Question 1

If Erika Lee invests $5,000 in a certificate of deposit that pays 5%, compounded annually, what amount will she have in 10 years?

Accepted Answer

A)  $8,954 
B)  $8,144 
C)  $12,969 
D)  $7,401 
A)  $8,954 
B)  $8,144 
C)  $12,969 
D)  $7,401 B

Question 2

Phoxco is considering automating its production line at a cost of $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 for 14 years. The firm requires a 20% rate of return. Ignore income taxes.
The net present value for this investment is:

Accepted Answer

A)  Positive 
B)  Zero 
C)  Negative 
D)  Cannot be determined 
A)  Positive 
B)  Zero 
C)  Negative 
D)  Cannot be determined C

Question 3

Which of the following is not a quantitative technique commonly used in capital budgeting decisions?

Accepted Answer

A)  Net present value 
B)  Activity-based budgeting 
C)  Internal rate of return 
D)  Payback 
A)  Net present value 
B)  Activity-based budgeting 
C)  Internal rate of return 
D)  Payback B

Question 4

Amortization tax savings are
I. The savings on taxes because business equipment can be amortized
II. The income tax rate times the allowed amortization for that year
III. Measured in nominal dollars

Accepted Answer

A)  I only 
B)  I and II only 
C)  I, II, and III 
D)  III only 
A)  I only 
B)  I and II only 
C)  I, II, and III 
D)  III only

Question 5

Arnold Company is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: $\begin{array}{lr}\text { Cost of new machine }&\$100,000\
\text { Annual cost savings in cash expenses }&45,000\
\text { Terminal value } & 8,000 \
\text { Maintenance required in the 4th year } & 5,000 \
\text { Book value of the old machine } & 20,000
\end{array}$ The new machine would replace an old fully-amortized machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Arnold uses the straight-line method for amortization on all machines (ignore the half-year convention). Note: some amounts are rounded.
The present value of the total tax savings from the amortization tax shield is:

Accepted Answer

A)  $21,630.00 
B)  $46,432.40 
C)  $50,470.00 
D)  $19,899.60 
A)  $21,630.00 
B)  $46,432.40 
C)  $50,470.00 
D)  $19,899.60

Question 6

Relevant cash flows for long-term decisions include:
I. Revenues for new projects or services
II. Variable costs for new projects or services
III. Labour or electricity savings for replacement of old equipment

Accepted Answer

A)  II and III only 
B)  I and III only 
C)  I and II only 
D)  I, II, and III 
A)  II and III only 
B)  I and III only 
C)  I and II only 
D)  I, II, and III

Question 7

The nominal method of NPV analysis adjusts future cash flows for the impact of inflation.

Accepted Answer

A) True 
 B)False

Question 8

For a particular investment project, the present value of the benefits is exactly equal to the present value of the investment. Given this, which of the following statements is true?

Accepted Answer

A)  The net present value is positive 
B)  The internal rate of return is less than the required rate of return 
C)  The profitability index is less than one 
D)  The project is acceptable 
A)  The net present value is positive 
B)  The internal rate of return is less than the required rate of return 
C)  The profitability index is less than one 
D)  The project is acceptable

Question 9

A capital investment's expected useful life is inversely correlated with the uncertainty of its cash flows.

Accepted Answer

A) True 
 B)False

Question 10

Phoxco would like to automate its calligraphy operation. The equipment will cost $150,000 plus freight, installation, and testing costs of $5,500. The expected life of the project is 8 years, with annual cost savings of $20,000. The minimum rate of return is 12% and estimated terminal value is $3,000. Ignore income taxes. The profitability index of the project is:

Accepted Answer

A)  1.55 
B)  1.57 
C)  0.67 
D)  0.65 
A)  1.55 
B)  1.57 
C)  0.67 
D)  0.65

Question 11

An organization that provides housing for abused women has limited housing, so it pays rent for several families. The director is considering expanding the housing facilities by purchasing a small triplex that has a useful life of 10 years. The estimated cost is $100,000. Using a discount rate of 15%, the present value of the future savings on rent is $120,000. To yield an internal rate of return that is at least 15%, the actual cost cannot exceed the estimated cost of $100,000 by more than:

Accepted Answer

A)  $10,038 
B)  $3,985 
C)  $20,000 
D)  $2,000 
A)  $10,038 
B)  $3,985 
C)  $20,000 
D)  $2,000

Question 12

Managers should consider qualitative information in making capital budgeting decisions.

Accepted Answer

A) True 
 B)False

Question 13

Phoxco is considering automating its production line. It will cost $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 per year for 14 years.. The firm requires a 20% return.
Ignoring income taxes, what is the payback period?

Accepted Answer

A)  3 years 
B)  4.2 years 
C)  5 years 
D)  6 years 
A)  3 years 
B)  4.2 years 
C)  5 years 
D)  6 years

Question 14

The net present value (NPV) method of investment project analysis assumes that the project's cash flows are reinvested at the:

Accepted Answer

A)  Computed internal rate of return 
B)  Risk-free interest rate 
C)  Discount rate used in the NPV calculation 
D)  Firm's accounting rate of return 
A)  Computed internal rate of return 
B)  Risk-free interest rate 
C)  Discount rate used in the NPV calculation 
D)  Firm's accounting rate of return

Question 15

Income taxes have a major effect on capital budgeting decisions.

Accepted Answer

A) True 
 B)False

Question 16

The local school board is considering the purchase of a computer. It will cost $100,000 and will be sold back to the dealer at the end of 6 years for $8,000. If the required rate of return is 14%, what is the minimal annual cost saving required to justify the purchase? Ignore income taxes.

Accepted Answer

A)  $25,714 
B)  $23,142 
C)  $24,776 
D)  $23,656 
A)  $25,714 
B)  $23,142 
C)  $24,776 
D)  $23,656

Question 17

What is the net present value of a capital project to buy new equipment for replacing old equipment, given the following data and a minimum return of 12%? Ignore income taxes. $$\begin{array} { l c c } 
& { \begin{array} { l } 
\text { Old } \
\text { Equipment }
\end{array} } & \begin{array} { l } 
\text { New } \
\text { Equipment }
\end{array} \
 \text { Purchase price } & \$ 21,600 & \$ 36,000 \
\text { Accumulated amortization } & 7,200 & 0 \
\text { Remaining useful life (years) } & 8 & 8 \
\text { Current salvage value } & 12,000 & 0 \
\text { Salvage value in 8 years } & 1,000 & 2,000 \
\text { Annual operating costs } & 14,000 & 8,000
\end{array}$$

Accepted Answer

A)  $6,616 
B)  $(5,788) 
C)  $4,596 
D)  $7,020 
A)  $6,616 
B)  $(5,788) 
C)  $4,596 
D)  $7,020

Question 18

The internal rate of return method assumes that future cash flows can be reinvested to earn the same return generated by a capital investment project.

Accepted Answer

A) True 
 B)False

Question 19

Inflation refers to the:

Accepted Answer

A)  Exchange rate between two different currencies 
B)  Decline in general purchasing power of a monetary unit 
C)  Increase in general purchasing power of a monetary unit 
D)  Time value of money 
A)  Exchange rate between two different currencies 
B)  Decline in general purchasing power of a monetary unit 
C)  Increase in general purchasing power of a monetary unit 
D)  Time value of money

Question 20

Which of the following factors are subject to uncertainty in an NPV analysis?
I. Project life
II. Appropriate discount rate
III. Terminal value

Accepted Answer

A)  I and II only 
B)  II and III only 
C)  I and III only 
D)  I, II, and III 
A)  I and II only 
B)  II and III only 
C)  I and III only 
D)  I, II, and III

If Erika Lee invests $5,000 in a certificate of deposit that pays 5%, compounded annually, what amount will she have in 10 years?

Phoxco is considering automating its production line at a cost of $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 for 14 years. The firm requires a 20% rate of return. Ignore income taxes. The net present value for this investment is:

Which of the following is not a quantitative technique commonly used in capital budgeting decisions?

Amortization tax savings are I. The savings on taxes because business equipment can be amortized II. The income tax rate times the allowed amortization for that year III. Measured in nominal dollars

Relevant cash flows for long-term decisions include: I. Revenues for new projects or services II. Variable costs for new projects or services III. Labour or electricity savings for replacement of old equipment

The nominal method of NPV analysis adjusts future cash flows for the impact of inflation.

For a particular investment project, the present value of the benefits is exactly equal to the present value of the investment. Given this, which of the following statements is true?

A capital investment's expected useful life is inversely correlated with the uncertainty of its cash flows.

Managers should consider qualitative information in making capital budgeting decisions.

Phoxco is considering automating its production line. It will cost $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 per year for 14 years.. The firm requires a 20% return. Ignoring income taxes, what is the payback period?

The net present value (NPV) method of investment project analysis assumes that the project's cash flows are reinvested at the:

Income taxes have a major effect on capital budgeting decisions.

The local school board is considering the purchase of a computer. It will cost $100,000 and will be sold back to the dealer at the end of 6 years for $8,000. If the required rate of return is 14%, what is the minimal annual cost saving required to justify the purchase? Ignore income taxes.

The internal rate of return method assumes that future cash flows can be reinvested to earn the same return generated by a capital investment project.

Inflation refers to the:

Which of the following factors are subject to uncertainty in an NPV analysis? I. Project life II. Appropriate discount rate III. Terminal value

The Role of Accounting Information in Ethical Management Decision Making

Cost Concepts, Behaviour, and Estimation

Cost-Volume-Profit Analysis

Relevant Information for Decision Making

Job Costing

Process Costing

Activity-Based Costing and Management

Measuring and Assigning Support Department Costs

Joint Product and By-Product Costing

Static and Flexible Budgets

Standard Costs and Variance Analysis

Strategic Investment Decisions

Strategic Management of Costs

Measuring and Assigning Costs for Income Statements

Performance Evaluation and Compensation

Filters

Exam 13: Pricing Decisions

If Erika Lee invests $5,000 in a certificate of deposit that pays 5%, compounded annually, what amount will she have in 10 years?

Phoxco is considering automating its production line at a cost of $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 for 14 years. The firm requires a 20% rate of return. Ignore income taxes. The net present value for this investment is:

Which of the following is not a quantitative technique commonly used in capital budgeting decisions?

Amortization tax savings are I. The savings on taxes because business equipment can be amortized II. The income tax rate times the allowed amortization for that year III. Measured in nominal dollars

Relevant cash flows for long-term decisions include: I. Revenues for new projects or services II. Variable costs for new projects or services III. Labour or electricity savings for replacement of old equipment

The nominal method of NPV analysis adjusts future cash flows for the impact of inflation.

For a particular investment project, the present value of the benefits is exactly equal to the present value of the investment. Given this, which of the following statements is true?

A capital investment's expected useful life is inversely correlated with the uncertainty of its cash flows.

Managers should consider qualitative information in making capital budgeting decisions.

Phoxco is considering automating its production line. It will cost $40,000 to acquire the necessary equipment. The annual cost savings are expected to be $8,000 per year for 14 years.. The firm requires a 20% return. Ignoring income taxes, what is the payback period?

The net present value (NPV) method of investment project analysis assumes that the project's cash flows are reinvested at the:

Income taxes have a major effect on capital budgeting decisions.

The local school board is considering the purchase of a computer. It will cost $100,000 and will be sold back to the dealer at the end of 6 years for $8,000. If the required rate of return is 14%, what is the minimal annual cost saving required to justify the purchase? Ignore income taxes.

The internal rate of return method assumes that future cash flows can be reinvested to earn the same return generated by a capital investment project.

Inflation refers to the:

Which of the following factors are subject to uncertainty in an NPV analysis? I. Project life II. Appropriate discount rate III. Terminal value

The Role of Accounting Information in Ethical Management Decision Making

Cost Concepts, Behaviour, and Estimation

Cost-Volume-Profit Analysis

Relevant Information for Decision Making

Job Costing

Process Costing

Activity-Based Costing and Management

Measuring and Assigning Support Department Costs

Joint Product and By-Product Costing

Static and Flexible Budgets

Standard Costs and Variance Analysis

Strategic Investment Decisions

Strategic Management of Costs

Measuring and Assigning Costs for Income Statements

Performance Evaluation and Compensation

Filters