1) Why is it beneficial to routinely compare the cost of individual investments to future earnings and cash flows?

To rank investments

To keep your boss happy

To practice my accounting skills

2) What is a synonym for capital investment analysis? Choose the best answer:

Capital budgeting

Balance Sheet

Income Statement

3) What are two methods to evaluate capital investments that do not use present values?

Average rate of return method

Cash payback method

Double declining balance depreciation

4) What are two methods to evaluate investments that use present value?

Statement of cash flows

Net present value method

Internal rate of return method

5) The time value of money concept recognizes that:

A dollar today is worth more than a dollar tomorrow because today's dollar can earn interest.

The Federal Reserve Board raised the interest rate.

Straight line depreciation is better than the double declining balance method.

6) The internal rate of return method of analysis is used to evaluate proposed capital investments. It uses present value concepts to compute the rate of return from the net cash flows expected from the investment. Are there any disadvantage of the IRR method?

7) Assume the average rate of return for investment A and B amounts to 10% (A) verses 20% (B). Which investment is preferable, and why?

8) Explain how to compute the net present value of an investment, in your own words.