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A project provides a reasonable return if:

a.it provides a return equal to initial cost of the project.

b.it covers the opportunity cost of funds invested.

c.it provides return lower than the initial investment in the project.

d.it receives a cash flow equal to the original investment in the first year of investment.

a.it provides a return equal to initial cost of the project.

b.it covers the opportunity cost of funds invested.

c.it provides return lower than the initial investment in the project.

d.it receives a cash flow equal to the original investment in the first year of investment.

Which of the following is a limitation of using the payback period model for making capital budgeting decisions?

a.The payback period model is dependent upon net income, which is something that can be easily manipulated by managers.

b.The payback period model evaluates the profitability of an investment by considering the time value of cash flows from a project.

c.The payback period model ignores the cash flow performance of investments beyond the recovery of the original investment.

d.The payback period model is dependent upon required rate of return of investment.

a.The payback period model is dependent upon net income, which is something that can be easily manipulated by managers.

b.The payback period model evaluates the profitability of an investment by considering the time value of cash flows from a project.

c.The payback period model ignores the cash flow performance of investments beyond the recovery of the original investment.

d.The payback period model is dependent upon required rate of return of investment.

Which of the following statements is a limitation of the net present value (NPV) model while making a capital investment decision?

a.The NPV model ignores the time value of money while making a capital investment decision.

b.The NPV model assumes that each cash inflow received is reinvested at the internal rate of return, which is not a realistic assumption.

c.The NPV method measures profitability in relative terms, and in the final analysis, what counts are the total dollars earned—the absolute profit— not the relative profits.

d.The NPV model allows firms to use a higher discount rate than its cost of capital because of uncertain future cash flows.

a.The NPV model ignores the time value of money while making a capital investment decision.

b.The NPV model assumes that each cash inflow received is reinvested at the internal rate of return, which is not a realistic assumption.

c.The NPV method measures profitability in relative terms, and in the final analysis, what counts are the total dollars earned—the absolute profit— not the relative profits.

d.The NPV model allows firms to use a higher discount rate than its cost of capital because of uncertain future cash flows.

Wilson Company is considering replacing an existing piece of capital equipment. Relevant information includes: New equipment cost is $245,000; Expected annual savings is $74,000; Incremental working capital is $26,000. The incremental working capital will be recovered at the end of the project's life. Based on this information, an NPV analysis will show for Year 0 as a:

a.$197,000 outflow.

b.$145,000 outflow.

c.$271,000 outflow.

d.$219,000 outflow.

a.$197,000 outflow.

b.$145,000 outflow.

c.$271,000 outflow.

d.$219,000 outflow.

Wilson Company is considering replacing an existing piece of capital equipment. Relevant information includes: New equipment cost is $250,000; expected annual savings is $75,000; incremental working capital is $27,000. The incremental working capital will be recovered at the end of the project's life. In an NPV analysis, the incremental working capital will be considered as:

a.a cash inflow at the project's inception.

b.a sunk cost that cannot be recovered.

c.an opportunity cost that can be recovered.

d.a cash outflow at the project's inception.

a.a cash inflow at the project's inception.

b.a sunk cost that cannot be recovered.

c.an opportunity cost that can be recovered.

d.a cash outflow at the project's inception.

Which of the following statements is a limitation of the net present value (NPV) model while making a capital investment decision?

a.The NPV model assumes that each cash inflow received is reinvested at the internal rate of return, which is not a realistic assumption.

b.The NPV model ignores the time value of money while making a capital investment decision.

c.The NPV model allows firms to use a higher discount rate than its cost of capital because of uncertain future cash flows.

d.The NPV method measures profitability in relative terms, and in the final analysis, what counts are the total dollars earned—the absolute profit— not the relative profits.

a.The NPV model assumes that each cash inflow received is reinvested at the internal rate of return, which is not a realistic assumption.

b.The NPV model ignores the time value of money while making a capital investment decision.

c.The NPV model allows firms to use a higher discount rate than its cost of capital because of uncertain future cash flows.

d.The NPV method measures profitability in relative terms, and in the final analysis, what counts are the total dollars earned—the absolute profit— not the relative profits.

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