Which of the following is NOT a true statement about the accounting rate of return (ARR)?

The accounting rate of return (ARR) ________.

ANSWER

INCORRECT

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computes a project’s unique rate of return

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indicates whether the asset will earn the company’s minimum required rate of return

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YOU WERE SURE AND INCORRECT

focuses on the time it takes to recover the company’s cash investment

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THE CORRECT ANSWER

is the only capital budgeting method that uses accrual accounting figures

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Accounting rate of return (ARR) is the only capital budgeting method that uses accrual accounting figures. The other answers are not correct.

The net present value (NPV) is the difference between the present value of the investment’s net cash inflows and the investment’s cost.

The internal rate of return (IRR) incorporates the time value of money. Recall the internal rate of return (IRR) is the rate of return, based on discounted cash flows, that a company can expect to earn by investing in a capital asset.

The payback period is a capital budgeting method that ignores the time value of money and focuses on the time it takes to recover the company’s cash investment.

Which of the following is NOT a true statement about the accounting rate of return (ARR)?

ANSWER

INCORRECT

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THE CORRECT ANSWER

Noncash expenses such as depreciation expense must be added to the asset’s net cash inflows to arrive at its operating income.

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The accounting rate of return (ARR) is simple and quick to compute.

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YOU WERE SURE AND INCORRECT

The accounting rate of return (ARR) measures the profitability of an asset over its entire life using accrual accounting figures.

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The accounting rate of return (ARR) focuses on the operating income instead of the net cash inflow of an asset.

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Noncash expenses such as depreciation expense must be added to the asset’s net cash inflows to arrive at its operating income is NOT a true statement about the accounting rate of return (ARR). The other answers are not correct because they represent true statements about the accounting rate of return (ARR). Noncash expenses such as depreciation expense must be subtracted from the asset’s net cash inflows to arrive at its operating income.

The ________ is a capital budgeting method that ignores the time value of money and focuses on the time it takes to recover the company’s cash investment.

ANSWER

INCORRECT

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accounting rate of return (ARR)

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THE CORRECT ANSWER

payback period

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YOU WERE SURE AND INCORRECT

internal rate of return (IRR)

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net present value (NPV)

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I DON'T KNOW YET

The payback period is a capital budgeting method that ignores the time value of money and focuses on the time it takes to recover the company’s cash investment.

The accounting rate of return (ARR) is a capital budgeting method that ignores the time value of money.

The net present value (NPV) is the difference between the present value of the investment’s net cash inflows and the investment’s cost.

The internal rate of return (IRR) incorporates the time value of money. Recall the internal rate of return (IRR) is the rate of return, based on discounted cash flows, that a company can expect to earn by investing in a capital asset.

The ________ is the difference between the present value of the investment’s net cash inflows and the cost of an investment.

ANSWER

INCORRECT

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THE CORRECT ANSWER

net present value (NPV)

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capital rationing

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YOU WERE SURE AND INCORRECT

accounting rate of return (ARR)

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internal rate of return (IRR)

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I DON'T KNOW YET

The net present value (NPV) is the difference between the present value of the investment’s net cash inflows and the cost of an investment.

The accounting rate of return (ARR) is a measure of profitability computed by dividing the average annual operating income from an asset by the initial investment in the asset.

The internal rate of return (IRR) is the rate of return, based on discounted cash flows, that a company can expect to earn by investing in a capital asset.

Capital rationing is the process of choosing among alterative capital investments due to limited funds.

In which step of the capital budgeting process should a manager make a capital budgeting estimate about the future costs, revenues, and savings of a capital investment?

ANSWER

INCORRECT

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THE CORRECT ANSWER

Step 2

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Step 4

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YOU WERE SURE AND INCORRECT

Step 3

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Step 1

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A manager should determine estimates about the future costs, revenues, and savings of the capital investment in Step 2: Estimate future cash inflows.

A manager must choose among alternative investments due to limited funds in Step 4: Analyze potential investments.

A manger eliminates unwanted investments in Step 3: Analyze potential investments.

A manager identifies potential investments in Step 1: Identify potential capital investment.