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#11.When making capital budgeting decisions for a firm, theaverage net income divided by the average book value equalsthe?

A. average accounting return

B. internal rate of return

C. net present value

D. project cash flow

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Jarrod Robel
Jarrod RobelLv2
28 Sep 2019

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8a. Explain why it is better to make decisions about acceptance or rejection of proposed projects based on project net present value rather than on project internal rate of return.

b. If a firm uses internal rate of return as the basis for its capital budgeting decisions, identify two things the firm should do to avoid making bad decisions due to shortcomings of the internal rate of return as a decision rule.

You want to get approval for a capital expense to bring the copy service back in house. You estimate that it will bring in a net cash flow of $40,000 over the next 5 years. An initial outlay of $24,000.00 cash will be needed for 2 networked, dedicated computers and a new copy machine to support the ROI staff you already have.

Use straight-line depreciation in calculating the average net income and enter the information in Table6-31. The accounting rate of return needs to be at least 10% for the project to be accepted.

Will the accounting rate of return for the capital expense be acceptable?

Accounting Rate of Return Method of Evaluating Capital Expense

Accounting Rate of Return

Net Cash flow per year

Cash flow/number of years

40, 000/5= 8000

Depreciation

Cost/ number of years

Average net income

Net cash flow per year less

Depreciation

Investment

Cost of project

Accounting rate of return for project

Average net income/investment

1. The capital budgeting decision depends in part on the
A. availability of funds.
B. relationships among proposed projects
C. risk associated with a particular project
D. all of these answers are correct

2. The payback period is often compared to an asset’s
A. warranty period.
B. net present value
C. internal rate of return
D. estimated useful life

3. When using the cash payback technique, the payback period is expressed in terms of
A. dollars
B. years
C. a percent
D. months

4. The primary capital budgeting method that uses discounted cash flow techniques is the
A. profitability index method.
B. annual rate of return method.
C. net present value method
D. cash payback technique.

5. A company's cost of capital refers to the
A. cost of printing and registering common stock shares.
B. total cost of a capital project.
C. rate of return earned on common stock.
D. rate the company must pay to obtain funds from creditors and stockholders.

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