Question : Objective 21.4 1) Which of the following methods of capital budgeting : 1211983

Objective 21.4

1) Which of the following methods of capital budgeting divides the average annual accrual accounting income of a project by a measure of the investment in it?

A) net present value

B) internal rate of return

C) payback method

D) accrual accounting rate of return

2) Accrual accounting rate of return is calculated by dividing ________.

A) net initial investment by an increase in expected average annual after-tax operating income

B) an increase in expected average annual after-tax operating income by the net initial investment

C) an increase in expected average annual cash flow by the net initial investment

D) net initial investment by an increase in expected average annual cash flow

3) Which of the following is the numerator in the mathematical expression for accrual accounting rate-of-return (AARR)?

A) increase in expected average investment

B) increase in expected average annual after-tax operating income

C) increase in expected average cash flow

D) increase in expected net initial investment

4) AARR indicates the average rate at which ________.

A) a dollar of investment generates after-tax operating income

B) a dollar of after-tax cash flow generates net income

C) a dollar of investment generates a positive cash flow

D) a dollar of after-tax non-operating income generates net income

5) Which of the following statements is true of accrual accounting rate of return (AARR) method and internal rate of return (IRR) method?

A) AARR method calculates the return in absolute terms, whereas IRR method calculates the result in terms of percentage.

B) The AARR method calculates the return using operating-income numbers after considering accruals and taxes, whereas the IRR method calculates the return using after-tax cash flows and the time value of money.

C) The AARR method calculates the return considering the time value of money, whereas the IRR method calculates the return ignoring the time value of money.

D) The AARR method considers cash flows, whereas the IRR method considers operating income.

6) The AARR method is similar to the IRR method as ________.

A) both calculate the return using after-tax cash flows

B) both calculate the return using operating-income numbers after considering accruals and taxes

C) both calculate the result in terms of percentage

D) both consider the time value of money

7) Which of the following is a limitation of AARR method?

A) It is difficult to compare projects as its result is expressed in dollars and not in percentage terms.

B) It does not consider income earned throughout a project’s expected useful life.

C) It does not track initial investment.

D) It does not consider time value of money.

8) Accrual accounting rate of return is calculated by dividing increase in expected average annual after-tax operating income by the net initial investment.

9) The accrual accounting rate-of-return method is similar to the internal rate-of-return method because both methods calculate a rate-of-return percentage.

10) Accrual accounting rate of return is calculated by dividing an increase in expected average annual after-tax operating income by the net initial or average investment.