Question 1

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 2

Use the following information for questions 
Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below: $\begin{array}{lrr}&\text { Project Soup }&\text { Project Nuts }\
\text { Initial investment } & \$ 400,000 & \$ 600,000 \
\text { Annual net income } & 30,000 & 46,000 \
\text { Net annual cash inflow } & 110,000 & 146,000 \
\text { Estimated useful life } & 5 \text { years } & 6 \text { years } \
\text { Salvage value } & -0- & -0-
\end{array}$ The company requires a 10% rate of return on all new investments. $\text { Present Value of an Annuity of } 1$
$\begin{array}{rrrr}\text { Periods }&9\%&10\%&11\%&12\%\
5 & 3.890 & 3.791 & 3.696 & 3.605 \
6 & 4.486 & 4.355 & 4.231 & 4.111
\end{array}$
-The internal rate of return for Project Nuts is approximately

Accepted Answer

A) 11%. 
B) 12%. 
C) 10%. 
D) 9%. 
A) 11%. 
B) 12%. 
C) 10%. 
D) 9%.

Question 3

All of the following statements about the internal rate of return method are correct except that it

Accepted Answer

A) recognizes the time value of money. 
B) is widely used in practice. 
C) is easy to interpret. 
D) can be used only when the cash inflows are equal. 
A) recognizes the time value of money. 
B) is widely used in practice. 
C) is easy to interpret. 
D) can be used only when the cash inflows are equal.

Question 4

Use the following information for questions 
Selma Inc. is comparing several alternative capital budgeting projects as shown below: $\begin{array}{lrrr}&\text { Projects A}&\text { Projects B}&\text { Projects C}\
\text { Initial investment } & \$ 80,000 & \$ 120,000 & \$ 160,000 \
\text { Present value of net cash flows } & 90,000 & 110,000 & 200,000
\end{array}$
-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 5

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 10%.It is considering investing in a project that costs $50,000 and is expected to generate cash inflows of $25,000 at the end of each year for three years.The profitability index for this project is

Accepted Answer

A) .80. 
B) 1.00. 
C) 1.24. 
D) 1.27. 
A) .80. 
B) 1.00. 
C) 1.24. 
D) 1.27.

Question 6

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 7

Garza Company is considering buying equipment for $320,000 with a useful life of five years and an estimated salvage value of $16,000.If annual expected income is $28,000, the denominator in computing the annual rate of return is

Accepted Answer

A) $320,000. 
B) $160,000. 
C) $168,000. 
D) $336,000. 
A) $320,000. 
B) $160,000. 
C) $168,000. 
D) $336,000.

Question 8

The capital budgeting method that allows comparison of the relative desirability of projects that require differing initial investments 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 9

The capital budget for the year is approved by a company's

Accepted Answer

A) board of directors. 
B) capital budgeting committee. 
C) officers. 
D) stockholders. 
A) board of directors. 
B) capital budgeting committee. 
C) officers. 
D) stockholders.

Question 10

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 11

The capital budgeting technique that indicates the profitability of a capital expenditure is the

Accepted Answer

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

Question 12

When using the cash payback technique, the payback period is expressed in terms of

Accepted Answer

A) a percent. 
B) dollars. 
C) years. 
D) months. 
A) a percent. 
B) dollars. 
C) years. 
D) months.

Question 13

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.
-The cash payback period on the equipment is

Accepted Answer

A) 13.3 years. 
B) 8.0 years. 
C) 5.0 years. 
D) 2.5 years. 
A) 13.3 years. 
B) 8.0 years. 
C) 5.0 years. 
D) 2.5 years.

Question 14

If a project costing $80,000 has a profitability index of 1.00 and the discount rate was 12%, then the present value of the net cash flows was

Accepted Answer

A) $80,000. 
B) less than $80,000. 
C) greater than $80,000. 
D) undeterminable. 
A) $80,000. 
B) less than $80,000. 
C) greater than $80,000. 
D) undeterminable.

Question 15

Which of the following is not a typical cash flow related to equipment purchase and replacement decisions?

Accepted Answer

A) Increased operating costs 
B) Overhaul of equipment 
C) Salvage value of equipment when project is complete 
D) Depreciation expense 
A) Increased operating costs 
B) Overhaul of equipment 
C) Salvage value of equipment when project is complete 
D) Depreciation expense

Question 16

The cash payback period is computed by dividing the cost of the capital investment by the

Accepted Answer

A) annual net income. 
B) net annual cash inflow. 
C) present value of the cash inflow. 
D) present value of the net income. 
A) annual net income. 
B) net annual cash inflow. 
C) present value of the cash inflow. 
D) present value of the net income.

Question 17

The profitability index is calculated by dividing the total cash flows by the initial investment.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is based directly on accrual accounting data rather than cash flows?

Accepted Answer

A) Profitability index 
B) Internal rate of return 
C) Net present value 
D) Annual rate of return 
A) Profitability index 
B) Internal rate of return 
C) Net present value 
D) Annual rate of return

Question 19

Use the following information for questions 
Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below: $\begin{array}{lrr}&\text { Project Soup }&\text { Project Nuts }\
\text { Initial investment } & \$ 400,000 & \$ 600,000 \
\text { Annual net income } & 30,000 & 46,000 \
\text { Net annual cash inflow } & 110,000 & 146,000 \
\text { Estimated useful life } & 5 \text { years } & 6 \text { years } \
\text { Salvage value } & -0- & -0-
\end{array}$ The company requires a 10% rate of return on all new investments. $\text { Present Value of an Annuity of } 1$
$\begin{array}{rrrr}\text { Periods }&9\%&10\%&11\%&12\%\
5 & 3.890 & 3.791 & 3.696 & 3.605 \
6 & 4.486 & 4.355 & 4.231 & 4.111
\end{array}$
-The net present value for Project Nuts is

Accepted Answer

A) $635,830. 
B) $200,330. 
C) $100,000. 
D) $35,830. 
A) $635,830. 
B) $200,330. 
C) $100,000. 
D) $35,830.

Question 20

The profitability index allows comparison of the relative desirability of projects that require differing initial investments.

Accepted Answer

A) True 
 B)False

The profitability index is computed by dividing the

All of the following statements about the internal rate of return method are correct except that it

The higher the risk element in a project, the

Garza Company is considering buying equipment for $320,000 with a useful life of five years and an estimated salvage value of $16,000.If annual expected income is $28,000, the denominator in computing the annual rate of return is

The capital budgeting method that allows comparison of the relative desirability of projects that require differing initial investments is the

The capital budget for the year is approved by a company's

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

The capital budgeting technique that indicates the profitability of a capital expenditure is the

When using the cash payback technique, the payback period is expressed in terms of

If a project costing $80,000 has a profitability index of 1.00 and the discount rate was 12%, then the present value of the net cash flows was

Which of the following is not a typical cash flow related to equipment purchase and replacement decisions?

The cash payback period is computed by dividing the cost of the capital investment by the

The profitability index is calculated by dividing the total cash flows by the initial investment.

Which of the following is based directly on accrual accounting data rather than cash flows?

The profitability index allows comparison of the relative desirability of projects that require differing initial investments.

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

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Exam 12: Statement of Cash Flows

The profitability index is computed by dividing the

All of the following statements about the internal rate of return method are correct except that it

The higher the risk element in a project, the

Garza Company is considering buying equipment for $320,000 with a useful life of five years and an estimated salvage value of $16,000.If annual expected income is $28,000, the denominator in computing the annual rate of return is

The capital budgeting method that allows comparison of the relative desirability of projects that require differing initial investments is the

The capital budget for the year is approved by a company's

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

The capital budgeting technique that indicates the profitability of a capital expenditure is the

When using the cash payback technique, the payback period is expressed in terms of

If a project costing $80,000 has a profitability index of 1.00 and the discount rate was 12%, then the present value of the net cash flows was

Which of the following is not a typical cash flow related to equipment purchase and replacement decisions?

The cash payback period is computed by dividing the cost of the capital investment by the

The profitability index is calculated by dividing the total cash flows by the initial investment.

Which of the following is based directly on accrual accounting data rather than cash flows?

The profitability index allows comparison of the relative desirability of projects that require differing initial investments.

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