In capital budgeting decision-making, the two most important fundamental factors that should be examined by managers are: Select one or more: a. Risk and capital investment b. Risk and rate of return. c. Risk and payback. d. Capital investment and rate of return. e. Payback and rate of return. The annual net cash flows from a particular investment project are equal to: Select one or more: a. The annual cash inflows generated by the project. b. The annual cash outflows generated by the project. c. The annual net income generated by the project. d. The project's annual cash inflows minus its annual cash outflows. e. Annual operating income, including a deduction for depreciation. The only method of evaluating capital investment projects that uses annual net income instead of annual net cash flows in its calculation is which method? Select one or more a. Accounting rate of return (ARR). b. Internal rate of return (IRR). c. Payback period. d. Net present value (NPV). e. None of the methods use annual net income in their calculations. The calculation of the payback period for an investment project when annual net cash flows are even (equal) is: Select one or more: a. Cost of investment divided by annual net income. b. Cost of investment divided by annual net cash flows. c. Annual net income divided by cost of investment d. Annual net cash flows divided by cost of investment. e. Cost of investment divided by total cash inflows. Which of the following statements about the payback period method of evaluating capital investment projects is true? Select one or more a. A disadvantage of an investment project with a short payback period is that it will produce revenue for only a short period of time. b. Managers prefer to invest in projects with longer payback periods to reduce the risk of an unprofitable investment over the long run. C. The payback period method fails to consider how long an investment will generate cash inflows beyond the payback period. d. It two projects have the same risks, the same payback periods, and the same initial investments, they are equally attractive e. The payback period method reflects differences in the timing of net cash flows within the payback period, Annual after-tax net income divided by annual average investment is the formula for calculating: Select one or more a. Accounting rate of return (ARR). b. Payback period c. Internal rate of return (IRR). d. Net present value (NPV). e. Earnings from investment. Which of the following statements about the net present value (NPV) method of evaluating capital investments is false? Select one or more: a. The net present value (NPV) method applies the time value of money to future cash inflows and cash outflows so management can evaluate a project's benefits and costs at one point in time. b. The net present value (NPV) method cannot be used to evaluate a project when the predicted annual net cash flows from the project are uneven (unequal). C. According to the net present value decision rule, when an asset's expected cash flows yield a positive net present value when discounted at the required rate of return, the asset should be acquired. d. If net present values are used to evaluate two investments that have equal costs and equal total cash flows, the investment with more cash flows in the early years will have a higher net present value. e. If an asset has a salvage value, the salvage value is an additional net cash inflow expected to be received in the final year of the asset's life for purposes of calculating the asset's net present value. A major limitation of the internal rate of return (IRR) method is: Select one or more: a. Failure to measure time value of money. b. Failure to measure results as a percent. c. Failure to consider the payback period. d. Failure to compare dissimilar projects. e. Failure to reflect varying risk levels over a project's life. Which of the following statements about the internal rate of return (IRR) method of evaluating capital investments is false? Select one or more: a. If the internal rate of return (IRR) of an investment is higher than the hurdle rate, the investment should be made. b. If the internal rate of return (IRR) is used as the discount rate to compute the total present value of an investment's net cash flows, and the initial investment is subtracted from this total present value, the result will be a net present value (NPV) of zero c. The internal rate of return (IRR) can be easily calculated, even when annual net cash flows are uneven (unequal), d. The formula used to compute the present value factor for the investment project in step 1 of the two-step process for computing internal rate of return (IRR) is identical to the formula used to compute payback period. e. If the internal rate of return (IRR) of an investment is lower than the hurdle rate, the investment should not be made. A company is considering a 5-year project. It plans to invest $60,000 now and it forecasts cash flows for each year of $16,000. The company requires a hurdle rate of 12%. Selected factors for the present value of an annuity of $1 for 5 years are shown below: Interest Rate Present Value of an Annuity of $1 for 5 Years 10%........... .........3.7908 12%... .3.6048 .3.3522 14%....... The internal rate of return (IRR) is: Select one or more a. Lower than 10% b. Slightly higher than 10%. c. Slightly lower than 12% d. Slightly higher than 12%. e. Higher than 14%