An optimal capital budget is determined by the point where the marginal cost of capital is A. Minimized.

B. Equal to the average cost of capital. C. Equal to the rate of return on total assets. D. Equal to the
marginal rate of return on investment. 10. The following statements refer to the accounting rate of
return (ARR) 1. The ARR is based on the accrual basis, not cash basis. 2. The ARR does not consider the
time value of money. 3. The profitability of the project is considered. From the above statements, which
are considered limitations of the ARR concept? a. Statements 2 and 3 only. c. All the 3 statements. b.
Statements 3 and 1 only. d. Statements 1 and 2 only. 11. The payback method assumes that all cash
inflows are reinvested to yield a return equal to a. the discount rate. c. the internal rate of return. b. the
hurdle rate. d. zero. 12. As a capital budgeting technique, the payback period considers depreciation
expenses (DE) and time value of money (TVM) as follows: a. b. c. d. DE relevant irrelevant Irrelevant
relevant TVM relevant irrelevant Relevant irrelevant 13. The bailout payback period is a. The payback
period used by firms with government insured loans. b. The length of time for payback using cash flows
plus the salvage value to recover the original investment c. (a) and (b) d. None of the above. 14. Which
of the following methods measures the cash flows and outflows of a project as if they occurred at a
single point in time? a. Cash flow based payback period. c. Payback method. b. Capital budgeting. d.
Discounted cash flow. 15. When using one of the discounted-cash-flow methods to evaluate the
feasibility of a capital budgeting project, which of the following factors generally is not important? a. The
method of financing the project under consideration. b. The impact of the project on income taxes to be
paid. c. The timing of cash flows relating to the project. d. The amount of cash flows relating to the
project. 16. In an investment in plant the return that should keep the market price of the firm stock
unchanged is a. Payback c. Net present value b. Discounted rate of return d. Cost of capital 17. The
excess present value method is anchored on the theory that the future returns, expressed in terms of
present value, must at least be a. Equal to the amount of investment c. More than the amount of
investment b. Less than the amount of investment d. Cannot be determined MSQ-08 Page 2 18. A
company had made the decision to finance next year’s capital projects through debt rather than
additional equity. The benchmark cost of capital for these projects should be a. The before-tax cost of
new-debt financing. c. The cost of equity financing. b. The after-tax cost of new-debt financing. d. The
weighted-average cost of capital. 19. All of the following refer to the discount rate used by a firm in
capital budgeting except a. Hurdle rate. c. Opportunity cost. b. Required rate of return. d. Opportunity
cost of capital. 20. If a firm identifies (or creates) an investment opportunity with a present value its
cost, the value of the firm and the price of its common stock will a. b. c. d. List A Greater than Greater
than Equal to Equal to List B Increase Decrease Increase Decrease 21. The common assumption in capital
budgeting analysis is that cash inflows occur in lump sums at the end of individual years during the life of
an investment project when in fact they flow more or less continuously during those years a. Results in
understated estimates of NPV. b. Is done because present value tables for continuous flows cannot be
constructed. c. Will result in inconsistent errors being made on estimating NPVs such that project cannot
be evaluated reliably. d. Results in higher estimate for the IRR on the investment. 22. An advantage of
the net present value method over the internal rate of return model in discounted cash flow analysis is
that the net present value method a. Computes a desired rate of return for capital projects. b. Can be
used when there is no constant rate of return required for each year of the project. c. Uses a discount
rate that equates the discounted cash inflows with the outflows. d. Uses discounted cash flows whereas
the internal rate of return model does not. 23. When using the net present value method for capital
budgeting analysis, the required rate of return is called all of the following except the A. Risk-free rate.
B. Cost of capital. C. Discount rate. D. Cutoff rate. 24. A project’s net present value, ignoring income tax
considerations, is normally affected by the a. Proceeds from the sale of the asset to be replaced. b.
Carrying amount of the asset to be replaced by the project. c. Amount of annual depreciation on the
asset to be replaced. d. Amount of annual depreciation on fixed assets used directly on the project. 25.
You have determined the profitability of a planned project by finding the present value of all the cash
flows from that project. Which of the following would cause the project to look less appealing, that is,
have a lower present value? a. The discount rate increases. b. The cash flows are extended over a longer
period of time. c. The investment cost decreases without affecting the expected income and life of the
project. d. The cash flows are accelerated and the project life is correspondingly shortened.