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The payback period of an investment is determined by dividing the cost of the investment by
the revenues generated from the investment.
2. If the cost of an investment is $12,000 and the expected annual sales from the investment is
$4,000, then the payback period is 3.0 years.
3. It is possible to determine a payback period when the net cash flows from the project are
4. The major weaknesses of using the payback period as the sole criteria for capital budgeting
decisions is that it ignores the timing of the cash flows, the risk involved, and the extent or
amount of the cash flows beyond the payback period.
5. The return on average investment for an investment in production machinery will be lower if
the ending book value is used in place of the final year's book value, when determining the
average investment.
6. The use of the net present value method for investment decisions is limited to those
investments that generate equal annual net cash flows over the life of the investment.
7. The further in the future a receipt of cash is the Smaller its present value will be
8. A capital investment that provides an internal rate of return that is higher than the
company's hurdle rate is usually considered an acceptable investment
9. Both the internal rate of return and the average rate of return methods of capital budgeting
are referred to as discounted cash flow methods.
10. An annuity is a series of equal or unequal cash flows at fixed intervals
11. In calculating net cash flows, depreciation is treated as a cost.
12. In general, a firm should undertake a project only if its net present value is positive.
13. If the internal rate of return is used to discount all cash flows associated with a project, the
net present value of the project will be equal to zero.
14. If the net present value method and the internal rate of return method yield contradictory
results, the latter should be followed rather than the former
15. One problem with the profitability index is that it ignores the time value of money.
16. The cost of debt should generally be figured on an after tax basis.
17. The cost of debt is generally greater than the cost of equity capital.
18. Capital budgeting is the process of identifying, analyzing, and selecting investment projects
whose cash flows will all be received within one year.
19. A firm short of cash might well give greater emphasis to the payback period in evaluating a
20. The result of dividing the annual, after tax income that results from using an asset by the
average investment in the asset is known as the accounting rate of return or the rate of
return on average investment.