True or False. Write true if the statement is correct, or false if the statement is incorrect. Correct also the incorrect statements. 1.The commitment of funds by a business into inventory, equipment, and like assets is an investment, the same as a purchase of stocks or bonds by an individual. 2. The present value of a sum discounted over 5 years would be greater than the present value of the sum discounted over 10 years. 3. The process of computing the present value of a future sum is called compounding. 4. Present value and future value are just two ways of expressing a given sum. 5. Under the net present value method, the present value of all cash inflows associated with an investment project are compared against the present value of all cash outflows, with the difference, or net present value, determining whether or not the project is an acceptable instrument. 6. If the net present value of an investment is zero, then the project should be rejected since it is not providing any return on the investment involved. 7. One key shortcoming of discounted cash flow methods is that they ignore the recovery of the original investment. 8. Although depreciation is an important element in the computation of accounting net income, it is not used in capital budgeting computations, since it does not involve a cash flow. 9. Although a cash outlay for a non-current asset such as a machine would be considered a capital budgeting analysis, a cash outlay for working capital items such as inventory, would not be considered. 10. Cost of capital is a broad concept involving a blending of the costs of all sources of capital, both debt and equity. 11. In discounted cash flow analysis, cash flows are assumed to occur uniformly throughout a period. 12. The time adjusted rate of return is that discount rate which will cause a project's net present value to be zero. 13. If the cash flows of a project are uneven, then the project's time-adjusted rate of return cannot be computed. 14. Depreciation is an example of out-of-pocket cost. 15. To be acceptable, a project's time adjusted rate of return cannot be less than the company's cost of capital. 16. The time adjusted rate of return method is simpler to use, makes it easier for the manager to adjust for risk and provides more usable information than the net present value method. 17. In a present value analysis, the higher the discount rate, the higher the present value of a given sum. 18. The "cash flow" in a company is computed by adding non-cash deductions (such as depreciation) to net income. 19. The release of working capital at the termination of an investment project would be a taxable cash inflow. 20. In ranking investment projects, a project with a high net present value should always be ranked above a project with a lower net present value. 21. The profitability index is computed by dividing an asset's net present value by the investment required in a project. 22. A very useful guide for making investment decisions is : Projects with short payback periods are more profitable than projects with long payback periods. 23. The payback method can be used even if the cash flows are uneven from year to year. 24. Although it deals with cash flows, the payback method gives no consideration to the time value of money. 25. The "simple rate of return" method focuses on net income, rather than cash flows. 26. The simple rate of return is equal to "incremental net income/initial investment". 27. Preference decisions are sometimes called ranking decisions because they attempt to ration limited investment funds among competing investment alternatives. 28. The profitability index is conceptually superior to the time adjusted rate of return method of making preference decisions because it will always give the correct signal as to the relative desirability of alternatives, even if alternatives have different lives and different patterns of earnings. 29. Discounted cash flow methods automatically provide for a return of the original investment. 30. The simple rate of return is the true interest yield promised by an investment project over its useful life. The Sunny Company is considering expansion of its major product line. State the effect (increase, decrease, or no effect) of each of the following items on the "net investment" in this project. Ignore income tax effects. 1. Purchase price of a new machinery to be used on the project 2. Sales value of old machine which will be replaced 3. Book value of the old machine which will be replaced 4. Cost of removing the old machine 5. Installation cost of new machine 6. Repairs of old machine which would have to be made if not replaced by new machinery 7. Cost of special wiring for new machine 8. Market price of equipment already owned (currently idle) which will be transferred to the project 9. Cost to ship new machine to plant site 10. Cost of test runs 11. Cost to develop and improve the product 12. Cost of training operators of new machinery 13. Cost of advertising the improved product 14. Increase in inventories if project is undertaken 15. Share of the product in fixed general overhead (no change in fixed general overhead is anticipated) 16. Increase in variable general overhead attributable to the project