Capital Budgeting

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MODULE 9

CAPITAL BUDGETING

THEORIES:
Basic Concepts
Decision Making Process
2.The first step in the decision-making process is to
A.determine and evaluate possible courses of action.
B.identify the problem and assign responsibility.
C.make a decision.
D.review results of the decision.

Strategic planning
39.Strategic planning is the process of deciding on an organization’ A.minor programs and the approximate resources to be devoted to them B.major programs and the approximate resources to be devoted to them C.minor programs prior to consideration of resources that might be needed D.major programs prior to consideration of resources that might be needed

Capital budgeting defined
1.The long-term planning process for making and financing investments that affect a company’s financial results over a number of years is referred to as A.capital budgetingC.master budgeting

B.strategic planningD.long-range planning

3.Capital budgeting is the process
A.used in sell or process further decisions.
B.of determining how much capital stock to issue
C.of making capital expenditure decisions
D.of eliminating unprofitable product line

5.A capital investment decision is essentially a decision to: A.exchange current assets for current liabilities.
B.exchange current cash outflows for the promise of receiving future cash inflows. C.exchange current cash flow from operating activities for future cash inflows from investing activities. D.exchange current cash inflows for future cash outflows.

Risk & return
6.The higher the risk element in a project, the
A.more attractive the investment is.
B.higher the net present value is.
C.higher the cost of capital is.
D.higher the discount rate is.

9.Cost of capital is the
A.amount the company must pay for its plant assets.
B.dividends a company must pay on its equity securities. C.cost the company must incur to obtain its capital resources. D.cost the company is charged by investment bankers who handle the issuance of equity or long-term debt securities.

14.How should the following projects be listed in order of increasing risk? A.New venture, replacement, expansion.
B.Replacement, new venture, expansion.
C.Replacement, expansion, new venture.
D.Expansion, replacement, new venture.

41.Problems associated with justifying investments in high-tech projects often include discount rates that are too A.low and time horizons that are too long
B.high and time horizons that are too long
C.high and time horizons that are too short
D.low and time horizons that are too short

60.In evaluating high-tech projects,
A.only tangible benefits should be considered.
B.only intangible benefits should be considered.
C.both tangible and intangible benefits should be considered. D.neither tangible nor intangible benefits should be considered.

Types of capital projects
4.A project that when accepted or rejected will not affect the cash flows of another project. A.Independent projectsC.Mutually exclusive projects
B.Dependent projectsD.Both b and c

Capital budgeting process
7.The normal methods of analyzing investments
A.cannot be used by not-for-profit entities.
B.do not apply if the project will not produce revenues. C.cannot be used if the company plans to finance the project with funds already available internally. D.require forecasts of cash flows expected from the project.

Investments
Sale of old asset
38.When disposing of an old asset and replacing it with a new one, tax effect on A.gain on sale of the old asset reduces the basis of the new asset B.gain on sale of the old asset increases the basis of the new asset C.loss on sale of the old asset reduces the basis of the new asset D.b and c

Working capital
18.A major difference between an...
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