Which of the following statements about capital rationing is most correct Quizlet

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Terms in this set (17)

As the discount rate applied to a single amount (lump sum) future value increases, the present value:

a.
Stays the same

b.
Increases by some amount

c.
Doubles

d.
Decreases

d.
Decreases

Above-average -risk projects are assigned a cost of capital that is higher than the corporate cost of capital.
True or False

True

Which of the following statements about payback (payback period) are correct?

a.
Payback is a measure of time to breakeven.

b.
Payback is a rough measure of risk.

c.
Payback is a rough measure of liquidity.

d.
Answers (a) and (b) are correct.

e.
Answers (a), (b), and (c) are correct.

e.
Answers (a), (b), and (c) are correct.

The time value of money principle is based on the fact that money expected to be received in the future is worth more than cash in-hand.
True or False

False

Two years ago, you invested $1,000 in a healthcare stock. Your return during the first year was -50 percent, while your return in the second year was +50 percent. Your investment is now worth $1,000.

True or False

False

Which of the following statements concerning financial risk is not correct?

a.
Risk requires the possibility of at least one return less favorable than the expected return.

b.
Risk requires the possibility of more than one return.

c.
Risk is one of the determinants of the project cost of capital (discount rate).

d.
The higher the risk, the lower the project cost of capital (discount rate).

d.
The higher the risk, the lower the project cost of capital (discount rate).

A net present value of zero ($0) signfies that the project's cash inflows will: (1) be sufficient to recover the project's costs, and; (2) earn a return equal to the project's opportunity cost of capital.

True or False

True

Which of the following statements about capital rationing is correct?

a.
Capital rationing occurs when a business does not have the capital necessary to fund all acceptable projects.

b.
Capital rationing occurs when a business has more capital available than needed to fund all acceptable projects.

c.
Under capital rationing, the typical approach is to accept all projects with negative net present values.

d.
Answers (a) and (b) are correct.

a.
Capital rationing occurs when a business does not have the capital necessary to fund all acceptable projects.

Which of the following statements about the post-audit is (are) correct?

a.
It may improve forecasts.

b.
It may improve operations.

c.
It may reduce losses.

d.
Answers (a) and (b) are correct.

e.
Answers (a), (b), and (c) are correct.

e.
Answers (a), (b), and (c) are correct.

Capital rationing is a condition where an organization has fewer acceptable projects than funds needed to undertake those projects.

True or False

False

Scenario analysis examines the impact of several potential economic outcomes on the profitability of project.
True or False

True

Which of the following statements about project classifications is (are) correct?

a.
Projects are classified by purpose, such as replacement.

b.
Projects are classified by size, such as less than $1 million.

c.
Projects are classified by life, such as less than five years.

d.
Answers (a) and (b) are correct.

e.
Answers (a), (b), and (c) are correct.

d.
Answers (a) and (b) are correct.

The internal rate of return of a capital investment:
a.
Changes when the cost of capital changes

b.
Must exceed the project cost of capital to make the investment financially acceptable

c.
Measures the dollar profitability of a project

d.
Must be less than the project cost of capital to make the investment financially acceptable

e.
Measures the length of time it takes a business to recover its initial investment in the project

b.
Must exceed the project cost of capital to make the investment financially acceptable

Which of the following statements about project cash flow estimation is not correct?

a.
Inflation effects should be included.

b.
The effects on a business's other projects should be included.

c.
Opportunity costs should be included.

d.
Sunk costs should be included.

d.
Sunk costs should be included.

For investor-owned businesses, a capital investment financial analysis identifies projects expected to contribute to owner (shareholder) wealth.

True or False

True

The best way to incorporate inflation effects in a project's cash flows is to assume neutral inflation- that is, to assign the same rate of inflation to all cash flows.

True or False

False

Although sensitivity analysis has its limitations with regard to project risk assessment, it is useful for identifying cash flow components that are most critical to the analysis (i.e., have the largest impact on profitability).

True or False

True

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Which of the following statement about capital rationing is most correct?

Which of the following statements about capital rationing is most correct? Capital rationing occurs when a business does not have the capital necessary to fund all acceptable projects.

Which of the following statements about capital investment project scoring is most correct group of answer choices?

The answer is: E. Project scoring combines the payback, net present value, and internal rate of return values to create a single measure of financial attractiveness.

Which of the following describes capital rationing?

Which of the following best describes the term capital rationing? The process of ranking and choosing among the alternative capital investments based on the availability of funds.

Which of the following is true about the capital budgeting process?

Which of the following is true of capital budgeting decisions? They create value for a firm when the value of the selected productive assets is worth more than their cost.