Question 1

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 2

If a 3-year capital project costing $77,310 has an internal rate of return factor equal to 2.577, the net annual cash flows assuming straight-line depreciation are

Accepted Answer

A)  $25,770. 
B)  $30,000. 
C)  $10,000. 
D)  $38,655. 
A)  $25,770. 
B)  $30,000. 
C)  $10,000. 
D)  $38,655.

Question 3

Which of the following does not consider a company's required rate of return?

Accepted Answer

A)  Net present value 
B)  Internal rate of return 
C)  Annual rate of return 
D)  Cash payback 
A)  Net present value 
B)  Internal rate of return 
C)  Annual rate of return 
D)  Cash payback

Question 4

The profitability index

Accepted Answer

A)  does not take into account the discounted cash flows. 
B)  is calculated by dividing total cash flows by the initial investment. 
C)  allows comparison of the relative desirability of projects that require differing initial investments. 
D)  will never be greater than 1. 
A)  does not take into account the discounted cash flows. 
B)  is calculated by dividing total cash flows by the initial investment. 
C)  allows comparison of the relative desirability of projects that require differing initial investments. 
D)  will never be greater than 1.

Question 5

The cost of capital is a weighted average of the rates paid on borrowed funds, as well as on funds provided by investors in the company's stock.

Accepted Answer

A) True 
 B)False

Question 6

If a project has a zero net present value, then the internal rate of return will be

Accepted Answer

A)  less than the discount rate. 
B)  greater than the discount rate. 
C)  equal to the discount rate. 
D)  a negative rate of return. 
A)  less than the discount rate. 
B)  greater than the discount rate. 
C)  equal to the discount rate. 
D)  a negative rate of return.

Question 7

Use the following information for questions 112-115.
Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below: $\begin{array}{lrr}&\text { Project Soup }&\text { Project Nuts }\
 \text { Initial investment } & \$ 400,000 & \$ 600,000 \
\text { Annual net income } & 30,000 & 46,000 \
\text { Net annual cash inflow } & 110,000 & 146,000 \
\text { Estimated useful life } & 5 \text { years } & 6 \text { years } \
\text { Salvage value } & -0- & -0-
\end{array}$

$\text { The company requires a } 10 \% \text { rate of return on all new investments. }$

$\text { Present Value of an Annuity of } 1$
$\begin{array}{lllll}\text { Periods } & 9 \% & 10 \% & 11 \%& 12 \%\
5 & 3.890 & 3.791 & 3.696 & 3.605 \
6 & 4.486 & 4.355 & 4.231 & 4.111
\end{array}$
-The cash payback period for Project Nuts is

Accepted Answer

A)  13.3 years. 
B)  6.7 years. 
C)  5.0 years. 
D)  4.1 years. 
A)  13.3 years. 
B)  6.7 years. 
C)  5.0 years. 
D)  4.1 years.

Question 8

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

Accepted Answer

A)    A , C , B . 
B)  A, B, C . 
C)  C , A , B. 
D)  C, B , A. 
A)    A , C , B . 
B)  A, B, C . 
C)  C , A , B. 
D)  C, B , A.

Question 9

Using the annual rate of return method, a project is acceptable if its rate of return is greater than management's minimum rate of return.

Accepted Answer

A) True 
 B)False

Question 10

Use the following information for questions 
Selma Inc. is comparing several alternative capital budgeting projects as shown below:
.. $\begin{array}{lrrr}&&\text { Projects }\
&A&B&C\
\text { Initial investment } & \$ 80,000 & \$ 120,000 & \$ 160,000 \
\text { Present value of net cash flows } & 90,000 & 110,000 & 200,000
\end{array}$
-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 11

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 12

Johnson Corp. has an 8% required rate of return. It's considering a project that would provide annual cost savings of $50,000 for 5 years. The most that Johnson would be willing to spend on this project is $\begin{array}{llr}& \text { Present Value } & \text { PV of an Annuity } \
\text { Year } & \text { of } 1 \text { at } 8 \% & \text { of } 1 \text { at } 8 \%\
1 & .926 & .926 \
2 & .857 & 1.783 \
3 & .794 & 2.577 \
4 & .735 & 3.312 \
5 & .681 & 3.993
\end{array}$

Accepted Answer

A)  $125,910. 
B)  $165,600. 
C)  $199,650. 
D)  $34,050. 
A)  $125,910. 
B)  $165,600. 
C)  $199,650. 
D)  $34,050.

Question 13

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

Question 14

The payback period is often compared to an asset's

Accepted Answer

A)  estimated useful life. 
B)  warranty period. 
C)  net present value. 
D)  internal rate of return. 
A)  estimated useful life. 
B)  warranty period. 
C)  net present value. 
D)  internal rate of return.

Question 15

If a project has a zero 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 16

Sloan Inc. recently invested in a project with a 3-year life span. The net present value was $9,000 and annual cash inflows were $21,000 for year 1; $24,000 for year 2; and $27,000 for year 3. The initial investment for the project, assuming a 15% required rate of return, was $\begin{array}{llr}& \text { Present Value } & \text { PV of an Annuity } \
\text { Year } & \text { of } 1 \text { at } 15 \% & \text { of } 1 \text { at } 15 \%\
1 & .870 & .870 \
2 & .756 & 1.626 \
3 & .658 & 2.283
\end{array}$

Accepted Answer

A)  $45,792. 
B)  $45,180. 
C)  $29,232. 
D)  $38,376. 
A)  $45,792. 
B)  $45,180. 
C)  $29,232. 
D)  $38,376.

Question 17

Post-audits create an incentive for managers to make accurate estimates, since managers know that their results will be evaluated.

Accepted Answer

A) True 
 B)False

Question 18

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 19

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 net present value of this investment?

Accepted Answer

A)  $27,600 
B)  $3,583 
C)  $1,772 
D)  $5,496 
A)  $27,600 
B)  $3,583 
C)  $1,772 
D)  $5,496

Question 20

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%.

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

If a 3-year capital project costing $77,310 has an internal rate of return factor equal to 2.577, the net annual cash flows assuming straight-line depreciation are

Which of the following does not consider a company's required rate of return?

The profitability index

The cost of capital is a weighted average of the rates paid on borrowed funds, as well as on funds provided by investors in the company's stock.

If a project has a zero net present value, then the internal rate of return will be

Using the annual rate of return method, a project is acceptable if its rate of return is greater than management's minimum rate of return.

The internal rate of return factor is equal to the

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

The payback period is often compared to an asset's

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

Post-audits create an incentive for managers to make accurate estimates, since managers know that their results will be evaluated.

The higher the risk element in a project, 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

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

If a 3-year capital project costing $77,310 has an internal rate of return factor equal to 2.577, the net annual cash flows assuming straight-line depreciation are

Which of the following does not consider a company's required rate of return?

The profitability index

The cost of capital is a weighted average of the rates paid on borrowed funds, as well as on funds provided by investors in the company's stock.

If a project has a zero net present value, then the internal rate of return will be

Using the annual rate of return method, a project is acceptable if its rate of return is greater than management's minimum rate of return.

The internal rate of return factor is equal to the

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

The payback period is often compared to an asset's

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

Post-audits create an incentive for managers to make accurate estimates, since managers know that their results will be evaluated.

The higher the risk element in a project, 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