When cash flows are uneven and vary from year to year, the internal rate of return method is easier to use than the net present value method.

1. When cash flows are uneven and vary from year to year, the internal rate of return method is easier to use than the net present value method.

           

            Ans:  False     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1,2     Level:  Hard

        2. For capital budgeting decisions, the net present value method is superior to the simple rate of return method.

           

            Ans:  True     AACSB:  Reflective Thinking     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1,6     Level:  Easy

        3. Depreciation is included as a cash flow in capital budgeting decisions to ensure that the original cost of the asset is fully recovered.

           

            Ans:  False     AACSB:  Reflective Thinking     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1     Level:  Medium

        4. Even when done properly, the total-cost and incremental-cost approaches to choosing between alternatives will sometimes yield different answers.

           

            Ans:  False     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  1     Level:  Medium

        5. An increase in the expected salvage value at the end of a capital budgeting project will have no effect on the internal rate of return for that project.

           

            Ans:  False     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  2     Level:  Medium

        6. The intangible benefits of automation cannot be estimated with any accuracy and therefore should be ignored in capital budgeting decisions.

           

            Ans:  False     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  3     Level:  Medium

        7. When making preference decisions about competing investment proposals, the project profitability index is superior to the internal rate of return.

           

            Ans:  True     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  4     Level:  Medium

        8. The project profitability index is computed by dividing the net present value of the project by the investment required by the project.

           

            Ans:  True     AACSB:  Reflective Thinking     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  4     Level:  Easy

        9. In calculating the “investment required” for the project profitability index, the amount invested should be reduced by any salvage recovered from the sale of old equipment.

           

            Ans:  True     AACSB:  Reflective Thinking     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  4     Level:  Medium

      10. The payback method is most appropriate for projects whose cash flows extend far into the future.

           

            Ans:  False     AACSB:  Reflective Thinking     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  5     Level:  Medium

      11. When using the payback method, any cash flows for a project that occur after the payback period are not considered in computing the payback period for that project.

           

            Ans:  True     AACSB:  Reflective Thinking     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  5     Level:  Medium

      12. The present value of a given future cash flow will increase as the discount rate decreases.

           

            Ans:  False     AACSB:  Analytic     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     LO:  7     Level:  Medium

      13. If a company is operating at a profit, the cash inflow resulting from the depreciation tax shield is computed by multiplying the depreciation deduction by one minus the tax rate.

           

            Ans:  False     AACSB:  Reflective Thinking     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     Appendix:  14C     LO:  8     Level:  Medium

      14. All cash inflows are taxable.

           

            Ans:  False     AACSB:  Reflective Thinking     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     Appendix:  14C     LO:  8     Level:  Easy

      15. The after-tax benefit, or net cash inflow, realized from a particular taxable cash receipt can be obtained by multiplying the cash receipt by one minus the tax rate.

           

            Ans:  True     AACSB:  Reflective Thinking     AICPA BB:  Critical Thinking     AICPA FN:  Reporting     Appendix:  14C     LO:  8     Level:  Easy

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