Which of the following is a criticism of return on investment?

1. Which of the following is a criticism (or are criticisms) of the traditional capital budgeting approach?

a. Intangible benefits are ignored or do not receive enough emphasis.
b. Assumes that the company's current competitive position will remain constant.
c. The discount rates used are too low.
d. a and b.
e. All of the above.

2. Which of the concepts below addresses the implications of not investing in a capital budgeting project?

a. the product life cycle concept.
b. the moving baseline concept.
c. the bench marking concept.
d. the statistical control concept.
e. the discounted cash flow concept.

3. The portfolio concept related to investment management and product life cycle management

a. considers a company’s investments projects as a whole rather than as separate and unrelated.
b. recognizes that synergistic benefits are obtained from many interrelated projects.
c. considers that mature investment projects tend to support projects at other life cycle stages.
d. a. and b
e. a., b. and c.

4. Which of the following measurements requires using the cost of capital?

a. The accounting rate of return.
b. The internal rate of return.
c. The net present value.
d. a and c.
e. All of the above.

5. When the present value of the cash inflows is equal to the present value of the cash outflows

a. the accounting rate of return is equal to the internal rate of return.
b. the internal rate of return is equal to the discount rate.
c. the internal rate of return is equal to the net present value of the project.
d. the internal rate of return is greater than the cost of capital.
e. none of the above.

6. Which of the following concepts is more closely related to the concept of opportunity cost?

a. Activity based costing.
b. Standard costing.
c. Return on investment.
d. Residual income.
e. Moving baseline.

7. Assume that compound interest depreciation is used for automated equipment, rather than straight line depreciation, or one of the accelerated depreciation methods. If the expected cash flows for the first project year of a project are as planned in the discounted cash flow capital budgeting analysis,

a. the accounting rate of return will be equal to the internal rate of return.
b. the accounting rate of return will be greater than the internal rate of return.
c. the accounting rate of return will be less than the internal rate of return.
d. the accounting rate of return will be equal to the cost of capital.
e. the net present value will be zero.

8. The implications of using the moving baseline concept in an investment analysis are that

a. the internal rate of return calculated in a traditional capital budgeting analysis tends to be too low.
b. the internal rate of return calculated in a traditional capital budgeting analysis tends to be too high.
c. higher discount rates should be used.
d. a and c.
e. b and c.

9. If the net present value calculated for an investment project is zero, the

a. accounting rate of return is zero.
b. internal rate of return is zero.
c. residual income is zero.
d. a and b.
e. b and c.

10. Which of the following most accurately reflects the level of technological risk for three investment strategies?

Type of StrategyLevel of
Technological Riska.Proactive
Responsive
ReactiveMedium
Low
Highb.Proactive
Responsive
ReactiveLow
Medium
Highc.Proactive
Responsive
ReactiveLow
Low
Highd.Proactive
Responsive
ReactiveHigh
Medium
Low

11. Which of the following most accurately reflects the level of market risk for three investment strategies?

Type of StrategyLevel of
Market Riska.Proactive
Responsive
ReactiveMedium
Low
Highb.Proactive
Responsive
ReactiveLow
Medium
Highc.Proactive
Responsive
ReactiveLow
High
Highd.Proactive
Responsive
ReactiveHigh
Medium
Low

12. In a capital budgeting analysis the cost of capital is

a. the weighted average cost of debt and equity capital.
b. the minimum desired rate of return.
c. equal to the internal rate of return.
d. a. and b.
e. all of the above.

13. In a capital budgeting analysis, if the net present value is less than zero

a. the internal rate of return is less than the cost of capital.
b. the internal rate of return is equal to the cost of capital.
c. the internal rate of return is greater than the cost of capital.
d. none of the above.

14. In a capital budgeting analysis, if the net present value is equal to zero

a. the internal rate of return is less than the cost of capital.
b. the internal rate of return is equal to the cost of capital.
c. the internal rate of return is greater than the cost of capital.
d. none of the above.

15. In a capital budgeting analysis, if the net present value is greater than zero

a. the internal rate of return is less than the cost of capital.
b. the internal rate of return is equal to the cost of capital.
c. the internal rate of return is greater than the cost of capital.
d. none of the above.

16. In a capital budgeting analysis, if the internal rate of return is less than the cost of capital

a. the investment should be rejected from the cash flow perspective.
b. the investment passes the screening test and should be considered in further analysis.
c. the investment should be accepted.
d. either b. or c.
e. none of the above.

17. In a capital budgeting analysis, if the internal rate of return is greater than the cost of capital

a. the investment should be rejected from the cash flow perspective.
b. the investment passes the screening test and should be considered in further analysis.
c. the investment should be accepted.
d. either b. or c.
e. none of the above.

18. The accounting rate of return

a. is not adjusted for the time values of money.
b. is incompatible with the internal rate of return.
c. decreases over the life of the investment as the book value decreases.
d. a. and b.
e. all of the above.

19. Part of the conflict between discounted cash flow (DCF) methods and investing in automation and computer integrated systems is that

a. many benefits from these investments are long term and appear insignificant because of discounting.
b. many benefits from these investments are intangible and excluded from the DCF analysis.
c. related improvements in quality, flexibility, responsiveness, and cycle time are hard to quantify.
d. a. and b.
e. all of the above.

20. In an investment analysis, a company using the moving baseline concept

a. would adjust the analysis for an expected change in the competitive environment.
b. would assume the status quo as far as customers are concerned.
c. would consider the risk of lost market share if the investment is not made.
d. a. and b.
e. a. and c.

21. The multiple attribute decision model described in the CAM-I conceptual design excludes the following factor or factors.

a. financial quantitative.
b. non-financial quantitative.
c. qualitative.
d. risk.
e. none of the above.

22. A situation where deferring investments reduces a firm's profitability and their incentive to invest is referred to as

a. the moving baseline problem.
b. the disinvestment spiral problem.
c. the discounted cash flow problem.
d. the portfolio investment problem.
e. none of these.

23. Considering a mix of investment strategies including proactive, responsive, and reactive is part of

a. the portfolio investment concept.
b. the capital budgeting concept.
c. the investment management concept.
d. a. and b.
e. a. and c.

24. Which of the following organizational characteristics are consistent with the investment management concept?