\[\text { Reference: } 10 - 02\] Oriental Company has gathered the following data on a proposed investment project: \[\begin{array} { | l | l | } \hline \text { Investment in depreciable equipment } & \$ 200,000 \\ \hline \text { Annual net cash flows } & \$ 50,000 \\ \hline \text { Life of the equipment } & 10 \text { years } \\ \hline \text { Salvage value } & \$ 20 \\ \hline \text { Discount rate } & 10 \% \\ \hline \end{array}\] The company uses straight-line depreciation on all equipment. -How can the internal rate of return of a project be determined

A) By finding the discount rate that yields a net present value of zero. B) By determining that the project cash flows are equal each year. C) By some other method than listed above. D) By determining that the project profitability index is greater than one. A) By finding the discount rate that yields a net present value of zero. B) By determining that the project cash flows are equal each year. C) By some other method than listed above. D) By determining that the project profitability index is greater than one.

Reference: 10-05 The Sawyer Company has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: \[\begin{array} { | l | l | l | } \hline & \text { Project } X & \text { Project } Y \\ \hline \text { Cost of equipment needed now } & \$ 80,000 & - \\ \hline \text { Working capital requirement } & - & \$ 80,000 \\ \hline \text { Annual cash operating inflows } & \$ 23,000 & \$ 18,000 \\ \hline \text { Salvage value in 5 years } & \$ 6,000 & - \\ \hline \end{array}\] Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%. -A piece of equipment has a cost of $20,000. The equipment will provide cost savings of $3,500 each year for ten years, after which time it will have a salvage value of $2,500. If the company's discount rate is 12%, the equipment's net present value is?

A) $2,275. B) $17,500. C) ($225). D) $580. A) $2,275. B) $17,500. C) ($225). D) $580.

\[\text { Reference: } 10 - 02\] Oriental Company has gathered the following data on a proposed investment project: \[\begin{array} { | l | l | } \hline \text { Investment in depreciable equipment } & \$ 200,000 \\ \hline \text { Annual net cash flows } & \$ 50,000 \\ \hline \text { Life of the equipment } & 10 \text { years } \\ \hline \text { Salvage value } & \$ 20 \\ \hline \text { Discount rate } & 10 \% \\ \hline \end{array}\] The company uses straight-line depreciation on all equipment. -The net present value of this investment would be?

A) $200,000. B) $77,200. C) $107,250. D) ($14,350). A) $200,000. B) $77,200. C) $107,250. D) ($14,350).

Reference: 10-08 Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: \[\begin{array} { | l | c | c | } \hline & \begin{array} { l } \text { Present } \\ \text { System } \end{array} & \begin{array} { l } \text { Proposed New } \\ \text { System } \end{array} \\ \hline \text { Purchase cost new } & \$ 250,000 & \$ 300,000 \\ \hline \text { Accumulated depreciation } & \$ 240,000 & - \\ \hline \text { Overhaul costs needed now } & \$ 230,000 & - \\ \hline \text { Annual cash operating costs } & \$ 180,000 & \$ 170,000 \\ \hline \text { Salvage value now } & \$ 160,000 & - \\ \hline \text { Salvage value at the end of 8 years } & \$ 152,000 & \$ 165,000 \\ \hline \text { Working capital required } & - & \$ 200,000 \\ \hline \end{array}\] Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. The working capital required will be released in full at the end of the 8 years to be available for other purposes. -The net present value of the alternative of purchasing the new system is:

A) ($969,895). B) ($1,169,895). C) ($1,076,495). D) ($1,236,495). A) ($969,895). B) ($1,169,895). C) ($1,076,495). D) ($1,236,495).

Reference: 10-09 Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects: \[\begin{array} { | l | l | l | } \hline & \text { Project A } & \text { Project } B \\ \hline \text { Cost of equipment needed now } & \$ 120,000 & \$ 70,000 \\ \hline \text { Working capital investment needed now } & - & \$ 50,000 \\ \hline \text { Annual net operating cash inflows } & \$ 50,000 & \$ 45,000 \\ \hline \text { Salvage value of equipment in 6 years } & \$ 15,000 & - \\ \hline \end{array}\] Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%. -The net present value of Project B is closest to?

A) $77,805. B) $105,005. C) $55,005. D) $127,805. A) $77,805. B) $105,005. C) $55,005. D) $127,805.

Reference: 10-06 The Becker Company is interested in buying a piece of equipment that it needs. The following data have been assembled concerning this equipment: \[\begin{array} { | l | c | } \hline \text { Cost of required equipment } & \$ 250,000 \\ \hline \text { Working capital required } & \$ 100,000 \\ \hline \text { Annual operating cash inflows } & \$ 80,000 \\ \hline \text { Cash repair at end of 4 years } & \$ 40,000 \\ \hline \text { Salvage value at end of 6 years } & \$ 90,000 \\ \hline \end{array}\] This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be released for use elsewhere. The company's discount rate is 10%. -The total net present value of the proposed equipment acquisition is closest to:

A) $21,760. B) $78,240. C) $0. D) ($1,600). A) $21,760. B) $78,240. C) $0. D) ($1,600).

Reference: 10-02 Oriental Company has gathered the following data on a proposed investment project: \[\begin{array} { | l | l | } \hline \text { Investment in depreciable equipment } & \$ 200,000 \\ \hline \text { Annual net cash flows } & \$ 50,000 \\ \hline \text { Life of the equipment } & 10 \text { years } \\ \hline \text { Salvage value } & \$ 20 \\ \hline \text { Discount rate } & 10 \% \\ \hline \end{array}\] The company uses straight-line depreciation on all equipment. -The payback period for the investment is closest to:

A) 5.0 years. B) 3.0 years. C) 1.0 years. D) 0.2 years. A) 5.0 years. B) 3.0 years. C) 1.0 years. D) 0.2 years.

Reference: 10-13 Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: \[\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine } B \\ \hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\ \hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\ \hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\ \hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\ \hline \end{array}\] Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. -Which statement below is true about the evaluation of an investment having uneven cash flows using the payback method?

A) It will produce essentially the same results as those obtained through the use of discounted cash flow techniques. B) It cannot be done. C) It requires the use of a sophisticated calculator or computer software. D) It can be done only by matching cash inflows and investment outflows on a year-by-year basis. A) It will produce essentially the same results as those obtained through the use of discounted cash flow techniques. B) It cannot be done. C) It requires the use of a sophisticated calculator or computer software. D) It can be done only by matching cash inflows and investment outflows on a year-by-year basis.

Reference: 10-13 Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: \[\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine B } \\ \hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\ \hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\ \hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\ \hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\ \hline \end{array}\] Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. -Which of the above costs are not relevant to the comparison of the alternatives

A) Salvage value at the end of 8 years. B) Annual cash operating costs. C) Purchase cost new. D) Overhaul costs needed year 4. A) Salvage value at the end of 8 years. B) Annual cash operating costs. C) Purchase cost new. D) Overhaul costs needed year 4.

Exam 10: Capital Budgeting Decisions

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -The payback period is the length of time it takes for an investment to recoup its own initial cost out of the cash receipts it generates.

(True/False)

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Question 81

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -In the simple rate of return method, depreciation expense is excluded from the calculation of incremental expenses.

(True/False)

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Question 82

$\text { Reference: } 10 - 02$ Oriental Company has gathered the following data on a proposed investment project: Investment in depreciable equipment \ 200,000 Annual net cash flows \ 50,000 Life of the equipment 10 years Salvage value \ 20 Discount rate 10\% The company uses straight-line depreciation on all equipment. -How can the internal rate of return of a project be determined

(Multiple Choice)

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Question 83

Reference: 10-05 The Sawyer Company has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: Project X Project Y Cost of equipment needed now \ 80,000 - Working capital requirement - \ 80,000 Annual cash operating inflows \ 23,000 \ 18,000 Salvage value in 5 years \ 6,000 - Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%. -A piece of equipment has a cost of $20,000. The equipment will provide cost savings of $3,500 each year for ten years, after which time it will have a salvage value of $2,500. If the company's discount rate is 12%, the equipment's net present value is?

(Multiple Choice)

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Question 84

Reference: 10-09 Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects: Project A Project B Cost of equipment needed now \ 120,000 \ 70,000 Working capital investment needed now - \ 50,000 Annual net operating cash inflows \ 50,000 \ 45,000 Salvage value of equipment in 6 years \ 15,000 - Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%. -Perkins Company is considering several investment proposals, as shown below: Investment Proposal A B C D Investment required \ 80,000 \ 100,000 \ 60,000 \ 75,000 Present value of future net cash flows \ 96,000 \ 150,000 \ 84,000 \ 120,000 In what order do the proposals rank in terms of preference using the profitability index?

(Multiple Choice)

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Question 85

$\text { Reference: } 10 - 02$ Oriental Company has gathered the following data on a proposed investment project: Investment in depreciable equipment \ 200,000 Annual net cash flows \ 50,000 Life of the equipment 10 years Salvage value \ 20 Discount rate 10\% The company uses straight-line depreciation on all equipment. -The net present value of this investment would be?

(Multiple Choice)

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Question 86

$\text { Reference: } 10 - 05$ The Sawyer Company has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: Project X Project Y Cost of equipment needed now \ 80,000 - Working capital requirement - \ 80,000 Annual cash operating inflows \ 23,000 \ 18,000 Salvage value in 5 years \ 6,000 - Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%. -Boston Company is contemplating the purchase of a new machine on which the following information has been gathered: Cost of the machine \ 38,900 Annual cash inflows expected \ 10,000 Salvage value \ 5,000 Life of the machine 6 years The company's discount rate is 16%, and the machine will be depreciated using the straight-line method. Given these data, the machine has a net present value of:

(Multiple Choice)

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Question 87

Reference: 10-08 Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: Present System Proposed New System Purchase cost new \ 250,000 \ 300,000 Accumulated depreciation \ 240,000 - Overhaul costs needed now \ 230,000 - Annual cash operating costs \ 180,000 \ 170,000 Salvage value now \ 160,000 - Salvage value at the end of 8 years \ 152,000 \ 165,000 Working capital required - \ 200,000 Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. The working capital required will be released in full at the end of the 8 years to be available for other purposes. -The net present value of the alternative of purchasing the new system is:

(Multiple Choice)

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Question 88

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -The present value of the capital cost allowance tax shield is deducted from the total of the net present values of all other cash flows to determine the final projected net cash flows of a planned depreciable asset acquisition.

(True/False)

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Question 89

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -In comparing two investment alternatives, the difference between the net present values of the two alternatives obtained using the total cost approach will be the same as the net present value obtained using the incremental cost approach.

(True/False)

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Question 90

Reference: 10-12 Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year. -The Whitton Company uses a discount rate of 16%. buy a machine now for $18,000 that will yield cash inflows of $10,000 per year for each of the next three years. The machine would have no salvage value. The net present value of this machine to the nearest whole dollar is:

(Multiple Choice)

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Question 91

Reference: 10-09 Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects: Project A Project B Cost of equipment needed now \ 120,000 \ 70,000 Working capital investment needed now - \ 50,000 Annual net operating cash inflows \ 50,000 \ 45,000 Salvage value of equipment in 6 years \ 15,000 - Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%. -The net present value of Project B is closest to?

(Multiple Choice)

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Question 92

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -Preference decisions in capital budgeting involve selecting from alternative projects that have already be determined as acceptable investments.

(True/False)

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Question 93

Reference: 10-06 The Becker Company is interested in buying a piece of equipment that it needs. The following data have been assembled concerning this equipment: Cost of required equipment \ 250,000 Working capital required \ 100,000 Annual operating cash inflows \ 80,000 Cash repair at end of 4 years \ 40,000 Salvage value at end of 6 years \ 90,000 This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be released for use elsewhere. The company's discount rate is 10%. -The total net present value of the proposed equipment acquisition is closest to:

(Multiple Choice)

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Question 94

Reference: 10-02 Oriental Company has gathered the following data on a proposed investment project: Investment in depreciable equipment \ 200,000 Annual net cash flows \ 50,000 Life of the equipment 10 years Salvage value \ 20 Discount rate 10\% The company uses straight-line depreciation on all equipment. -The payback period for the investment is closest to:

(Multiple Choice)

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Question 95

Reference: 10-12 Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year. -What is the payback period closest to?

(Multiple Choice)

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Question 96

Reference: 10-14 Jimbob Co. is considering two alternatives to replace a delivery truck. The following data have been gathered concerning these two alternatives: Truck A Truck B Purchase cost new \ 50,000 \ 70,000 Major repairs end of year 2 \ 10,000 8,000 Annual cash operating costs \ 20,000 \ 18,000 Salvage value at the end of 3 years \ 15,000 \ 20,000 Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both trucks are expected to have a useful life of three years. -The following data pertain to an investment proposal: Investment in the project (equipment) \ 14,000 Net annual cash inflows promised \ 2,800 Working capital required \ 5,000 Salvage value of the equipment \ 1,000 Life of the project 10 years The working capital would be released for use elsewhere when the project is completed. What is the net present value of the project, using a discount rate of 8%?

(Multiple Choice)

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Question 97

Reference: 10-04 The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%. -Projects with shorter payback periods are always more profitable than projects with longer payback periods.

(True/False)

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Question 98

Reference: 10-13 Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: Machine A Machine B Purchase cost new \ 300,000 \ 300,000 Overhaul costs needed year 4 \ 10,000 20,000 Annual cash operating costs \ 130,000 \ 120,000 Salvage value at the end of 8 years \ 20,000 \ 30,000 Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. -Which statement below is true about the evaluation of an investment having uneven cash flows using the payback method?

(Multiple Choice)

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Question 99

Reference: 10-13 Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: Machine A Machine B Purchase cost new \ 300,000 \ 300,000 Overhaul costs needed year 4 \ 10,000 20,000 Annual cash operating costs \ 130,000 \ 120,000 Salvage value at the end of 8 years \ 20,000 \ 30,000 Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. -Which of the above costs are not relevant to the comparison of the alternatives

(Multiple Choice)

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Question 100

An Introduction to Managerial Accounting

Cost Concepts

Systems Design: Job-Order Costing

Process Costing

Activity-Based Costing

Cost Behaviour: Analysis and Use

Budgeting

Cost-Volume-Profit Relationships

Relevant Costs: the Key to Decision Making

Standard Costs and Variance Analysis

Organizational Structure and Performance Measurement

How Well Am I Doing Financial Statement Analysis Online

How Well Am I Doing Cash Flow Statement Online

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