Question 1

The cash payback period is computed by dividing the cost of the capital investment by the net annual cash inflow.

Accepted Answer

A) True 
 B)False

Question 2

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 3

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 4

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 5

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 6

All of the following are involved in the capital budgeting evaluation process except 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 7

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 8

Use the following information for questions 106-108.
Cleaners, Inc. is considering purchasing equipment costing $60,000 with a 6-year useful life. The equipment will provide cost savings of $14,600 and will be depreciated straight-line over its useful life with no salvage value. Cleaners requires a 10% rate of return. $\text { Present Value of an Annuity of } 1$
$\begin{array}{ll}
\text { Periods } &8\%& 9 \% & 10 \% & 11 \%& 12 \%&15\%\
5&4.623&4.486&4.355&4.231&4.111&3.784
\end{array}$

-What is the approximate internal rate of return for this investment?

Accepted Answer

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

Question 9

A company's discount rate is based on the

Accepted Answer

A)  cost of capital and the internal rate of return. 
B)  cost of capital and the risk element. 
C)  cut-off rate and the risk element. 
D)  cut-off rate and the internal rate of return. 
A)  cost of capital and the internal rate of return. 
B)  cost of capital and the risk element. 
C)  cut-off rate and the risk element. 
D)  cut-off rate and the internal rate of return.

Question 10

The capital budgeting method that takes into account both the size of the original investment and the discounted cash flows 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 11

A company's cost of capital refers to the

Accepted Answer

A)  rate the company must pay to obtain funds from creditors and stockholders. 
B)  total cost of a capital project. 
C)  cost of printing and registering common stock shares. 
D)  rate of return earned on common stock. 
A)  rate the company must pay to obtain funds from creditors and stockholders. 
B)  total cost of a capital project. 
C)  cost of printing and registering common stock shares. 
D)  rate of return earned on common stock.

Question 12

An advantage of the annual rate of return method is that it relies on accrual accounting numbers rather than actual cash flows.

Accepted Answer

A) True 
 B)False

Question 13

When calculating the annual rate of return, the average investment is equal to

Accepted Answer

A)  (initial investment plus $0) divided by 2. 
B)  initial investment divided by life of project. 
C)  initial investment divided by 2. 
D)  (initial investment plus salvage value) divided by 2. 
A)  (initial investment plus $0) divided by 2. 
B)  initial investment divided by life of project. 
C)  initial investment divided by 2. 
D)  (initial investment plus salvage value) divided by 2.

Question 14

One way of incorporating intangible benefits into the capital budgeting decision is to project conservative estimates of the value of the intangible benefits and include them in the NPV calculation.

Accepted Answer

A) True 
 B)False

Question 15

Brady Corp. is considering the purchase of a piece of equipment that costs $20,000. Projected net annual cash flows over the project's life are: $\begin{array}{lr}\text { Year } &\text { Net Annual Cash Flow }\
1 & \$ 3,000 \
2 & 8,000 \
3 & 15,000 \
4 & 9,000
\end{array}$ The cash payback period is

Accepted Answer

A)  2.29 years. 
B)  2.60 years. 
C)  2.40 years. 
D)  2.31 years. 
A)  2.29 years. 
B)  2.60 years. 
C)  2.40 years. 
D)  2.31 years.

Question 16

Most of the capital budgeting methods use

Accepted Answer

A)  accrual accounting numbers. 
B)  cash flow numbers. 
C)  net income. 
D)  accrual accounting revenues. 
A)  accrual accounting numbers. 
B)  cash flow numbers. 
C)  net income. 
D)  accrual accounting revenues.

Question 17

Colaw Company is considering buying equipment for $240,000 with a useful life of five years and an estimated salvage value of $12,000. If annual expected income is $21,000, the denominator in computing the annual rate of return is

Accepted Answer

A)  $240,000. 
B)  $120,000. 
C)  $126,000. 
D)  $252,000. 
A)  $240,000. 
B)  $120,000. 
C)  $126,000. 
D)  $252,000.

Question 18

In evaluating high-tech projects,

Accepted Answer

A)  only tangible benefits should be considered. 
B)  only intangible benefits should be considered. 
C)  both tangible and intangible benefits should be considered. 
D)  neither tangible nor intangible benefits should be considered. 
A)  only tangible benefits should be considered. 
B)  only intangible benefits should be considered. 
C)  both tangible and intangible benefits should be considered. 
D)  neither tangible nor intangible benefits should be considered.

Question 19

Use the following table for questions 109-111. $\text { Present Value of an Annuity of } 1$
$\begin{array}{rrrr}\text { Periods } & 8 \% & 9 \% & 10\%\
1 & .926 & .917 & .909 \
2 & 1.783 & 1.759 & 1.736 \
3 & 2.577 & 2.531 & 2.487
\end{array}$
-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 20

A capital budgeting method that takes into consideration the time value of money is the

Accepted Answer

A)  annual rate of return method. 
B)  return on stockholders' equity method. 
C)  cash payback technique. 
D)  internal rate of return method. 
A)  annual rate of return method. 
B)  return on stockholders' equity method. 
C)  cash payback technique. 
D)  internal rate of return method.

The cash payback period is computed by dividing the cost of the capital investment by the net annual cash inflow.

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

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

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

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

All of the following are involved in the capital budgeting evaluation process except a company's

A company's discount rate is based on the

The capital budgeting method that takes into account both the size of the original investment and the discounted cash flows is the

A company's cost of capital refers to the

An advantage of the annual rate of return method is that it relies on accrual accounting numbers rather than actual cash flows.

When calculating the annual rate of return, the average investment is equal to

One way of incorporating intangible benefits into the capital budgeting decision is to project conservative estimates of the value of the intangible benefits and include them in the NPV calculation.

Brady Corp. is considering the purchase of a piece of equipment that costs $20,000. Projected net annual cash flows over the project's life are: Year Net Annual Cash Flow 1 \ 3,000 2 8,000 3 15,000 4 9,000 The cash payback period is

Most of the capital budgeting methods use

Colaw Company is considering buying equipment for $240,000 with a useful life of five years and an estimated salvage value of $12,000. If annual expected income is $21,000, the denominator in computing the annual rate of return is

In evaluating high-tech projects,

A capital budgeting method that takes into consideration the time value of money is the

Managerial Accounting

Job Order Costing

Process Costing

Activity-Based Costing

Cost-Volume-Profit

Cost-Volume-Profit Analysis: Additional Issues

Incremental Analysis

Pricing

Budgetary Planning

Budgetary Control and Responsibility Accounting

Standard Costs and Balanced Scorecard

Statement of Cash Flows

Financial Statement Analysis

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Exam 12: Planning for Capital Investments

The cash payback period is computed by dividing the cost of the capital investment by the net annual cash inflow.

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

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

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

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

All of the following are involved in the capital budgeting evaluation process except a company's

A company's discount rate is based on the

The capital budgeting method that takes into account both the size of the original investment and the discounted cash flows is the

A company's cost of capital refers to the

An advantage of the annual rate of return method is that it relies on accrual accounting numbers rather than actual cash flows.

When calculating the annual rate of return, the average investment is equal to

One way of incorporating intangible benefits into the capital budgeting decision is to project conservative estimates of the value of the intangible benefits and include them in the NPV calculation.

Brady Corp. is considering the purchase of a piece of equipment that costs $20,000. Projected net annual cash flows over the project's life are: Year Net Annual Cash Flow 1 \ 3,000 2 8,000 3 15,000 4 9,000 The cash payback period is

Most of the capital budgeting methods use

Colaw Company is considering buying equipment for $240,000 with a useful life of five years and an estimated salvage value of $12,000. If annual expected income is $21,000, the denominator in computing the annual rate of return is

In evaluating high-tech projects,

A capital budgeting method that takes into consideration the time value of money is the

Managerial Accounting

Job Order Costing

Process Costing

Activity-Based Costing

Cost-Volume-Profit

Cost-Volume-Profit Analysis: Additional Issues

Incremental Analysis

Pricing

Budgetary Planning

Budgetary Control and Responsibility Accounting

Standard Costs and Balanced Scorecard

Statement of Cash Flows

Financial Statement Analysis

Filters