Reading 44: Capital Budgeting - LOS b ～ Q1-3 principles, statements, budgeting, following, regarding

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Q1. Ashlyn Lutz makes the following statements to her supervisor, Paul Ulring, regarding the basic principles of capital budgeting:

Statement 1: The timing of expected cash flows is crucial for determining the profitability of a capital budgeting project.

Statement 2: Capital budgeting decisions should be based on the after-tax net income produced by the capital project.

Which of the following regarding Lutz’s statements is most accurate?

          Statement 1          Statement 2

 

A)    Correct                                Correct

B)    Incorrect                              Correct

C)    Correct                                Incorrect

Q2. Financing costs for a capital project are:

A)   subtracted from the net present value of a project.

B)   subtracted from estimates of a project’s future cash flows.

C)   captured in the project’s required rate of return.

Q3. Mason Webb makes the following statements to his boss, Laine DeWalt about the principles of capital budgeting.

Statement 1: Opportunity costs are not true cash outflows and should not be considered in a capital budgeting analysis.

Statement 2: Cash flows should be analyzed on an after-tax basis.

Should DeWalt agree or disagree with Webb’s statements?

          Statement 1           Statement 2

 

A)     Agree                                 Agree

B)    Disagree                             Disagree

C)    Disagree                             Agree

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