20. – 29. TRUE/FALSE – A capital investment decision is essentially a decision t

Question

20. – 29. TRUE/FALSE – A capital investment decision is essentially a decision to exchange current cash outflows for future cash inflows. 21 TRUE FALSE The time value of money concept recognizes the fact that the present value of a dollar to be received in the future is worth more than a dollar. 22 TRUE FALSE The compensation a company receives for investing in capital assets is referred to as a return on investment. 23 TRUE FALSE Because of the expense of applying multiple techniques, managers should use a single capital budgeting technique to analyze potential capital investments. 24 TRUE FALSE A project's net present value can be found by subtracting the cost of the project from the total present value of the future cash flows generated by the project. 25 TRUE FALSE When a capital investment is expected to provide unequal annual cash inflows, the payback period cannot be calculated. 26 TRUE FALSE The payback method shows how long will be required to recover the cost of an investment in a capital asset. 27 TRUE FALSE A post audit should be performed at the end of a capital investment project to determine whether the expected results were actually achieved. 28 TRUE FALSE The assumption regarding ordinary annuities is that cash flows occur at the end of each period. 29 TRUE FALSE The payback method of evaluating capital investments measures the recovery of the investment, but it does not measure profitability.

Explanation / Answer

Ans 20 True

Yes capital investment decisions uses current cash outflows and future cah inflows which can be discounted to know their time value.

Ans 21 False

Rather the present value of a dollar to be received in the future is worth less than a dollar as it is discounted cash flows.

Ans 22 True

It is the risk premium that the investors received which is also known as compensation.

Ans 23 False

Managers should use various techniques to know which alternative will be most profitable

Ans 24 True

NPV is Present value of all the cash flows which will be generated in future less the cost of the project/Investment.

Ans 25 False

In both cases even and uneven cash flows payback period can be calculated. For calculation of payback period of uneven calculation cumulative cash flows is used.

Ans 26 True

Payback period does not take present value of cash flow into account. So it takes the undiscounted cash flow and tells period of time that the project requires to recover the amount invested

Ans 27 True.

As post audit determines a capital project which was accepted has actually received results or not

Ans 28 True

Ordinary annuities is a series of inflow or outflow occurring at the end of each period over a specified period

Ans 29 True

It only measures how quickly the money is recovered. It does not take into account the cash flows after payback period so profitability cannot be known from paybak period.

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