Question 1

The net present value method can only be used in capital budgeting if the expected cash flows from a project are an equal amount each year.

Accepted Answer

A) True 
 B)False

Question 2

The capital budgeting method that takes into account both the size of the original investment and the discounted cash flows is the

Accepted Answer

A) cash payback method. 
B) internal rate of return method. 
C) net present value method. 
D) profitability index. 
A) cash payback method. 
B) internal rate of return method. 
C) net present value method. 
D) profitability index.

Question 3

The profitability index is computed by dividing the

Accepted Answer

A) total cash flows by the initial investment. 
B) present value of cash flows by the initial investment. 
C) initial investment by the total cash flows. 
D) initial investment by the present value of cash flows. 
A) total cash flows by the initial investment. 
B) present value of cash flows by the initial investment. 
C) initial investment by the total cash flows. 
D) initial investment by the present value of cash flows.

Question 4

A project has annual income exclusive of depreciation of $80,000. The annual rate of return is 15% and annual depreciation is $20,000. There is no salvage value. The internal rate of return is 12%. The initial cost of the project was

Accepted Answer

A) $400,000. 
B) $500,000. 
C) $1,000,000. 
D) $800,000. 
A) $400,000. 
B) $500,000. 
C) $1,000,000. 
D) $800,000.

Question 5

Mini Inc. is contemplating a capital project costing $47,019. The project will provide annual cost savings of $18,000 for 3 years and have a salvage value of $3,000. The company's required rate of return is 10%. The company uses straight-line depreciation. $\begin{array}{llr}\text { Year } &\text { Present Value } & \text { PV of an Annuity } \
&\text { of } 1 \text { at } 10 \%&\text { of } 1 \text { at } 10 \%\
1 & .909 & .909 \
2 & .826 & 1.736 \
3 & .751 & 2.487
\end{array}$ This project is

Accepted Answer

A) unacceptable because it earns a rate less than 10%. 
B) acceptable because it has a positive NPV. 
C) unacceptable because it has a negative NPV. 
D) acceptable because it has a zero NPV. 
A) unacceptable because it earns a rate less than 10%. 
B) acceptable because it has a positive NPV. 
C) unacceptable because it has a negative NPV. 
D) acceptable because it has a zero NPV.

Question 6

If a 3-year capital project costing $77,310 has an internal rate of return factor equal to 2.577, the net annual cash flows assuming straight-line depreciation are

Accepted Answer

A) $25,770. 
B) $30,000. 
C) $10,000. 
D) $38,655. 
A) $25,770. 
B) $30,000. 
C) $10,000. 
D) $38,655.

Question 7

Intangible benefits in capital budgeting would include all of the following except increased

Accepted Answer

A) product quality. 
B) employee loyalty. 
C) salvage value. 
D) product safety. 
A) product quality. 
B) employee loyalty. 
C) salvage value. 
D) product safety.

Question 8

A post-audit is an evaluation of how well a project's actual performance matches the projections made when the project was proposed.

Accepted Answer

A) True 
 B)False

Question 9

A company's cost of capital refers to the

Accepted Answer

A) rate the company must pay to obtain funds from creditors and stockholders. 
B) total cost of a capital project. 
C) cost of printing and registering common stock shares. 
D) rate of return earned on common stock. 
A) rate the company must pay to obtain funds from creditors and stockholders. 
B) total cost of a capital project. 
C) cost of printing and registering common stock shares. 
D) rate of return earned on common stock.

Question 10

If a project has a zero net present value, then the internal rate of return will be

Accepted Answer

A) less than the discount rate. 
B) greater than the discount rate. 
C) equal to the discount rate. 
D) a negative rate of return. 
A) less than the discount rate. 
B) greater than the discount rate. 
C) equal to the discount rate. 
D) a negative rate of return.

Question 11

Use the following information for questions 
Selma Inc. is comparing several alternative capital budgeting projects as shown below: $\begin{array}{lrrr}&&\text { Projects }\&A&B&C\
\text { Initial investment } & \$ 80,000 & \$ \overline{120,000} & \$ 160,000 \
\text { Present value of net cash flows } & 90,000 & 110,000 & 200,000
\end{array}$
-Using the profitability index, how many of the projects are acceptable?

Accepted Answer

A) 3 
B) 2 
C) 1 
D) 0 
A) 3 
B) 2 
C) 1 
D) 0

Question 12

The capital budgeting technique that finds the interest yield of the potential investment is the

Accepted Answer

A) annual rate of return method. 
B) internal rate of return method. 
C) net present value method. 
D) profitability index method. 
A) annual rate of return method. 
B) internal rate of return method. 
C) net present value method. 
D) profitability index method.

Question 13

The cash payback method is frequently used as a screening tool but it does not take into consideration the profitability of a project.

Accepted Answer

A) True 
 B)False

Question 14

The following information is available for a potential investment for Panda Company: $$\begin{array} { l r } 
\text { Initial investment } & \$ 95,000 \
\text { Net annual cash inflow } & 20,000 \
\text { Net present value } & 36,224 \
\text { Salvage value } & 10,000 \
\text { Useful life } & 10 \text { yrs. }
\end{array}$$ The potential investment's profitability index is

Accepted Answer

A) 4.75. 
B) 3.22. 
C) 2.62. 
D) 1.38. 
A) 4.75. 
B) 3.22. 
C) 2.62. 
D) 1.38.

Question 15

Sensitivity analysis uses a number of outcome estimates to get a sense of the variability among potential returns.

Accepted Answer

A) True 
 B)False

Question 16

The higher the risk element in a project, the

Accepted Answer

A) more attractive the investment. 
B) higher the net present value. 
C) higher the cost of capital. 
D) higher the discount rate. 
A) more attractive the investment. 
B) higher the net present value. 
C) higher the cost of capital. 
D) higher the discount rate.

Question 17

Using a number of outcome estimates to get a sense of the variability among potential returns is

Accepted Answer

A) financial analysis. 
B) post-audit analysis. 
C) sensitivity analysis. 
D) outcome analysis. 
A) financial analysis. 
B) post-audit analysis. 
C) sensitivity analysis. 
D) outcome analysis.

Question 18

Mussina Company had an investment which cost $250,000 and had a salvage value at the end of its useful life of zero. If Mussina's expected annual net income is $15,000, the annual rate of return is:

Accepted Answer

A) 6.0%. 
B) 10.2%. 
C) 12.0%. 
D) 15.0%. 
A) 6.0%. 
B) 10.2%. 
C) 12.0%. 
D) 15.0%.

Question 19

The discount rate that will result in the lowest net present value for a project is

Accepted Answer

A) any rate lower that the cost of capital. 
B) any rate higher than the cost of capital. 
C) the lowest rate used to evaluate the project. 
D) the highest rate used to evaluate the project. 
A) any rate lower that the cost of capital. 
B) any rate higher than the cost of capital. 
C) the lowest rate used to evaluate the project. 
D) the highest rate used to evaluate the project.

Question 20

If a project has a zero net present value, its profitability index will be

Accepted Answer

A) one. 
B) greater than one. 
C) less than one. 
D) undeterminable. 
A) one. 
B) greater than one. 
C) less than one. 
D) undeterminable.

Exam 23: Planning for Capital Investments

The net present value method can only be used in capital budgeting if the expected cash flows from a project are an equal amount each year.

The capital budgeting method that takes into account both the size of the original investment and the discounted cash flows is the

The profitability index is computed by dividing the

A project has annual income exclusive of depreciation of $80,000. The annual rate of return is 15% and annual depreciation is $20,000. There is no salvage value. The internal rate of return is 12%. The initial cost of the project was

If a 3-year capital project costing $77,310 has an internal rate of return factor equal to 2.577, the net annual cash flows assuming straight-line depreciation are

Intangible benefits in capital budgeting would include all of the following except increased

A post-audit is an evaluation of how well a project's actual performance matches the projections made when the project was proposed.

A company's cost of capital refers to the

If a project has a zero net present value, then the internal rate of return will be

The capital budgeting technique that finds the interest yield of the potential investment is the

The cash payback method is frequently used as a screening tool but it does not take into consideration the profitability of a project.

The following information is available for a potential investment for Panda Company: Initial investment \ 95,000 Net annual cash inflow 20,000 Net present value 36,224 Salvage value 10,000 Useful life 10 yrs. The potential investment's profitability index is

Sensitivity analysis uses a number of outcome estimates to get a sense of the variability among potential returns.

The higher the risk element in a project, the

Using a number of outcome estimates to get a sense of the variability among potential returns is

Mussina Company had an investment which cost $250,000 and had a salvage value at the end of its useful life of zero. If Mussina's expected annual net income is $15,000, the annual rate of return is:

The discount rate that will result in the lowest net present value for a project is

If a project has a zero net present value, its profitability index will be

Introduction to Financial Statements

A Further Look at Financial Statements

The Accounting Information System

Merchandising Operations and the Multiple-Step Income Statement

Reporting and Analyzing Inventory

Fraud, Internal Control, and Cash

Reporting and Analyzing Receivables

Reporting and Analyzing Long-Lived Assets

Reporting and Analyzing Liabilities

Reporting and Analyzing Stockholders Equity

Statement of Cash Flows

Financial Analysis: The Big Picture

Managerial Accounting

Job Order Costing

Process Costing

Activity-Based Costing

Cost-Volume-Profit

Cost-Volume-Profit Analysis: Additional Issues

Incremental Analysis

Budgetary Planning

Budgetary Control and Responsibility Accounting

Standard Costs and Balanced Scorecard

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