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1. Capital budgeting decisions usually involve large investments and often have a significant impact on a company's future profitability.
2. The capital budgeting committee ultimately approves the capital expenditure budget for the year.
3. For purposes of capital budgeting, estimated cash inflows and outflows are preferred for inputs into the capital budgeting decision tools.
4. The cash payback technique is a quick way to calculate a project's net present value.
5. The cash payback period is computed by dividing the cost of the capital investment by the net annual cash inflow.
6. The cash payback method is frequently used as a screening tool but it does not take into consideration the profitability of a project.
7. The cost of capital is a weighted average of the rates paid on borrowed funds, as well as on funds provided by investors in the company's stock.
8. Using the net present value method, a net present value of zero indicates that the project would not be acceptable.
9. The net present value method can only be used in capital budgeting if the expected cash flows from a project are an equal amount each year.
10. By ignoring intangible benefits, capital budgeting techniques might incorrectly eliminate projects that could be financially beneficial to the company.
11. To avoid accepting projects that actually should be rejected, a company should ignore intangible benefits in calculating net present value.
12. One way of incorporating intangible benefits into the capital budgeting decision is to project conservative estimates of the value of the intangible benefits and include them in the NPV calculation.
13. The profitability index is calculated by dividing the total cash flows by the initial investment.
14. The profitability index allows comparison of the relative desirability of projects that require differing initial investments.
15. Sensitivity analysis uses a number of outcome estimates to get a sense of the variability among potential returns.
16. A well-run organization should perform an evaluation, called a post-audit, of its investment projects before their completion.
17. Post-audits create an incentive for managers to make accurate estimates, since managers know that their results will be evaluated.
18. A post-audit is an evaluation of how well a project's actual performance matches the projections made when the project was proposed.
19. The internal rate of return method is, like the NPV method, a discounted cash flow technique.
20. The interest yield of a project is a rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected annual cash inflows.
21. Using the internal rate of return method, a project is rejected when the rate of return is greater than or equal to the required rate of return.
22. Using the annual rate of return method, a project is acceptable if its rate of return is greater than management's minimum rate of return.
23. The annual rate of return method requires dividing a project's annual cash inflows by the economic life of the project.
24. A major advantage of the annual rate of return method is that it considers the time value of money.
25. An advantage of the annual rate of return method is that it relies on accrual accounting numbers rather than actual cash flows.
