Question

5. Which of the following is/are correct?

A. If the salvage value is the same as the book value of the asset, then there is a tax effect.

B. Book value = initial cost - accumulated depreciation

C. After-tax salvage = salvage - Tax Rate x (salvage - book value)

D. Both B and C

6. ________ is the most important alternative to Net Present Value.

A. IRR

B. Payback Method

C. Average Accounting Return

D. Discounted Payback

7. The mean difference between Payback and Discounted Payback is:

A. Discounted Payback accounts for the time value of money and Payback does not

B. Discounted Payback accounts for the risk of the cash flows and Payback does not

C. Only Payback does not provide an indication about the increase in value

D. Both A and B

8. The ________ measures the time to get the initial cost back.

A. Internal Rate of Return

B. Net Present Value

C. Payback period

D. Profitability Index

9. Which of the following element/s should be considered when evaluating capital budgeting decision rules?

A. Time value of money

B. Adjustment for risk

C. Creating value for the firm

D. All of the above

Answer 1

5. D. Both B and C

If the salvage value is the same as the book value of the asset, then there is No tax effect. Hence the statement is wrong. B and C are right

6. A. IRR.

IRR evaluates the rate at which Investment is being repaid. hence it is more similier to NPV.

7. A. Discounted Payback accounts for the time value of money and Payback does not

Discounted payback discounts the cash flow with Cost of capital. hence it is considering the time value of money

8. C. Payback period

Payback period measures the time to get the initial cost back.

9. D. All of the above