a capital financing strategy is:
To give policymakers the ability to make a sound economic distinction between pay-as-go and borrowing to finance capital improvements
Maintaining fund balances and setting aside capital reserves are two important capital financing policies. What is the fundamental difference between these two policies?
Capital reserves are set up to finance a particular capital need
The fundamental difference between capital reserves and fund balances is:
Capital reserves are set up to meet one or more specific capital needs and fund balances are precautionary resources kept on hand to meet unexpected contingencies
One statement regarding capital financing planning is true:
Explicit, written policies adopted by the governing board provide the strongest and most consistent foundation for capital financing
One disadvantage of relying on fund balances to finance capital improvement is:
The fund balances are not earmarked and could be used for any purpose including meeting a cash flow shortfall in the operating budget
What is the capital improvement plan?
A comprehensive process and evaluation tool in that it starts with an inventory of capital needs, an identification of a capital budget, a forecast of future needs, and a multiyear financial analysis of what can the jurisdiction afford to implement
One of the following statements is correct:
The capital budget is the first year of the capital improvement plan
One statement is true:
Not all large local governments prepare a capital improvement plan separate from the operating budget
Cost-benefits analysis uses the following decision rule:
Potential Pareto efficiency criterion; adopt only those policies that have positive net benefits
One statement is fully accurate:
Cost-benefit analysis aims to help policy makers make efficient use of public resources and equitable distribution of resources between affected groups in society
All things being equal, lower discount rates produce:
Higher present values
One statement is true:
State and local government debt has significantly increased since 2002 and it is mostly long-term
Which of the following would be a reasonable component of a state capital budget?
The cost to renovate a segment of an interstate road
The Tax Reform Act of 1986 aims to:
Limit the inequity and inefficiency of allowing private investors to take advantage of tax-exempt debt issued by state and local governments for private development
One argument against a separate capital budget at the federal level of the U.S. government is:
Many recurring, operating expenditures could be reclassified as capital spending and financed through borrowing, further increasing the national debt
Federal government capital expenditure/budget is small compared to the operating budget.
A separate capital budget at the federal level makes sense because it would reduce the deficit.
Municipalities impose impact fees on developers to:
Defray the cost to the jurisdiction that the proposed development is projected to create
What does it mean to have a net present value greater than 0?
It means that present value of benefits is greater than present value of costs
You are asked to decide among four alternatives and you are given each alternative's net present value. Which one would you recommend?
The one with the highest net present value
The most stable and reliable decision criterion used in recommending a preferred policy alternative is the:
Net present value
One disadvantage of pay-as-go capital financing is that:
It contributes to intergenerational inequity and unstable tax rates
One important advantage of pay-as-go capital financing is that:
It saves fiscal resources because the jurisdiction does not incur interest payments and other debt related expenses
One source of pay-as-go financing is:
Federal, state, and other intergovernmental transfers
One of the following statements about sources of pay-as-go financing is completely accurate:
Internal sources of pay-as-go financing include operating revenues, fund balances, capital reserves, special assessment, impact fees and other fees to property
Prioritizing capital projects includes one of the following considerations:
The project is critically needed by the jurisdiction