Question 1

The first step in addressing capital budgeting decisions is to identify relevant cash flows.

Accepted Answer

A) True 
 B)False

Question 2

You are currently entering university and you want to buy your uncle's Mercedes when you graduate. He has promised to sell it to you for $18,000. How much will you have to deposit now, in an account earning 8%, to have enough money buy the car in 4 years?

Accepted Answer

A)  $3,060 
B)  $6,122 
C)  $4,500 
D)  $13,230 
A)  $3,060 
B)  $6,122 
C)  $4,500 
D)  $13,230

Question 3

Uncertainty is very often a factor when estimating a project's terminal value for an NPV analysis.

Accepted Answer

A) True 
 B)False

Question 4

Philipp is considering automating its production line. It will cost $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 per year for 14 years. The firm requires a 20% return. Ignoring income taxes, what is the payback period?

Accepted Answer

A)  6 years 
B)  3 years 
C)  4.2 years 
D)  5 years 
A)  6 years 
B)  3 years 
C)  4.2 years 
D)  5 years

Question 5

Bruno is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: $\begin{array}{lr}
\text { Cost of new machine } & \$ 100000 \
\text { Annual cost savings in cash expenses } & 45000 \
\text { Terminal value } & 8000 \
\text { Maintenance required in the 4th year } & 5000 \
\text { Book value of the old machine } & 20000
\end{array}$
 The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Bruno uses the straight-line method for depreciation on all machines (ignore the half-year convention).
The present value of the terminal cash flows is:

Accepted Answer

A)  $3,175 
B)  $8,000 
C)  $4,536 
D)  $1,361 
A)  $3,175 
B)  $8,000 
C)  $4,536 
D)  $1,361

Question 6

The local school board is considering the purchase of a new computer system. It will cost $100,000 and will be sold back to the dealer at the end of 6 years for $8,000. If the required rate of return is 14%, what is the minimal annual cost saving required to justify the purchase? Ignore income taxes.

Accepted Answer

A)  $23,656 
B)  $25,714 
C)  $23,142 
D)  $24,776 
A)  $23,656 
B)  $25,714 
C)  $23,142 
D)  $24,776

Question 7

Teddy & Sons invested in a project that cost $100,000. It had a net present value of $15,975 and a useful life of 8 years. The firm uses a 14% discount rate, and the project has an internal rate of return of 16%. What are the annual cost savings provided by the project?

Accepted Answer

A)  $8,600 
B)  $25,000 
C)  $26,698 
D)  $9,263 
A)  $8,600 
B)  $25,000 
C)  $26,698 
D)  $9,263

Question 8

Bruno is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: $\begin{array}{lr}
\text { Cost of new machine } & \$ 100000 \
\text { Annual cost savings in cash expenses } & 45000 \
\text { Terminal value } & 8000 \
\text { Maintenance required in the 4th year } & 5000 \
\text { Book value of the old machine } & 20000
\end{array}$ The new machine would replace an old fully-depreciated machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Bruno uses the straight-line method for depreciation on all machines (ignore the half-year convention).
The present value of the total tax savings from the depreciation tax shield is:

Accepted Answer

A)  $19,899.60 
B)  $21,630.00 
C)  $46,432.40 
D)  $50,470.00 
A)  $19,899.60 
B)  $21,630.00 
C)  $46,432.40 
D)  $50,470.00

Question 9

Acebeck Pty Ltd is considering a project that would provide a single cash inflow eight years from now of $80,000. What is the most that Acebeck would be willing to spend on this project if the discount rate is 16%?

Accepted Answer

A)  $22,191 
B)  $262,295 
C)  $24,400 
D)  $288,400 
A)  $22,191 
B)  $262,295 
C)  $24,400 
D)  $288,400

Question 10

Which of the following is the best example of a tax shield for an asset?

Accepted Answer

A)  Its trade-in value 
B)  Its periodic depreciation 
C)  Its cost basis 
D)  Its disposal cost 
A)  Its trade-in value 
B)  Its periodic depreciation 
C)  Its cost basis 
D)  Its disposal cost

Question 11

Axios is a software manufacturer. Managers are considering a new equipment proposal. The income tax rate is 40%, and the discount rate is 10%. The following data are available: $\begin{array}{lcc}
&\underline{\text { Old Equipment}}& \underline{\text {New Equipment }}\
\text { Purchase cost } & \$ 12,000 & \$ 36,000 \
\text { Annual depreciation } & 1,500 & 4,500 \
\text { Remaining useful life (years) } & 8 & 8 \
\text { Current selling price } & 14,400 & \text { not applicable } \
\text { Selling price in 8 years } & 1,000 & 2,000 \
\text { Annual operating costs } & 14,000 & 8,000
\end{array}$ The after-tax cash flows from selling the old equipment are:

Accepted Answer

A)  $11,040 
B)  $12,000 
C)  $13,440 
D)  $12,960 
A)  $11,040 
B)  $12,000 
C)  $13,440 
D)  $12,960

Question 12

The internal rate of return method assumes that future cash flows can be reinvested to earn the same return generated by a capital investment project.

Accepted Answer

A) True 
 B)False

Question 13

In general, the initial project investment does not require discounting in a net present value analysis.

Accepted Answer

A) True 
 B)False

Question 14

Grant Ltd has the following equity structure: $\begin{array}{c}
\begin{array}{l}
\
 \text {Long-term debt}\
 \text {Preference shares}\
 \text {Ordinary shares}
\end{array}
\begin{array}{c}
\underline{\text { Market Value }} \
\$ 700,000 \
50,000 \
250,000 
\end{array}
\begin{array}{c}
\underline{\text { Cost} } \
15 \% \
5 \
15 
\end{array}
\end{array}$
 The weighted average cost of capital is:

Accepted Answer

A)  10.3% 
B)  14.5% 
C)  8.2% 
D)  8.7% 
A)  10.3% 
B)  14.5% 
C)  8.2% 
D)  8.7%

Question 15

If nominal cash flow is calculated as real cash flow × (1 + i)t in an NPV analysis, i denotes the:

Accepted Answer

A)  Rate of inflation 
B)  Weighted average cost of capital 
C)  Risk-free interest rate 
D)  Discount rate 
A)  Rate of inflation 
B)  Weighted average cost of capital 
C)  Risk-free interest rate 
D)  Discount rate

Question 16

Wingbury Ltd has invested in a project with a cost of $36,504, annual net cash flows of $12,000, a terminal value of $4,000, and a 5-year useful life. The firm uses a 16% discount rate. Compute the internal rate of return to the nearest tenth of a percent. Ignore income taxes.

Accepted Answer

A)  18.8% 
B)  19.2% 
C)  20.8% 
D)  19.8% 
A)  18.8% 
B)  19.2% 
C)  20.8% 
D)  19.8%

Question 17

Because of its complex calculation, few managers rely on the payback period as a capital budgeting analysis tool.

Accepted Answer

A) True 
 B)False

Question 18

In a capital budgeting analysis, nominal cash flow is generally calculated as:

Accepted Answer

A)  (1 + inflation rate) × t × real cash flow 
B)  Real cash flow × (1 + inflation rate)t 
C)  Real cash flow / (1 + inflation rate)t 
D)  Real cash flow (1 + inflation rate)×t 
A)  (1 + inflation rate) × t × real cash flow 
B)  Real cash flow × (1 + inflation rate)t 
C)  Real cash flow / (1 + inflation rate)t 
D)  Real cash flow (1 + inflation rate)×t

Question 19

The net present value method is

Accepted Answer

A)  The sum of the projected cash inflows and outflows valued in today's dollars. 
B)  Used to appraise a capital project's qualitative factors. 
C)  Used to show how long the initial investment will be at risk. 
D)  The sum of the cash inflows, discounted to time zero. 
A)  The sum of the projected cash inflows and outflows valued in today's dollars. 
B)  Used to appraise a capital project's qualitative factors. 
C)  Used to show how long the initial investment will be at risk. 
D)  The sum of the cash inflows, discounted to time zero.

Question 20

Capital budgeting is a process managers' use when choosing investments with multi-year cash flows.

Accepted Answer

A) True 
 B)False

The first step in addressing capital budgeting decisions is to identify relevant cash flows.

You are currently entering university and you want to buy your uncle's Mercedes when you graduate. He has promised to sell it to you for $18,000. How much will you have to deposit now, in an account earning 8%, to have enough money buy the car in 4 years?

Uncertainty is very often a factor when estimating a project's terminal value for an NPV analysis.

Philipp is considering automating its production line. It will cost $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 per year for 14 years. The firm requires a 20% return. Ignoring income taxes, what is the payback period?

Teddy & Sons invested in a project that cost $100,000. It had a net present value of $15,975 and a useful life of 8 years. The firm uses a 14% discount rate, and the project has an internal rate of return of 16%. What are the annual cost savings provided by the project?

Acebeck Pty Ltd is considering a project that would provide a single cash inflow eight years from now of $80,000. What is the most that Acebeck would be willing to spend on this project if the discount rate is 16%?

Which of the following is the best example of a tax shield for an asset?

The internal rate of return method assumes that future cash flows can be reinvested to earn the same return generated by a capital investment project.

In general, the initial project investment does not require discounting in a net present value analysis.

Grant Ltd has the following equity structure: Long-term debt Preference shares Ordinary shares \ 700,000 50,000 250,000 15\% 5 15 The weighted average cost of capital is:

If nominal cash flow is calculated as real cash flow × (1 + i)^t in an NPV analysis, i denotes the:

Wingbury Ltd has invested in a project with a cost of $36,504, annual net cash flows of $12,000, a terminal value of $4,000, and a 5-year useful life. The firm uses a 16% discount rate. Compute the internal rate of return to the nearest tenth of a percent. Ignore income taxes.

Because of its complex calculation, few managers rely on the payback period as a capital budgeting analysis tool.

In a capital budgeting analysis, nominal cash flow is generally calculated as:

The net present value method is

Capital budgeting is a process managers' use when choosing investments with multi-year cash flows.

The Role of Accounting Information in Management Decision Making

Cost Concepts, Behaviour and Estimation

A Costing Framework and Cost Allocation

Costvolumeprofit Cvp Analysis

Planning Budgeting and Behaviour

Operational Budgets

Job and Process Costing Systems

Flexible Budgets, Standard Costs and Variance Analysis

Variance Analysis: Revenue and Cost

Activity Analysis: Costing and Management

Relevant Costs for Decision Making

Strategy and Control

The Strategic Management of Costs and Revenues

Strategic Management Control: a Lean Perspective

Responsibility Accounting, Performance Evaluation and Transfer Pricing

The Balanced Scorecard and Strategy Maps

Rewards, Incentives and Risk Management

Sustainability Management Accounting

Filters

Exam 13: Capital Budgeting and Strategic Investment Decisions

The first step in addressing capital budgeting decisions is to identify relevant cash flows.

You are currently entering university and you want to buy your uncle's Mercedes when you graduate. He has promised to sell it to you for $18,000. How much will you have to deposit now, in an account earning 8%, to have enough money buy the car in 4 years?

Uncertainty is very often a factor when estimating a project's terminal value for an NPV analysis.

Philipp is considering automating its production line. It will cost $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 per year for 14 years. The firm requires a 20% return. Ignoring income taxes, what is the payback period?

Teddy & Sons invested in a project that cost $100,000. It had a net present value of $15,975 and a useful life of 8 years. The firm uses a 14% discount rate, and the project has an internal rate of return of 16%. What are the annual cost savings provided by the project?

Acebeck Pty Ltd is considering a project that would provide a single cash inflow eight years from now of $80,000. What is the most that Acebeck would be willing to spend on this project if the discount rate is 16%?

Which of the following is the best example of a tax shield for an asset?

The internal rate of return method assumes that future cash flows can be reinvested to earn the same return generated by a capital investment project.

In general, the initial project investment does not require discounting in a net present value analysis.

Grant Ltd has the following equity structure: Long-term debt Preference shares Ordinary shares \ 700,000 50,000 250,000 15\% 5 15 The weighted average cost of capital is:

If nominal cash flow is calculated as real cash flow × (1 + i)t in an NPV analysis, i denotes the:

Wingbury Ltd has invested in a project with a cost of $36,504, annual net cash flows of $12,000, a terminal value of $4,000, and a 5-year useful life. The firm uses a 16% discount rate. Compute the internal rate of return to the nearest tenth of a percent. Ignore income taxes.

Because of its complex calculation, few managers rely on the payback period as a capital budgeting analysis tool.

In a capital budgeting analysis, nominal cash flow is generally calculated as:

The net present value method is

Capital budgeting is a process managers' use when choosing investments with multi-year cash flows.

The Role of Accounting Information in Management Decision Making

Cost Concepts, Behaviour and Estimation

A Costing Framework and Cost Allocation

Costvolumeprofit Cvp Analysis

Planning Budgeting and Behaviour

Operational Budgets

Job and Process Costing Systems

Flexible Budgets, Standard Costs and Variance Analysis

Variance Analysis: Revenue and Cost

Activity Analysis: Costing and Management

Relevant Costs for Decision Making

Strategy and Control

The Strategic Management of Costs and Revenues

Strategic Management Control: a Lean Perspective

Responsibility Accounting, Performance Evaluation and Transfer Pricing

The Balanced Scorecard and Strategy Maps

Rewards, Incentives and Risk Management

Sustainability Management Accounting

Filters

If nominal cash flow is calculated as real cash flow × (1 + i)^t in an NPV analysis, i denotes the: