Question 1

Projects that, if accepted, preclude the acceptance of competing projects are

Accepted Answer

A) priority projects. 
B) mutually exclusive projects. 
C) independent projects. 
D) equity projects. 
A) priority projects. 
B) mutually exclusive projects. 
C) independent projects. 
D) equity projects.

Question 2

The problem with the accounting rate of return is that it fails to consider the:

Accepted Answer

A) profitability of the project. 
B) life of the project. 
C) timing of cash flows. 
D) effect on net income. 
A) profitability of the project. 
B) life of the project. 
C) timing of cash flows. 
D) effect on net income.

Question 3

(Memorandum required)
Simon Enterprises is considering the purchase of a flexible manufacturing system. The savings associated with the system are estimated to be as follows: $\begin{array}{lr}
\text { Increased quality } & £ 75,000 \
\text { Decrease in operating costs } & 20,000 \
\text { Increase in on-time deliveries } & 5,000
\end{array}$ The system will cost £400,000 and will last ten years. The system would have a salvage value of £30,000 at the end of ten years. The company's cost of capital is 8 per cent.

Accepted Answer

@#IMG-DLM& SUPPORTING CALCULATIONS TO ACCOMPANY ME

Question 4

Which of the following methods consider the time value of money?

Accepted Answer

A) payback and accounting rate of return 
B) payback and internal rate of return 
C) internal rate of return and accounting rate of return 
D) internal rate of return and net present value 
A) payback and accounting rate of return 
B) payback and internal rate of return 
C) internal rate of return and accounting rate of return 
D) internal rate of return and net present value

Question 5

A firm is considering two projects with the following cash flows: $\begin{array}{rrr} 
& \text { Project A } & \text { Project B } \
\text { Year 1 } & £ 40,000 & £ 140,000 \
\text { Year 2 } & 60,000 & 60,000 \
\text { Year 3 } & 140,000 & 40,000
\end{array}$ Each project requires an investment of £120,000. Which project will have the higher net present value?

Accepted Answer

A) Project A 
B) Project B 
C) Project A and Project B will have the same net present value. 
D) The question cannot be answered from the information provided. 
A) Project A 
B) Project B 
C) Project A and Project B will have the same net present value. 
D) The question cannot be answered from the information provided.

Question 6

A capital investment project requires an investment of £1,000,000. It has an expected life of five years with annual cash flows of £240,000 received at the end of each year.
a.Compute payback for the project.
b.Compute the internal rate of return for the project.
c.Compute the net present value of the project using a 12 per cent discount rate. Ignore income taxes.
d.Would you recommend this project be accepted? Why or why not?

Accepted Answer

The answer of A capital investment project requires an investment...

Question 7

A company invests in a project that realizes an internal rate of return equal to its cost of capital. This project should:

Accepted Answer

A) increase the value of the company. 
B) have little or no effect on the value of the company. 
C) decrease the value of the company. 
D) cause the company to realize an infinite net present value. 
A) increase the value of the company. 
B) have little or no effect on the value of the company. 
C) decrease the value of the company. 
D) cause the company to realize an infinite net present value.

Question 8

Future cash flows expressed in present value terms are

Accepted Answer

A) compounded cash flows. 
B) extended cash flows. 
C) budgeted cash flows. 
D) discounted cash flows. 
A) compounded cash flows. 
B) extended cash flows. 
C) budgeted cash flows. 
D) discounted cash flows.

Question 9

A firm is considering a project with an annual cash flow of £200,000. The project would have a 7-year life, and the company uses a discount rate of 10 per cent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable?

Accepted Answer

A) £718,200 
B) £1,400,000 
C) £973,600 
D) £200,000 
A) £718,200 
B) £1,400,000 
C) £973,600 
D) £200,000

Question 10

The present value of £2,000 to be received each year for three years and earning a 10 per cent return is

Accepted Answer

A) £5,560. 
B) £4,974. 
C) £4,922. 
D) £4,600. 
A) £5,560. 
B) £4,974. 
C) £4,922. 
D) £4,600.

Question 11

When the discount rate is decreased,

Accepted Answer

A) the present value of future cash flows increases. 
B) the present value of future cash flows decreases. 
C) there is no change in the present value. 
D) net present value would equal zero. 
A) the present value of future cash flows increases. 
B) the present value of future cash flows decreases. 
C) there is no change in the present value. 
D) net present value would equal zero.

Question 12

Kaylin Company purchased a piece of equipment for £100,000 that had a useful life of 5 years. The equipment had no salvage value. It saves the company £40,000 a year and costs the company £5,000 a year to operate. What is the accounting rate of return on the equipment?

Accepted Answer

A) 30% 
B) 15% 
C) 40% 
D) 35% 
A) 30% 
B) 15% 
C) 40% 
D) 35%

Question 13

The Bradshaw Company is considering purchasing equipment for £78,000. This equipment will save the company £22,000 in operating costs annually. The payback period for this equipment is

Accepted Answer

A) 3.5 years. 
B) 4 years. 
C) 2.2 years. 
D) 0.3 years. 
A) 3.5 years. 
B) 4 years. 
C) 2.2 years. 
D) 0.3 years.

Question 14

In computing the net present value of a project, a manager uses a cost of capital number that is too low. This error causes the manager to compute a net present value that:

Accepted Answer

A) is lower that what it in fact should be. 
B) is higher that what it in fact should be. 
C) has no effect on the net present value computation. 
D) is undefined in mathematical terms. 
A) is lower that what it in fact should be. 
B) is higher that what it in fact should be. 
C) has no effect on the net present value computation. 
D) is undefined in mathematical terms.

Question 15

What is a weakness of the payback method?

Accepted Answer

A) It emphasizes projects with possible liquidity problems. 
B) It ignores the profitability of investments beyond the payback period. 
C) It can be used in conjunction with discounted cash flow methods. 
D) both a and b above 
A) It emphasizes projects with possible liquidity problems. 
B) It ignores the profitability of investments beyond the payback period. 
C) It can be used in conjunction with discounted cash flow methods. 
D) both a and b above

Question 16

A firm is considering a project requiring an investment of £14,150. The project would generate annual cash inflows of £3,300 per year for the next seven years. 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 17

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

Accepted Answer

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

Question 18

A firm is considering a project requiring an investment of £100,000. The project would generate annual cash inflows of £26,380 per year for the next five years. The approximate internal rate of return for the project is

Accepted Answer

A) 8%. 
B) 10%. 
C) 12%. 
D) 16%. 
A) 8%. 
B) 10%. 
C) 12%. 
D) 16%.

Question 19

How is working capital needed in the operations of investments treated in discounted cash flow analysis?

Accepted Answer

A) added to cost of the investment 
B) added to cash inflows when recovery occurs 
C) both a and b 
D) none of the above 
A) added to cost of the investment 
B) added to cash inflows when recovery occurs 
C) both a and b 
D) none of the above

Question 20

The present value of £8,000 to be received each year for ten years and earning a 16 per cent return is

Accepted Answer

A) £1,655. 
B) £1,816. 
C) £35,242. 
D) £38,664. 
A) £1,655. 
B) £1,816. 
C) £35,242. 
D) £38,664.

Exam 13: Capital Investment Decisions: Appraisal Methods

Projects that, if accepted, preclude the acceptance of competing projects are

The problem with the accounting rate of return is that it fails to consider the:

Which of the following methods consider the time value of money?

A firm is considering two projects with the following cash flows: Project A Project B Year 1 £40,000 £140,000 Year 2 60,000 60,000 Year 3 140,000 40,000 Each project requires an investment of £120,000. Which project will have the higher net present value?

A company invests in a project that realizes an internal rate of return equal to its cost of capital. This project should:

Future cash flows expressed in present value terms are

A firm is considering a project with an annual cash flow of £200,000. The project would have a 7-year life, and the company uses a discount rate of 10 per cent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable?

The present value of £2,000 to be received each year for three years and earning a 10 per cent return is

When the discount rate is decreased,

Kaylin Company purchased a piece of equipment for £100,000 that had a useful life of 5 years. The equipment had no salvage value. It saves the company £40,000 a year and costs the company £5,000 a year to operate. What is the accounting rate of return on the equipment?

The Bradshaw Company is considering purchasing equipment for £78,000. This equipment will save the company £22,000 in operating costs annually. The payback period for this equipment is

In computing the net present value of a project, a manager uses a cost of capital number that is too low. This error causes the manager to compute a net present value that:

What is a weakness of the payback method?

A firm is considering a project requiring an investment of £14,150. The project would generate annual cash inflows of £3,300 per year for the next seven years. The approximate internal rate of return for the project is

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

A firm is considering a project requiring an investment of £100,000. The project would generate annual cash inflows of £26,380 per year for the next five years. The approximate internal rate of return for the project is

How is working capital needed in the operations of investments treated in discounted cash flow analysis?

The present value of £8,000 to be received each year for ten years and earning a 16 per cent return is

Introduction to Management Accounting

An Introduction to Cost Terms and Concepts

Cost Assignment

Accounting Entries for a Job Costing System

Process Costing

Joint and By-Product Costing

Income Effects of Alternative Cost Accumulation Systems

Cost-Volume-Profit Analysis

Measuring Relevant Costs and Revenues for Decision-Making

Activity-Based Costing

Activity-Based Costing

Decision-Making Under Conditions of Risk and Uncertainty

Capital Investment Decisions: the Impact of Capital Rationing, Taxation, Inflation and Risk

The Budgeting Process

Management Control Systems

Standard Costing and Variance Analysis 1

Standard Costing and Variance Analysis 2: Further Aspects

Divisional Financial Performance Measures

Transfer Pricing in Divisionalized Companies

Strategic Cost Management

Strategic Performance Management

Cost Estimation and Cost Behaviour

Quantitative Models for the Planning and Control of Inventories

The Application of Linear Programming to Management Accounting

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