For each of the following question mark either T for True or F for False in the

Question

For each of the following question mark either T for True or F for False in the left margin 1. The NPV decision model indicates a internal rate of return for decision purposes. 2. The IRR capital budgeting model develops a required rate of return. 3.The accrual accounting rate of return model for capital budgeting includes in its computation investment. 4.--When two similar projects are compared, the one with the lower payback the initial investment and Net income on period would tend to have the higher IRR. 5.--A 15% discount rate was used to compute the net present value of a project. If the NPV than 15%. 6. The time value of money is part of the internal rate of return model for is positive, the internal rate of return is lower capital budeting. 7.--When the NPV of a project is negative, the IRR would be lower than the discount rate used to compute the NPV. 8. The net cash effect of $30,000 depreciation expense per year, assuming a 40% income tax per year. 9· When income taxes are considered, the effects of depreciation expense rate, is an $18,000 cash inflow have a negative present value. 10. The after tax effect of depreciation expense on net cash inflows for a year is the depreciation expense for the year multiplied by the applicable rate of income tax for the year.

Explanation / Answer

1.

False. The NPV decision model indicates the net present value of the investment that is the difference between the present value of cash inflows and outflows from the investment.

2.

False. The IRR decision model shows the actual rate of return which is compared with the required rate of return to determine whether the investment should be accepted or not.

3.

True. The accrual accounting rate of return on an investment is calculated buy dividing the average net income by the initial investment.

4.

True. A project with low payback period means cash was recovered in recent years which would give a high IRR in comparison to a project with high payback period.

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