Question 1

A disadvantage of the cash payback technique is that it

Accepted Answer

A) ignores obsolescence factors. 
B) ignores the cost of an investment. 
C) is complicated to use. 
D) ignores the time value of money. 
A) ignores obsolescence factors. 
B) ignores the cost of an investment. 
C) is complicated to use. 
D) ignores the time value of money.

Question 2

An approach that uses a number of outcome estimates to get a sense of the variability among potential returns is

Accepted Answer

A) the discounted cash flow technique. 
B) the net present value method. 
C) risk analysis. 
D) sensitivity analysis. 
A) the discounted cash flow technique. 
B) the net present value method. 
C) risk analysis. 
D) sensitivity analysis.

Question 3

Which of the following is not a capital budgeting decision?

Accepted Answer

A) Constructing new studios 
B) Replacing old equipment 
C) Scrapping obsolete inventory 
D) Remodeling an office building 
A) Constructing new studios 
B) Replacing old equipment 
C) Scrapping obsolete inventory 
D) Remodeling an office building

Question 4

If a project's profitability index is equal to 1, then

Accepted Answer

A) its net present value is zero. 
B) its net present value is positive. 
C) it should be rejected. 
D) its internal rate of return is greater than the discount rate. 
A) its net present value is zero. 
B) its net present value is positive. 
C) it should be rejected. 
D) its internal rate of return is greater than the discount rate.

Question 5

Use the following information for questions 
A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used.
-If the equipment is purchased, the annual rate of return expected on this equipment is

Accepted Answer

A) 40.0%. 
B)  7.5%. 
C) 15.0%. 
D) 20.0%. 
A) 40.0%. 
B)  7.5%. 
C) 15.0%. 
D) 20.0%.

Question 6

Use the following table for questions . $\text { Present Value of an Annuity of } 1$
$\begin{array}{rrrr}\text { Periods }&8\%&9\%&10\%\
1 & .926 & .917 & .909 \
2 & 1.783 & 1.759 & 1.736 \
3 & 2.577 & 2.531 & 2.487
\end{array}$
-A company has a minimum required rate of return of 8%.It is considering investing in a project that costs $91,116 and is expected to generate cash inflows of $36,000 each year for three years.The approximate internal rate of return on this project is

Accepted Answer

A) 8%. 
B) 9%. 
C) 10%. 
D) less than the required 8%. 
A) 8%. 
B) 9%. 
C) 10%. 
D) less than the required 8%.

Question 7

If a project has a positive 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.

Question 8

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 9

If a payback period for a project is greater than its expected useful life, the

Accepted Answer

A) project will always be profitable. 
B) entire initial investment will not be recovered. 
C) project would only be acceptable if the company's cost of capital was low. 
D) project's return will always exceed the company's cost of capital. 
A) project will always be profitable. 
B) entire initial investment will not be recovered. 
C) project would only be acceptable if the company's cost of capital was low. 
D) project's return will always exceed the company's cost of capital.

Question 10

A project that cost $80,000 with a useful life of 5 years is being considered.Straight-line depreciation is being used and salvage value is $5,000.The project will generate annual cash flows of $21,375.The annual rate of return is

Accepted Answer

A) 15%. 
B) 50.3%. 
C) 16%. 
D) 17%. 
A) 15%. 
B) 50.3%. 
C) 16%. 
D) 17%.

Question 11

If a project has a negative 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.

Question 12

Capital budgeting decisions depend in part on all of the following except the

Accepted Answer

A) relationships among proposed projects. 
B) profitability of the company. 
C) company's basic decision making approach. 
D) risks associated with a particular project. 
A) relationships among proposed projects. 
B) profitability of the company. 
C) company's basic decision making approach. 
D) risks associated with a particular project.

Question 13

Intangible benefits in capital budgeting

Accepted Answer

A) should be ignored because they are difficult to determine. 
B) include increased quality or employee loyalty. 
C) are not considered because they are usually not relevant to the decision. 
D) have a rate of return in excess of the company's cost of capital. 
A) should be ignored because they are difficult to determine. 
B) include increased quality or employee loyalty. 
C) are not considered because they are usually not relevant to the decision. 
D) have a rate of return in excess of the company's cost of capital.

Question 14

The internal rate of return factor is equal to the

Accepted Answer

A) capital investment divided by the net cash flows. 
B) present value of net cash flows divided by the capital investment. 
C) present value of net cash flows divided by the profitability index. 
D) capital investment divided by the present value of the net cash flows. 
A) capital investment divided by the net cash flows. 
B) present value of net cash flows divided by the capital investment. 
C) present value of net cash flows divided by the profitability index. 
D) capital investment divided by the present value of the net cash flows.

Question 15

Use the following table, $\text { Present Value of an Annuity of } 1$
$\begin{array}{rrrr}\text { Period }&8\%&9\%&10\%\
1 & .926 & .917 & .909 \
2 & 1.783 & 1.759 & 1.736 \
3 & 2.577 & 2.531 & 2.487
\end{array}$ A company has a minimum required rate of return of 9%.It is considering investing in a project which costs $350,000 and is expected to generate cash inflows of $140,000 at the end of each year for three years.The net present value of this project is

Accepted Answer

A) $354,340. 
B) $70,000. 
C) $35,436. 
D) $4,340. 
A) $354,340. 
B) $70,000. 
C) $35,436. 
D) $4,340.

Question 16

Using the profitability index method, the present value of cash inflows for Project Flower is $88,000 and the present value of cash inflows of Project Plant is $48,000.If Project Flower and Project Plant require initial investments of $90,000 and $40,000, respectively, and have the same useful life, the project that should be accepted is

Accepted Answer

A) Project Flower. 
B) Project Plant. 
C) Either project may be accepted. 
D) Neither project should be accepted. 
A) Project Flower. 
B) Project Plant. 
C) Either project may be accepted. 
D) Neither project should be accepted.

Question 17

If a project's profitability index is greater than 1, then the

Accepted Answer

A) project should always be accepted. 
B) project's net present value is negative. 
C) project's internal rate of return is less than the discount rate. 
D) project should be accepted if funds are available. 
A) project should always be accepted. 
B) project's net present value is negative. 
C) project's internal rate of return is less than the discount rate. 
D) project should be accepted if funds are available.

Question 18

To avoid accepting projects that actually should be rejected, a company should ignore intangible benefits in calculating net present value.

Accepted Answer

A) True 
 B)False

Question 19

To avoid rejecting projects that actually should be accepted,
1.	intangible benefits should be ignored.
2.	conservative estimates of the intangible benefits' value should be incorporated into the NPV calculation.
3.	calculate net present value ignoring intangible benefits and then, if the NPV is negative, estimate whether the intangible benefits are worth at least the amount of the negative NPV.

Accepted Answer

A) 1 
B) 2 
C) 3 
D) both 2 and 3 are correct. 
A) 1 
B) 2 
C) 3 
D) both 2 and 3 are correct.

Question 20

Which of the following is a disadvantage of the cash payback technique?

Accepted Answer

A) It is difficult to calculate 
B) It relies on the time value of money 
C) It can only be calculated when there are equal annual net cash flows 
D) It ignores the expected profitability of a project 
A) It is difficult to calculate 
B) It relies on the time value of money 
C) It can only be calculated when there are equal annual net cash flows 
D) It ignores the expected profitability of a project

A disadvantage of the cash payback technique is that it

An approach that uses a number of outcome estimates to get a sense of the variability among potential returns is

Which of the following is not a capital budgeting decision?

If a project's profitability index is equal to 1, then

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

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

If a payback period for a project is greater than its expected useful life, the

A project that cost $80,000 with a useful life of 5 years is being considered.Straight-line depreciation is being used and salvage value is $5,000.The project will generate annual cash flows of $21,375.The annual rate of return is

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

Capital budgeting decisions depend in part on all of the following except the

Intangible benefits in capital budgeting

The internal rate of return factor is equal to the

If a project's profitability index is greater than 1, then the

To avoid accepting projects that actually should be rejected, a company should ignore intangible benefits in calculating net present value.

Which of the following is a disadvantage of the cash payback technique?

Introduction to Financial Statements

A Further Look at Financial Statements

The Accounting Information System

Accrual Accounting Concepts

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

Financial Analysis: the Big Picture

Managerial Accounting

Time Value of Money

Filters

Exam 12: Statement of Cash Flows

A disadvantage of the cash payback technique is that it

An approach that uses a number of outcome estimates to get a sense of the variability among potential returns is

Which of the following is not a capital budgeting decision?

If a project's profitability index is equal to 1, then

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

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

If a payback period for a project is greater than its expected useful life, the

A project that cost $80,000 with a useful life of 5 years is being considered.Straight-line depreciation is being used and salvage value is $5,000.The project will generate annual cash flows of $21,375.The annual rate of return is

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

Capital budgeting decisions depend in part on all of the following except the

Intangible benefits in capital budgeting

The internal rate of return factor is equal to the

If a project's profitability index is greater than 1, then the

To avoid accepting projects that actually should be rejected, a company should ignore intangible benefits in calculating net present value.

Which of the following is a disadvantage of the cash payback technique?

Introduction to Financial Statements

A Further Look at Financial Statements

The Accounting Information System

Accrual Accounting Concepts

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

Financial Analysis: the Big Picture

Managerial Accounting

Time Value of Money

Filters