33. There are severaldisadvantages to the payback method. Among them are: (a) Pa

Question

33.       There are severaldisadvantages to the payback method. Among them are:

(a)               Payback ignores the time value of money.

(b)              Payback emphasizes receiving money back as fast as possible forinvestment.

(c)               Payback is easy to understand.

(d)              Payback can be used in conjunction with the time-adjusted methodsof evaluation.

34.       The primary differencebetween a line of credit and a short-term loan is:

(a)    We borrow the entire amount with theshort-term loan, but borrow only what we need with the line ofcredit.

(b)   We borrow the entire amount with both theshort-term loan and the line of credit.

(c)    We borrow only what we need for the currentmonth with both the short-term loan and the line of credit.

(d)   We make payments on the line of credit every monthto insure we will have good credit.

35.       Proper management ofaccounts payable will guarantee that a firm:

(a)               Pays each bill early to avoid penalties and interest.

(b)              Pays some bills early and some late to obtain an average payment ofon time.

(c)               Pays the maximum due to each vendor.

(d)              Pays the minimum due to each vendor.

36.       The best way to pay theminimum price to a vendor is to take advantage of:

(a)               Trade discounts, but not cash discounts.

(b)              Cash discounts, but not trade discounts.

(c)               Both trade discounts and cash discounts.

(d)              Neither discount, but to pay the invoice price on the due date.

37.       Which of the followingis not a time-adjusted method for ranking investmentproposals?

(a)               Net present value method.

(b)              Payback method.

(c)               Internal rate of return method.

(d)              All of the above are time-adjusted methods.

38.       If an investment projecthas a positive net present value, then the internal rate of returnis:

(a)               Less than the cost of capital.

(b)              Greater than the cost of capital.

(c)               Equal to the cost of capital.

(d)              Indeterminate, it depends on the length of the project.

39.       The reason cash flow isused in capital budgeting is because:

(a)               Cash rather than income is used to purchase new machines.

(b)              Cash outlays need to be evaluated in terms of the present value ofthe resultant cash inflows.

(c)               To ignore the tax shield provided from depreciation ignores thecash flow provided by the machine, which should be reinvested toreplace old, worn out machines.

(d)              All of the above.

Explanation / Answer

33. A         Payback ignores the time value of money. 34. A         Weborrow the entire amount with the short-term loan, but borrow onlywhat we need with the line of                   credit. 35. D.       minimum due toeach vendor. 36. D.        Neither discount, but to pay the invoice price on the due date. 37. D    All of the above are timeadjusted methods. 38. B greater than the cost ofcapital. 39. D ALl of theabove

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