Question 1

The process that managers use when they evaluate multi-year investments is called

Accepted Answer

A)  Breakeven analysis 
B)  Capital budgeting 
C)  Activity-based budgeting 
D)  Short-term decision making 
A)  Breakeven analysis 
B)  Capital budgeting 
C)  Activity-based budgeting 
D)  Short-term decision making

Question 2

The rate of return that results in a zero net present value for a project is called the:

Accepted Answer

A)  Discount rate of return 
B)  Average rate of return 
C)  Internal rate of return 
D)  Required rate of return 
A)  Discount rate of return 
B)  Average rate of return 
C)  Internal rate of return 
D)  Required rate of return

Question 3

Uniform cash flows from a capital project are necessary for which of the following calculations?
 I $\quad $Net present value
II $\quad $Internal rate of return 
III $\quad $Profitability index

Accepted Answer

A)  I and II only 
B)  II and III only 
C)  I and III only 
D)  None of the above (not I, II, or III) 
A)  I and II only 
B)  II and III only 
C)  I and III only 
D)  None of the above (not I, II, or III)

Question 4

The payback period is deficient as a decision criterion for capital projects because it: I $\quad $Disregards relative profitability 
II $\quad $Ignores income beyond the payback period 
III $\quad $Does not take into account the time value of money

Accepted Answer

A)  I, II, and III 
B)  I only 
C)  II only 
D)  III only 
A)  I, II, and III 
B)  I only 
C)  II only 
D)  III only

Question 5

Meinhardt (Qld) Ltd invested in a 3-year project and expects a 15% rate of return. Annual cash inflows from the project are: year 1 $8,000; year 2 $8,500; and year 3 $9,500. The net present value is $4,000. What was the amount of the original investment? Ignore income taxes.

Accepted Answer

A)  $23,637 
B)  $17,637 
C)  $15,637 
D)  $19,637 
A)  $23,637 
B)  $17,637 
C)  $15,637 
D)  $19,637

Question 6

Hewitt Ltd has chosen four potential investment projects. Listed below are some relevant data on these projects: $\begin{array}{c}
\begin{array}{c}
\underline{\text { Project} } \
 1 \
2 \
3 \
4
\end{array}
\begin{array}{c}
\underline{\text { Investment }} \
 \$ 125,000 \
150,000 \
75,000 \
112,500 
\end{array}
\begin{array}{c}
\underline{\text { Net Present Value }} \
 \$ 62,500 \
45,000 \
52,500 \
45,000 
\end{array}
\end{array}$
 Use the profitability index to rank these investments in terms of preference.

Accepted Answer

A)  3, 1, 4, 2 
B)  1, 3, 2, 4 
C)  2, 1, 4, 3 
D)  1, 2, 3, 4 
A)  3, 1, 4, 2 
B)  1, 3, 2, 4 
C)  2, 1, 4, 3 
D)  1, 2, 3, 4

Question 7

Marie Pty Ltd is considering modernising its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment: $\begin{array}{c}
\begin{array}{lr}
\quad\quad\quad\quad\quad\underline{\text { Old Machine }}\
\text { Cost } & \$ 40,000 \
\text { Accumulated depreciation } & \$ 20,000 \
\text { Remaining life } & 4 \text { years } \
\text { Current salvage value } & \$ 5,000 \
\text { Salvage value in 4 years } & \$-0- \
\text { Annual cash operating costs } & \$ 18,000
\end{array}
\begin{array}{lr}
\quad\quad\quad\quad\quad\underline{\text { New Machine }}\\text { Cost } & \$ 19,000 \
\text { Estimated useful life } & 4 \text { years } \
\text { Salvage value in 4 years } & \$ 5,000 \
\text { Annual cash operating costs } & \$ 14,000\
\
\
\end{array}
\end{array}$
 The income tax rate is 40%, and the required rate of return is 16%. Depreciation is $5,000 per year for the old machine. The new machine would be depreciated $7,600 in 2015, $5,700 in 2016, $3,800 in 2017, and $1,900 in 2018. Assume Marie would purchase the new machine in December 2014 and dispose of the old machine in January 2015. The tax effect of selling the new machine in 2018 would be:

Accepted Answer

A)  $0 
B)  $5,000 
C)  $3,000 
D)  $2,000 
A)  $0 
B)  $5,000 
C)  $3,000 
D)  $2,000

Question 8

Under the general quantitative rule, a project with a net present value less than zero should not be accepted.

Accepted Answer

A) True 
 B)False

Question 9

Grant Ltd invested in a machine that has a 3-year useful life. The company's discount rate is 12%, and the net present value of the investment is $(573). Annual cost savings are: year 1 $3,000; year 2 $4,000; and year 3 $5,000. Determine the original cost of the machine. Ignore income taxes.

Accepted Answer

A)  $9,500 
B)  $12,000 
C)  $8,500 
D)  $10,000 
A)  $9,500 
B)  $12,000 
C)  $8,500 
D)  $10,000

Question 10

Erwin Ltd is considering an investment in equipment for a new product line with a cost of $48,625, a terminal value of $6,283, and a useful life of 5 years. The project will provide an annual contribution margin of $12,500. The required rate of return is 12%. Ignore income taxes. This project is

Accepted Answer

A)  Acceptable, because it earns exactly 12%. 
B)  Unacceptable, because it earns a rate below 12%. 
C)  Acceptable, because it has a positive NPV. 
D)  Unacceptable, because it has a 0 NPV. 
A)  Acceptable, because it earns exactly 12%. 
B)  Unacceptable, because it earns a rate below 12%. 
C)  Acceptable, because it has a positive NPV. 
D)  Unacceptable, because it has a 0 NPV.

Question 11

Capital budgeting decisions typically fall into which of the following major categories? 
I $\quad $Developing or expanding products or services
II $\quad $Allocating costs to products or services
III $\quad $Replacing or reorganising assets or services

Accepted Answer

A)  I, II, and III 
B)  I and II only 
C)  II and III only 
D)  I and III only 
A)  I, II, and III 
B)  I and II only 
C)  II and III only 
D)  I and III only

Question 12

For a particular investment project, the present value of the benefits is exactly equal to the present value of the investment. Given this, which of the following statements is true?

Accepted Answer

A)  The project is acceptable. 
B)  The net present value is positive. 
C)  The internal rate of return is less than the required rate of return. 
D)  The profitability index is less than one. 
A)  The project is acceptable. 
B)  The net present value is positive. 
C)  The internal rate of return is less than the required rate of return. 
D)  The profitability index is less than one.

Question 13

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: $\begin{array}{lcc}
&\underline{\text { Old Equipment}}& \underline{\text {New Equipment }}\
\text { Purchase cost } & \$ 12,000 & \$ 36,000 \
\text { Annual depreciation } & 1,500 & 4,500 \
\text { Remaining useful life (years) } & 8 & 8 \
\text { Current selling price } & 14,400 & \text { not applicable } \
\text { Selling price in 8 years } & 1,000 & 2,000 \
\text { Annual operating costs } & 14,000 & 8,000
\end{array}$
 What is the relevant after-tax cash flow associated with disposing of the new equipment at its salvage value in 8 years?

Accepted Answer

A)  $800 
B)  $2,000 
C)  $1,200 
D)  $0 
A)  $800 
B)  $2,000 
C)  $1,200 
D)  $0

Question 14

McKinsey & Co. invested in a project that was to last for 2 years. The project has an internal rate of return of 12%. The project is expected to produce cash inflows of $70,000 in the first year and $80,000 in the second year. The project cost is:

Accepted Answer

A)  $126,270 
B)  $143,760 
C)  $142,510 
D)  $150,000 
A)  $126,270 
B)  $143,760 
C)  $142,510 
D)  $150,000

Question 15

Incremental operating cash flows can be associated with changes in capacity or product quality in capital budgeting decisions.

Accepted Answer

A) True 
 B)False

Question 16

Cash flows to be considered in capital budgeting decisions generally fall into three major groups: initial investment, incremental operating cash flows, and terminal cash flows.

Accepted Answer

A) True 
 B)False

Question 17

Marie Pty Ltd is considering modernising its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment: $\begin{array}{c}
\begin{array}{lr}
\quad\quad\quad\quad\quad\underline{\text { Old Machine }}\
\text { Cost } & \$ 40,000 \
\text { Accumulated depreciation } & \$ 20,000 \
\text { Remaining life } & 4 \text { years } \
\text { Current salvage value } & \$ 5,000 \
\text { Salvage value in 4 years } & \$-0- \
\text { Annual cash operating costs } & \$ 18,000
\end{array}
\begin{array}{lr}
\quad\quad\quad\quad\quad\underline{\text { New Machine }}\\text { Cost } & \$ 19,000 \
\text { Estimated useful life } & 4 \text { years } \
\text { Salvage value in 4 years } & \$ 5,000 \
\text { Annual cash operating costs } & \$ 14,000\
\
\
\end{array}
\end{array}$ The income tax rate is 40%, and the required rate of return is 16%. Depreciation is $5,000 per year for the old machine. The new machine would be depreciated $7,600 in 2015, $5,700 in 2016, $3,800 in 2017, and $1,900 in 2018. Assume Marie would purchase the new machine in December 2014 and dispose of the old machine in January 2015. The net cash flow associated with selling the old machine in January 2015 (i.e., the value of the sale and any tax consequences) would be:

Accepted Answer

A)  $11,000 
B)  $5,000 
C)  $15,000 
D)  $20,000 
A)  $11,000 
B)  $5,000 
C)  $15,000 
D)  $20,000

Question 18

Acroe Trading Pty Ltd. has $100,000 available for long-term investment. Which projects should be selected from the list below? $\begin{array}{c}
\begin{array}{c}
\underline{\text { Project} } \
 1 \
2 \
3 \
4 \
5
\end{array}
\begin{array}{c}
\underline{\text { Cost }}\
\$ 60,000\
40,000 \
40,000 \
20,000 \
60,000
\end{array}
\begin{array}{c}
\underline{\text { IRR }} \
16 \% \
20 \% \
24 \% \
14 \% \
18 \%
\end{array}
\begin{array}{c}
\underline{\mathrm{NPV}}\
\$ 3,413 \
7,563 \
8,036 \
1,313 \
14,583 
\end{array}
\begin{array}{c}
\underline{\text { Profitability Index } }\
 1.057 \
1.190 \
1.201 \
1.066 \
1.243
\end{array}
\end{array}$

Accepted Answer

A)  2 and 5 
B)  4 and 5 
C)  2, 3, and 4 
D)  3 and 5 
A)  2 and 5 
B)  4 and 5 
C)  2, 3, and 4 
D)  3 and 5

Question 19

Income taxes have a major effect on capital budgeting decisions.

Accepted Answer

A) True 
 B)False

Question 20

Marie Pty Ltd is considering modernising its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment: $\begin{array}{c}
\begin{array}{lr}
\quad\quad\quad\quad\quad\underline{\text { Old Machine }}\
\text { Cost } & \$ 40,000 \
\text { Accumulated depreciation } & \$ 20,000 \
\text { Remaining life } & 4 \text { years } \
\text { Current salvage value } & \$ 5,000 \
\text { Salvage value in 4 years } & \$-0- \
\text { Annual cash operating costs } & \$ 18,000
\end{array}
\begin{array}{lr}
\quad\quad\quad\quad\quad\underline{\text { New Machine }}\\text { Cost } & \$ 19,000 \
\text { Estimated useful life } & 4 \text { years } \
\text { Salvage value in 4 years } & \$ 5,000 \
\text { Annual cash operating costs } & \$ 14,000\
\
\
\end{array}
\end{array}$
 The income tax rate is 40%, and the required rate of return is 16%. Depreciation is $5,000 per year for the old machine. The new machine would be depreciated $7,600 in 2015, $5,700 in 2016, $3,800 in 2017, and $1,900 in 2018. Assume Marie would purchase the new machine in December 2014 and dispose of the old machine in January 2015. The relevant annual pre-tax cash operating cost associated with Marie's decision will be:

Accepted Answer

A)  $2,400 
B)  $4,000 
C)  $14,000 
D)  $18,000 
A)  $2,400 
B)  $4,000 
C)  $14,000 
D)  $18,000

The process that managers use when they evaluate multi-year investments is called

The rate of return that results in a zero net present value for a project is called the:

Uniform cash flows from a capital project are necessary for which of the following calculations? I $\quad$ Net present value II $\quad$ Internal rate of return III $\quad$ Profitability index

The payback period is deficient as a decision criterion for capital projects because it: I $\quad$ Disregards relative profitability II $\quad$ Ignores income beyond the payback period III $\quad$ Does not take into account the time value of money

Meinhardt (Qld) Ltd invested in a 3-year project and expects a 15% rate of return. Annual cash inflows from the project are: year 1 $8,000; year 2 $8,500; and year 3 $9,500. The net present value is $4,000. What was the amount of the original investment? Ignore income taxes.

Hewitt Ltd has chosen four potential investment projects. Listed below are some relevant data on these projects: 1 2 3 4 \ 125,000 150,000 75,000 112,500 \ 62,500 45,000 52,500 45,000 Use the profitability index to rank these investments in terms of preference.

Under the general quantitative rule, a project with a net present value less than zero should not be accepted.

Grant Ltd invested in a machine that has a 3-year useful life. The company's discount rate is 12%, and the net present value of the investment is $(573). Annual cost savings are: year 1 $3,000; year 2 $4,000; and year 3 $5,000. Determine the original cost of the machine. Ignore income taxes.

Erwin Ltd is considering an investment in equipment for a new product line with a cost of $48,625, a terminal value of $6,283, and a useful life of 5 years. The project will provide an annual contribution margin of $12,500. The required rate of return is 12%. Ignore income taxes. This project is

Capital budgeting decisions typically fall into which of the following major categories? I $\quad$ Developing or expanding products or services II $\quad$ Allocating costs to products or services III $\quad$ Replacing or reorganising assets or services

For a particular investment project, the present value of the benefits is exactly equal to the present value of the investment. Given this, which of the following statements is true?

McKinsey & Co. invested in a project that was to last for 2 years. The project has an internal rate of return of 12%. The project is expected to produce cash inflows of $70,000 in the first year and $80,000 in the second year. The project cost is:

Incremental operating cash flows can be associated with changes in capacity or product quality in capital budgeting decisions.

Cash flows to be considered in capital budgeting decisions generally fall into three major groups: initial investment, incremental operating cash flows, and terminal cash flows.

Acroe Trading Pty Ltd. has $100,000 available for long-term investment. Which projects should be selected from the list below? 1 2 3 4 5 \ 60,000 40,000 40,000 20,000 60,000 16\% 20\% 24\% 14\% 18\% \ 3,413 7,563 8,036 1,313 14,583 1.057 1.190 1.201 1.066 1.243

Income taxes have a major effect on capital budgeting decisions.

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 process that managers use when they evaluate multi-year investments is called

The rate of return that results in a zero net present value for a project is called the:

Uniform cash flows from a capital project are necessary for which of the following calculations? I \quad Net present value II \quad Internal rate of return III \quad Profitability index

The payback period is deficient as a decision criterion for capital projects because it: I \quad Disregards relative profitability II \quad Ignores income beyond the payback period III \quad Does not take into account the time value of money

Meinhardt (Qld) Ltd invested in a 3-year project and expects a 15% rate of return. Annual cash inflows from the project are: year 1 $8,000; year 2 $8,500; and year 3 $9,500. The net present value is $4,000. What was the amount of the original investment? Ignore income taxes.

Hewitt Ltd has chosen four potential investment projects. Listed below are some relevant data on these projects: 1 2 3 4 \ 125,000 150,000 75,000 112,500 \ 62,500 45,000 52,500 45,000 Use the profitability index to rank these investments in terms of preference.

Under the general quantitative rule, a project with a net present value less than zero should not be accepted.

Grant Ltd invested in a machine that has a 3-year useful life. The company's discount rate is 12%, and the net present value of the investment is $(573). Annual cost savings are: year 1 $3,000; year 2 $4,000; and year 3 $5,000. Determine the original cost of the machine. Ignore income taxes.

Erwin Ltd is considering an investment in equipment for a new product line with a cost of $48,625, a terminal value of $6,283, and a useful life of 5 years. The project will provide an annual contribution margin of $12,500. The required rate of return is 12%. Ignore income taxes. This project is

Capital budgeting decisions typically fall into which of the following major categories? I \quad Developing or expanding products or services II \quad Allocating costs to products or services III \quad Replacing or reorganising assets or services

For a particular investment project, the present value of the benefits is exactly equal to the present value of the investment. Given this, which of the following statements is true?

McKinsey & Co. invested in a project that was to last for 2 years. The project has an internal rate of return of 12%. The project is expected to produce cash inflows of $70,000 in the first year and $80,000 in the second year. The project cost is:

Incremental operating cash flows can be associated with changes in capacity or product quality in capital budgeting decisions.

Cash flows to be considered in capital budgeting decisions generally fall into three major groups: initial investment, incremental operating cash flows, and terminal cash flows.

Acroe Trading Pty Ltd. has $100,000 available for long-term investment. Which projects should be selected from the list below? 1 2 3 4 5 \ 60,000 40,000 40,000 20,000 60,000 16\% 20\% 24\% 14\% 18\% \ 3,413 7,563 8,036 1,313 14,583 1.057 1.190 1.201 1.066 1.243

Income taxes have a major effect on capital budgeting decisions.

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

Uniform cash flows from a capital project are necessary for which of the following calculations? I $\quad$ Net present value II $\quad$ Internal rate of return III $\quad$ Profitability index

The payback period is deficient as a decision criterion for capital projects because it: I $\quad$ Disregards relative profitability II $\quad$ Ignores income beyond the payback period III $\quad$ Does not take into account the time value of money

Capital budgeting decisions typically fall into which of the following major categories? I $\quad$ Developing or expanding products or services II $\quad$ Allocating costs to products or services III $\quad$ Replacing or reorganising assets or services