Question 1

Capital budgeting is a process managers use when choosing investments with multi-year cash flows.

Accepted Answer

A) True 
 B)False

Question 2

Valley Hospital is considering the purchase of new medical equipment for $25,000. The old equipment has zero salvage value. The costs associated with operating the equipment are: $\begin{array}{lrr} 
& \underline{\text { Old Equipment}}& \underline{\text { New Equipment}}\
& \$ 9,000 & \$ 4,500 \
\text { Mabour } & 2,000 & 1,200 \
\text { Miscellaneous } & 1,500 & 1,300 \
\text { Amortization } & 8,000 & 4,750
\end{array}$
 If the new machine is purchased and ignoring income taxes, the payback period is:

Accepted Answer

A)  3.57 years 
B)  2.13 years 
C)  2.86 years 
D)  4.55 years 
A)  3.57 years 
B)  2.13 years 
C)  2.86 years 
D)  4.55 years

Question 3

The tax savings cash flows are treated differently under the nominal and real methods. Which of the following reflects this treatment? $\begin{array} { l l l } 
&& \text { Real } && \text { Nominal } \\end{array}$
A)$\begin{array} { l l l }  & \text { Inflated } & \text { Deflated } \\end{array}$
B)$\begin{array} { l l l } & \text { Deflated } & \text { Used as is } \\end{array}$
C)$\begin{array} { l l l }  & \text { Used as is } & \text { Deflated } \\end{array}$
D)$\begin{array} { l l l } & \text { Deflated } & \text { Inflated }
\end{array}$

Accepted Answer

The answer of The tax savings cash flows are treated...

Question 4

A negative net present value means that the:

Accepted Answer

A)  Internal rate of return is less than the required rate of return 
B)  Project is acceptable 
C)  Present value of the inflows exceeds the present value of the outflows 
D)  Company chose the wrong discount rate 
A)  Internal rate of return is less than the required rate of return 
B)  Project is acceptable 
C)  Present value of the inflows exceeds the present value of the outflows 
D)  Company chose the wrong discount rate

Question 5

Elkins Co. is considering an investment in equipment for a new product line with a cost of $48,625, a terminal value of $6,283, and a useful life of 5 years. The project will provide an annual contribution margin of $12,500. The required rate of return is 12%. Ignore income taxes. This project is:

Accepted Answer

A)  Unacceptable, because it earns a rate below 12%. 
B)  Acceptable, because it has a positive NPV. 
C)  Unacceptable, because it has a 0 NPV. 
D)  Acceptable, because it earns exactly 12%. 
A)  Unacceptable, because it earns a rate below 12%. 
B)  Acceptable, because it has a positive NPV. 
C)  Unacceptable, because it has a 0 NPV. 
D)  Acceptable, because it earns exactly 12%.

Question 6

Last semester a class gave a professor $810 to fly to Borneo. However, he decided not to go until he had enough money to fly back, an additional $690. If he invests the $810 at 8%, when can he make the trip, assuming no change in ticket prices?

Accepted Answer

A)  8 years 
B)  6 years 
C)  4 years 
D)  2 years 
A)  8 years 
B)  6 years 
C)  4 years 
D)  2 years

Question 7

Which of the following statements regarding NPV analysis is true?

Accepted Answer

A)  Uncertainties increase as the dollar value of an investment increases 
B)  The discount rate can be calculated with certainty if it is based on the weighted average cost of capital 
C)  Managers should generally accept projects with an NPV greater than zero 
D)  The timing of incremental revenues and costs is irrelevant in NPV analysis 
A)  Uncertainties increase as the dollar value of an investment increases 
B)  The discount rate can be calculated with certainty if it is based on the weighted average cost of capital 
C)  Managers should generally accept projects with an NPV greater than zero 
D)  The timing of incremental revenues and costs is irrelevant in NPV analysis

Question 8

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 terminal cash flows is:

Accepted Answer

A)  $8,000 
B)  $4,536 
C)  $1,361 
D)  $3,175 
A)  $8,000 
B)  $4,536 
C)  $1,361 
D)  $3,175

Question 9

A firm is currently buying a part at a cost of $12 each. It is considering buying a machine that will produce the part at a variable cost of $8. Each unit of input produces the part plus a by-product, which is sold for $1. The machine will cost $40,000 and will have a useful life of 5 years. The firm requires an 8% return. What annual volume is necessary to justify making the investment? Ignore income taxes.

Accepted Answer

A)  2,558 units 
B)  3,198 units 
C)  12,792 units 
D)  8,000 units 
A)  2,558 units 
B)  3,198 units 
C)  12,792 units 
D)  8,000 units

Question 10

The accrual accounting rate of return method does not consider the time value of money.

Accepted Answer

A) True 
 B)False

Question 11

Walter borrows $10,000 from his mother. He will repay her $2,000 at the end of each of the next four years and the balance at the end of the fifth year. If the interest rate is 12%, what is the amount to be paid at the end of the fifth year?

Accepted Answer

A)  $3,926.00 
B)  $6,924.16 
C)  $5,869.65 
D)  $2,000.00 
A)  $3,926.00 
B)  $6,924.16 
C)  $5,869.65 
D)  $2,000.00

Question 12

Uncertainty is very often a factor when estimating a project's terminal value for an NPV analysis.

Accepted Answer

A) True 
 B)False

Question 13

The first step in addressing capital budgeting decisions is to identify relevant cash flows.

Accepted Answer

A) True 
 B)False

Question 14

Bell Company is considering a project that would provide a single cash inflow eight years from now of $80,000. What is the most that Bell would be willing to spend on this project if the discount rate is 16%?

Accepted Answer

A)  $262,295 
B)  $24,400 
C)  $288,400 
D)  $22,191 
A)  $262,295 
B)  $24,400 
C)  $288,400 
D)  $22,191

Question 15

The payback method is:
I. A long-term decision-making method
II. Uses the time value of money
III. Uses accounting earnings in the calculation

Accepted Answer

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

Question 16

Cash flows for a capital budgeting analysis are often affected by inflation, but not by deflation.

Accepted Answer

A) True 
 B)False

Question 17

An approach that allows analysis of different future rates of inflation or deflation for different cash flows is the:

Accepted Answer

A)  NPV analysis 
B)  Payback method 
C)  Accrual Accounting Rate of Return 
D)  Target costing method 
A)  NPV analysis 
B)  Payback method 
C)  Accrual Accounting Rate of Return 
D)  Target costing method

Question 18

Disquotek, Inc., is a software manufacturer. Managers are considering a new equipment proposal. The income tax rate is 40%, and the discount rate is 10%. The following data are available: $\begin{array}{lrc}
& \underline{\text { Old Equipment}}&
 \underline{\text { New Equipment}}\
 \text { Purchase cost } & \$ 12,000 & \$ 36,000 \
\text { Annual amortization } & 1,500 & 4,500 \
\text { Remaining useful life (years) } & 8 & 8 \
\text { Current selling price } & 14,400 & \text { not applicable } \
\text { Selling price in 8 years } & 1,000 & 2,000 \
\text { Annual operating costs } & 14,000 & 8,000
\end{array}$

What is the relevant after-tax annual cash operating cost associated with this decision?

Accepted Answer

A)  $8,000 
B)  $6,000 
C)  $3,600 
D)  $2,400 
A)  $8,000 
B)  $6,000 
C)  $3,600 
D)  $2,400

Question 19

Sensitivity analysis is usually performed after applying quantitative analysis techniques in a capital budgeting decision.

Accepted Answer

A) True 
 B)False

Question 20

Incremental operating cash flows can be associated with changes in capacity or product quality in capital budgeting decisions.

Accepted Answer

A) True 
 B)False

Capital budgeting is a process managers use when choosing investments with multi-year cash flows.

The tax savings cash flows are treated differently under the nominal and real methods. Which of the following reflects this treatment? Real Nominal A) Inflated Deflated B) Deflated Used as is C) Used as is Deflated D) Deflated Inflated

A negative net present value means that the:

Elkins Co. is considering an investment in equipment for a new product line with a cost of $48,625, a terminal value of $6,283, and a useful life of 5 years. The project will provide an annual contribution margin of $12,500. The required rate of return is 12%. Ignore income taxes. This project is:

Last semester a class gave a professor $810 to fly to Borneo. However, he decided not to go until he had enough money to fly back, an additional $690. If he invests the $810 at 8%, when can he make the trip, assuming no change in ticket prices?

Which of the following statements regarding NPV analysis is true?

The accrual accounting rate of return method does not consider the time value of money.

Walter borrows $10,000 from his mother. He will repay her $2,000 at the end of each of the next four years and the balance at the end of the fifth year. If the interest rate is 12%, what is the amount to be paid at the end of the fifth year?

Uncertainty is very often a factor when estimating a project's terminal value for an NPV analysis.

The first step in addressing capital budgeting decisions is to identify relevant cash flows.

Bell Company is considering a project that would provide a single cash inflow eight years from now of $80,000. What is the most that Bell would be willing to spend on this project if the discount rate is 16%?

The payback method is: I. A long-term decision-making method II. Uses the time value of money III. Uses accounting earnings in the calculation

Cash flows for a capital budgeting analysis are often affected by inflation, but not by deflation.

An approach that allows analysis of different future rates of inflation or deflation for different cash flows is the:

Sensitivity analysis is usually performed after applying quantitative analysis techniques in a capital budgeting decision.

Incremental operating cash flows can be associated with changes in capacity or product quality in capital budgeting decisions.

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

Capital budgeting is a process managers use when choosing investments with multi-year cash flows.

The tax savings cash flows are treated differently under the nominal and real methods. Which of the following reflects this treatment? Real Nominal A) Inflated Deflated B) Deflated Used as is C) Used as is Deflated D) Deflated Inflated

A negative net present value means that the:

Elkins Co. is considering an investment in equipment for a new product line with a cost of $48,625, a terminal value of $6,283, and a useful life of 5 years. The project will provide an annual contribution margin of $12,500. The required rate of return is 12%. Ignore income taxes. This project is:

Last semester a class gave a professor $810 to fly to Borneo. However, he decided not to go until he had enough money to fly back, an additional $690. If he invests the $810 at 8%, when can he make the trip, assuming no change in ticket prices?

Which of the following statements regarding NPV analysis is true?

The accrual accounting rate of return method does not consider the time value of money.

Walter borrows $10,000 from his mother. He will repay her $2,000 at the end of each of the next four years and the balance at the end of the fifth year. If the interest rate is 12%, what is the amount to be paid at the end of the fifth year?

Uncertainty is very often a factor when estimating a project's terminal value for an NPV analysis.

The first step in addressing capital budgeting decisions is to identify relevant cash flows.

Bell Company is considering a project that would provide a single cash inflow eight years from now of $80,000. What is the most that Bell would be willing to spend on this project if the discount rate is 16%?

The payback method is: I. A long-term decision-making method II. Uses the time value of money III. Uses accounting earnings in the calculation

Cash flows for a capital budgeting analysis are often affected by inflation, but not by deflation.

An approach that allows analysis of different future rates of inflation or deflation for different cash flows is the:

Sensitivity analysis is usually performed after applying quantitative analysis techniques in a capital budgeting decision.

Incremental operating cash flows can be associated with changes in capacity or product quality in capital budgeting decisions.

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