# Managerial Accounting 4th Edition By Stacey Whitecotton – Test Bank

Chapter 11 Capital Budgeting

1) Preference decisions compare an investment with some minimum criteria.

Answer: FALSE

Explanation: Preference decisions require managers to choose among a set of alternative capital investment opportunities. Screening decisions compare an investment with some minimum criteria.

Difficulty: 1 Easy

Topic: Capital Investment Decisions

Learning Objective: 11-01 Calculate the accounting rate of return and describe its major weaknesses.

Bloom’s: Remember

AACSB: Analytical Thinking

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2) Independent projects are unrelated to one another, so that investing in one project does not affect the choice about investing in another project.

Answer: TRUE

Explanation: An independent project is one that is unrelated to other projects, so that investing in it does not affect the choice about investing in another.

Difficulty: 1 Easy

Topic: Capital Investment Decisions

Learning Objective: 11-01 Calculate the accounting rate of return and describe its major weaknesses.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

3) The accounting rate of return is the only method that focuses on net income rather than cash flow.

Answer: TRUE

Explanation: The accounting rate of return is net income as a percentage of investment, while payback period, net present value, and internal rate of return focus on cash flows.

Difficulty: 1 Easy

Topic: Accounting Rate of Return

Learning Objective: 11-01 Calculate the accounting rate of return and describe its major weaknesses.

Bloom’s: Understand

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

4) The payback period is defined as the average net income divided by the initial investment.

Answer: FALSE

Explanation: Assuming there are equal projected cash flows each year, the payback period is the initial investment divided by the annual net cash flow.

Difficulty: 1 Easy

Topic: Payback Period

Learning Objective: 11-02 Calculate the payback period and describe its major weaknesses.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

5) The payback period method ignores the time value of money.

Answer: TRUE

Explanation: The payback period is calculated using undiscounted cash flows.

Difficulty: 1 Easy

Topic: Payback Period

Learning Objective: 11-02 Calculate the payback period and describe its major weaknesses.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

6) The net present value method compares a project’s future net income to the initial investment.

Answer: FALSE

Explanation: The net present value method compares the present value of a project’s future cash flows to the initial investment.

Difficulty: 1 Easy

Topic: Net Present Value

Learning Objective: 11-03 Calculate net present value and describe why it is superior to the other capital budgeting techniques.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

7) The internal rate of return is the rate of return that yields a zero net present value.

Answer: TRUE

Explanation: Internal rate of return is calculated as the rate of return that yields a zero net present value.

Difficulty: 1 Easy

Topic: Internal Rate of Return

Learning Objective: 11-04 Predict the internal rate of return and describe its relationship to net present value.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

8) The internal rate of return method uses cash flows rather than net income.

Answer: TRUE

Explanation: The internal rate of return is calculated using cash flows, not net income.

Difficulty: 1 Easy

Topic: Internal Rate of Return

Learning Objective: 11-04 Predict the internal rate of return and describe its relationship to net present value.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

9) The profitability index is calculated as the present value of future cash flows divided by the initial investment.

Answer: TRUE

Explanation: The formula for the profitability index is the present value of future cash flows divided by the initial investment.

Difficulty: 1 Easy

Topic: Profitability Index

Learning Objective: 11-04 Predict the internal rate of return and describe its relationship to net present value.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

10) Sensitivity analysis helps determine whether changing the underlying assumptions would affect the decision.

Answer: TRUE

Explanation: The purpose of sensitivity analysis is to determine whether changing the underlying assumptions would affect the decision.

Difficulty: 1 Easy

Topic: Evaluating Mutually Exclusive Projects

Learning Objective: 11-05 Use the net present value method to analyze mutually exclusive capital investments.

Bloom’s: Remember

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

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