# ACC 604 ACC604 Chapter 8 Homework Answers (National University)

**ACC 604 ACC/604 ACC604 Homework Chapter 8 Solutions (National University)**

**Chapter Eight**

**1. What is the difference between capital budgeting screening decisions and capital budgeting preference decisions?**

**2. What is meant by the term time value of money?**

**3. What is meant by the term discounting?**

**4. Why isn’t accounting net income used in the net present value and internal rate of return methods of making capital budgeting decisions?**

**5. Why are discounted cash flow methods of making capital budgeting decisions superior to other methods?**

**6. What is net present value? Can it ever be negative? Explain.**

**7. Identify two simplifying assumptions associated with discounted cash flow methods of making capital budgeting decisions.**

**8. If a company has to pay interest of 14% on long-term debt, then its cost of capital is 14%. Do you agree? Explain.**

**9. What is meant by an investment project’s internal rate of return? How is the internal rate of return computed?**

**10. Explain how the cost of capital serves as a screening tool when using ( a) the net present value method and (b) the internal rate of return method.**

**11. As the discount rate increases, the present value of a given future cash flow also increases. Do you agree? Explain.**

**12 Refer to Exhibit 8–4. Is the return on this investment proposal exactly 14%, more than 14%, or less than 14%? Explain**.

**13. How is the project profitability index computed, and what does it measure?**

**14. What is meant by the term payback period? How is the payback period determined? How can the payback method be useful?**

**15. What is the major criticism of the payback and simple rate of return methods of making capital budgeting decisions?**