Question 1

If the net present value of an investment is zero,the investment earns less than the minimum required rate of return.

Accepted Answer

A) True 
 B)False  False

Question 2

A series of equal future cash flows is a(n)____.

Accepted Answer

A) future amount 
B) future earnings 
C) annuity 
D) earnings to be discounted 
E) insurance 
A) future amount 
B) future earnings 
C) annuity 
D) earnings to be discounted 
E) insurance C

Question 3

How do NPV and IRR differ?

Accepted Answer

A) NPV measures profitability in absolute terms,whereas the IRR method measures profitability in relative terms. 
B) IRR should be used for choosing among competing,mutually exclusive projects. 
C) NPV considers the time value of money and IRR does not. 
D) Both NPV and IRR will generate the same decisions. 
A) NPV measures profitability in absolute terms,whereas the IRR method measures profitability in relative terms. 
B) IRR should be used for choosing among competing,mutually exclusive projects. 
C) NPV considers the time value of money and IRR does not. 
D) Both NPV and IRR will generate the same decisions. A

Question 4

_______________________ are the future cash flows expressed in terms of their present value.

Accepted Answer

Discounted

Question 5

Oakland Shop is considering the purchase of a used printing press costing $9,600.The printing press would generate a net cash inflow of $4,000 per year for three years.At the end of three years,the press would have no salvage value.The company's cost of capital is 10 percent.The company uses straight-line depreciation with no mid-year convention. What is the accounting rate of return on the original investment in the press to the nearest percent,assuming no taxes are paid?

Accepted Answer

A) 41.67% 
B) 8.33% 
C) 75.00% 
D) 10.00% 
A) 41.67% 
B) 8.33% 
C) 75.00% 
D) 10.00%

Question 6

The payback period considers the profitability of a project over its entire life span.

Accepted Answer

A) True 
 B)False

Question 7

A disadvantage of the payback period is that it ignores the time value of money.

Accepted Answer

A) True 
 B)False

Question 8

Figure 14-6. Present value of $1
  Present value of an Annuity of $1
  Refer to Figure 14-6.Roman Knoze is considering two investments.Each will cost $20,000 initially.Project 1 will return annual cash flows of $10,000 in each of three years.Project 2 will return $5,000 in year 1,$10,000 in year 2,and $15,000 in year 3.Roman requires a minimum rate of return of 10 percent.What is the net present value of Project 2?

Accepted Answer

A) $5,670 
B) $20,000 
C) $2,530 
D) $24,070 
E) $4,070 
A) $5,670 
B) $20,000 
C) $2,530 
D) $24,070 
E) $4,070

Question 9

Figure 14-11.
Present value of an Annuity of $1 in Arrears
   Refer to Figure 14-11.Aragon Company is considering an investment in equipment that will have an initial cost of $560,290 and yield annual net cash inflows of $90,000.Yearly depreciation will be $56,000.The equipment is expected to be useful for 10 years and then it will be scrapped.Aragon requires a minimum rate of return of 10 percent.

Accepted Answer

The answer of Figure 14-11.
Present value of an Annuity of...

Question 10

A firm is evaluating a project that has a net present value of $0 when a discount rate of 8 percent is used.A discount rate of 6 percent will result in a

Accepted Answer

A) negative net present value. 
B) positive net present value. 
C) net present value of $0. 
D) The question cannot be answered based upon the information provided. 
A) negative net present value. 
B) positive net present value. 
C) net present value of $0. 
D) The question cannot be answered based upon the information provided.

Question 11

Figure 14-7. Osler Company is considering an investment with the following data:
  Depreciation will be taken on a straight-line basis over the expected life of the investment.
Refer to Figure 14-7.The company requires a minimum rate of return of 4%.What is the net present value of the investment?

Accepted Answer

A) $2,775 
B) $202,775 
C) $118,170 
D) ($81,830) 
A) $2,775 
B) $202,775 
C) $118,170 
D) ($81,830)

Question 12

Which of the following compares the actual benefits from an investment with the estimated benefits,and the actual operating costs of the investment with estimated operating costs?

Accepted Answer

A) internal rate of return 
B) discounted returns 
C) postaudit 
D) opportunity cost 
E) capital investment decision making 
A) internal rate of return 
B) discounted returns 
C) postaudit 
D) opportunity cost 
E) capital investment decision making

Question 13

A firm is considering a project requiring an investment of $27,000.The project would generate an annual cash flow of $6,296 for the next seven years.The company uses the straight-line method of depreciation.The approximate internal rate of return for the project is

Accepted Answer

A) 6%. 
B) 8%. 
C) 12%. 
D) 14%. 
A) 6%. 
B) 8%. 
C) 12%. 
D) 14%.

Question 14

If cash flows are uneven,the payback period assumes that the inflows during the last fraction of a year occur evenly.

Accepted Answer

A) True 
 B)False

Question 15

One disadvantage of the payback period is that

Accepted Answer

A) it is sometimes used as a crude measure of risk. 
B) managers may choose investments with quick payback periods to maximize short term criteria on which their own bonuses,etc.may be based. 
C) it cannot be used for investments with unequal cash inflows. 
D) it cannot be used if the entire cost of the investment does not occur immediately. 
E) all of these. 
A) it is sometimes used as a crude measure of risk. 
B) managers may choose investments with quick payback periods to maximize short term criteria on which their own bonuses,etc.may be based. 
C) it cannot be used for investments with unequal cash inflows. 
D) it cannot be used if the entire cost of the investment does not occur immediately. 
E) all of these.

Question 16

Figure 14-3. Davis Company is considering the purchase of a new piece of equipment that will cost $1,600,000 and have a life of five years with no expected salvage value.The expected cash flows associated with the project are as follows:
  Refer to Figure 14-3.What is the average annual income for this project?

Accepted Answer

A) $900,000 
B) $1,500,000 
C) $600,000 
D) $700,000 
E) $300,000 
A) $900,000 
B) $1,500,000 
C) $600,000 
D) $700,000 
E) $300,000

Question 17

The time required for a firm to recover its original investment is the

Accepted Answer

A) internal rate of return. 
B) net present value. 
C) life of the project. 
D) accounting rate of return. 
E) payback period. 
A) internal rate of return. 
B) net present value. 
C) life of the project. 
D) accounting rate of return. 
E) payback period.

Question 18

Which of the following is a drawback of the payback period?

Accepted Answer

A) It ignores a project's total profitability. 
B) It uses a set discount rate. 
C) It considers total profitability,requiring the forecasting of all future cash flows. 
D) It uses before-tax cash flows rather than after-tax cash flows. 
E) It uses operating income rather than cash flows. 
A) It ignores a project's total profitability. 
B) It uses a set discount rate. 
C) It considers total profitability,requiring the forecasting of all future cash flows. 
D) It uses before-tax cash flows rather than after-tax cash flows. 
E) It uses operating income rather than cash flows.

Question 19

Figure 14-11.
Present value of an Annuity of $1 in Arrears
   Refer to Figure 14-11.Cleves Company is considering two projects.
   Cleves requires a minimum rate of return of 8 percent.

Accepted Answer

The answer of Figure 14-11.
Present value of an Annuity of...

Question 20

Figure 14-6. Present value of $1
  Present value of an Annuity of $1
  Refer to Figure 14-6.Morgan Clinical Practice is considering an investment in new imaging equipment that will cost $400,000.The equipment is expected to yield cash inflows of $80,000 per year for a six year period.At the end of the sixth year,the firm expects to recover $150,000 from the sale of the equipment.Morgan set a required rate of return at 10 percent.What is the net present value of the investment? (Note: there may be a rounding error depending on the table you use to compute your answer.Choose the answer closest to the one you calculate.)

Accepted Answer

A) ($33,000) 
B) $45,200 
C) $433,000 
D) $33,000 
E) ($177,280) 
A) ($33,000) 
B) $45,200 
C) $433,000 
D) $33,000 
E) ($177,280)

If the net present value of an investment is zero,the investment earns less than the minimum required rate of return.

A series of equal future cash flows is a(n)____.

How do NPV and IRR differ?

_______________________ are the future cash flows expressed in terms of their present value.

The payback period considers the profitability of a project over its entire life span.

A disadvantage of the payback period is that it ignores the time value of money.

A firm is evaluating a project that has a net present value of $0 when a discount rate of 8 percent is used.A discount rate of 6 percent will result in a

Figure 14-7. Osler Company is considering an investment with the following data: Depreciation will be taken on a straight-line basis over the expected life of the investment. Refer to Figure 14-7.The company requires a minimum rate of return of 4%.What is the net present value of the investment?

Which of the following compares the actual benefits from an investment with the estimated benefits,and the actual operating costs of the investment with estimated operating costs?

A firm is considering a project requiring an investment of $27,000.The project would generate an annual cash flow of $6,296 for the next seven years.The company uses the straight-line method of depreciation.The approximate internal rate of return for the project is

If cash flows are uneven,the payback period assumes that the inflows during the last fraction of a year occur evenly.

One disadvantage of the payback period is that

The time required for a firm to recover its original investment is the

Which of the following is a drawback of the payback period?

Figure 14-11. Present value of an Annuity of $1 in Arrears Refer to Figure 14-11.Cleves Company is considering two projects. Cleves requires a minimum rate of return of 8 percent.

Introduction to Managerial Accounting

Basic Managerial Accounting Concepts

Cost Behavior

Cost-Volume-Profit Analysis: a Managerial Planning Tool

Job-Order Costing

Process Costing

Activity-Based Costing and Management

Absorption and Variable Costing,and Inventory Management

Profit Planning

Standard Costing: a Managerial Control Tool

Flexible Budgets and Overhead Analysis

Performance Evaluation and Decentralization

Short-Run Decision Making: Relevant Costing

Statement of Cash Flows

Financial Statement Analysis

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Exam 14: Capital Investment Decisions

If the net present value of an investment is zero,the investment earns less than the minimum required rate of return.

A series of equal future cash flows is a(n)____.

How do NPV and IRR differ?

_______________________ are the future cash flows expressed in terms of their present value.

The payback period considers the profitability of a project over its entire life span.

A disadvantage of the payback period is that it ignores the time value of money.

A firm is evaluating a project that has a net present value of $0 when a discount rate of 8 percent is used.A discount rate of 6 percent will result in a

Figure 14-7. Osler Company is considering an investment with the following data: Depreciation will be taken on a straight-line basis over the expected life of the investment. Refer to Figure 14-7.The company requires a minimum rate of return of 4%.What is the net present value of the investment?

Which of the following compares the actual benefits from an investment with the estimated benefits,and the actual operating costs of the investment with estimated operating costs?

A firm is considering a project requiring an investment of $27,000.The project would generate an annual cash flow of $6,296 for the next seven years.The company uses the straight-line method of depreciation.The approximate internal rate of return for the project is

If cash flows are uneven,the payback period assumes that the inflows during the last fraction of a year occur evenly.

One disadvantage of the payback period is that

The time required for a firm to recover its original investment is the

Which of the following is a drawback of the payback period?

Figure 14-11. Present value of an Annuity of $1 in Arrears Refer to Figure 14-11.Cleves Company is considering two projects. Cleves requires a minimum rate of return of 8 percent.

Introduction to Managerial Accounting

Basic Managerial Accounting Concepts

Cost Behavior

Cost-Volume-Profit Analysis: a Managerial Planning Tool

Job-Order Costing

Process Costing

Activity-Based Costing and Management

Absorption and Variable Costing,and Inventory Management

Profit Planning

Standard Costing: a Managerial Control Tool

Flexible Budgets and Overhead Analysis

Performance Evaluation and Decentralization

Short-Run Decision Making: Relevant Costing

Statement of Cash Flows

Financial Statement Analysis

Filters