Capital Budgeting Decisions: True/False Answers
- Both the net present value method and the internal rate of return method can be used as a screening tool in capital budgeting decisions.
- When considering a number of investment projects, the project that has the best payback period will also always have the highest net present value.
- When discounted cash flow methods of capital budgeting are used, the working capital required for a project is ordinarily counted as a cash outflow at the beginning of the project and as a cash inflow at the end of the project.
- Discounted cash flow techniques automatically provide for recovery of initial investment.
- When computing the project profitability index of an investment project, the investment required will include any investment made in working capital at the beginning of the project.
- If investment funds are limited, the net present value of one project should not be compared directly to the net present value of another project unless the initial investments in these projects are equal.
- In calculating payback where new equipment is replacing old equipment, any salvage value to be received on disposal of the old equipment should be deducted from the cost of the new equipment.
- In the payback method, depreciation is added back to net operating income when computing the net annual cash flow.
- The simple rate of return method is desirable because of its simplicity and the fact that it takes the time value of money into account.
- The present value of a cash flow will never be greater than the future dollar amount of the cash flow.