Question 1

Why would a company use the accounting rate of return?

Accepted Answer

A)  to ensure that a new investment will not adversely affect accounting income 
B)  because it does not consider the time value of money 
C)  because it is a measure of liquidity 
D)  all of the above 
A)  to ensure that a new investment will not adversely affect accounting income 
B)  because it does not consider the time value of money 
C)  because it is a measure of liquidity 
D)  all of the above

Question 2

Figure 13-4
A capital investment project requires an investment of £60,000 and has an expected life of four years. Annual cash flows, which occur evenly throughout the year, are expected to be as follows:  
-Refer to Figure 13-4. The net present value of the project using a 6 per cent discount rate is

Accepted Answer

A)  £40,960. 
B)  £43,950. 
C)  £53,160. 
D)  £35,040. 
A)  £40,960. 
B)  £43,950. 
C)  £53,160. 
D)  £35,040.

Question 3

Brooks Company invested in a project that is expected to have an annual cash flow of £10,000. The project's life is five years and has an IRR of 14 per cent. How much was the initial investment in the project?

Accepted Answer

A)  £34,330 
B)  £50,000 
C)  £36,050 
D)  £29,140 
A)  £34,330 
B)  £50,000 
C)  £36,050 
D)  £29,140

Question 4

Figure 13-5  
-Refer to Figure 13-5. The net present value of the project is

Accepted Answer

A)  (£3,215). 
B)  £393. 
C)  £6,102. 
D)  £6,412. 
A)  (£3,215). 
B)  £393. 
C)  £6,102. 
D)  £6,412.

Question 5

Figure 13-6
JD, Inc., is considering the purchase of production equipment that costs £400,000. The equipment is expected to generate annual cash inflows of £125,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 12 per cent.
-Refer to Figure 13-6. Based on quantitative factors, should JD accept, reject, or wait on the project?

Accepted Answer

A)  accept 
B)  reject 
C)  wait 
A)  accept 
B)  reject 
C)  wait

Question 6

A firm is considering a project with annual cash flows of £75,000. The project would have a 7-year life, and the company uses a discount rate of 10 per cent. What is the maximum amount the company could invest in the project and the project still be acceptable?

Accepted Answer

A)  £525,000 
B)  £365,100 
C)  £269,325 
D)  none of the above 
A)  £525,000 
B)  £365,100 
C)  £269,325 
D)  none of the above

Question 7

Five mutually exclusive projects had the following information:   Which project is preferred?

Accepted Answer

A)  Project A 
B)  Project B 
C)  Project C 
D)  Project D 
A)  Project A 
B)  Project B 
C)  Project C 
D)  Project D

Question 8

A capital investment project requires an investment of £350,000. It has an expected life of ten years with annual cash flows of £50,000 received at the end of each year.
Required:
a.
Compute payback for the project.
b.
Determine the accounting rate of return for the project, based on the initial capital investment.
c.
Compute the internal rate of return for the project.
d.
Compute the net present value of the project using a 14 per cent discount rate.
e.
Would you recommend this project be accepted? Why or why not?

Accepted Answer

The answer of A capital investment project requires an investment...

Question 9

Compare the various quantitative models used to evaluate capital budgeting proposals. Which models are preferred if used as the only criterion?

Accepted Answer

The models discussed in the text are the

Question 10

Which of the following methods consider the time value of money?

Accepted Answer

A)  payback and accounting rate of return 
B)  payback and internal rate of return 
C)  internal rate of return and accounting rate of return 
D)  internal rate of return and net present value 
A)  payback and accounting rate of return 
B)  payback and internal rate of return 
C)  internal rate of return and accounting rate of return 
D)  internal rate of return and net present value

Question 11

When the discount rate is decreased,

Accepted Answer

A)  the present value of future cash flows increases. 
B)  the present value of future cash flows decreases. 
C)  there is no change in the present value. 
D)  net present value would equal zero. 
A)  the present value of future cash flows increases. 
B)  the present value of future cash flows decreases. 
C)  there is no change in the present value. 
D)  net present value would equal zero.

Question 12

If the investment's internal rate of return is more than the required rate of return, the investment should be

Accepted Answer

A)  accepted. 
B)  rejected. 
C)  put on hold. 
D)  None of the above are correct. 
A)  accepted. 
B)  rejected. 
C)  put on hold. 
D)  None of the above are correct.

Question 13

Matusadona Company plans to invest £450,000 in a new factory. With a discount rate of 14 per cent, the present value from the factory is £483,000. To yield a 14 per cent internal rate of return, the actual investment cost cannot exceed the £450,000 estimate by more than

Accepted Answer

A)  £63,000. 
B)  £33,000. 
C)  £16,500. 
D)  This cannot be determined from the information given. 
A)  £63,000. 
B)  £33,000. 
C)  £16,500. 
D)  This cannot be determined from the information given.

Question 14

Which of the following is a capital investment criterion, but NOT captured in any of the basic capital budgeting models examined in the text?

Accepted Answer

A)  the period of time required to recoup an initial investment 
B)  various non-quantitative factors 
C)  the time value of money 
D)  the company's discount rate 
A)  the period of time required to recoup an initial investment 
B)  various non-quantitative factors 
C)  the time value of money 
D)  the company's discount rate

Question 15

Ducky Pizza Restaurant purchases a van to deliver pizzas to their customers. The van costs £28,000 and is projected to increase revenues by £10,000 a year and to increase costs by £4,500. The payback period for this van is

Accepted Answer

A)  2.8 years. 
B)  6.2 years. 
C)  5.1 years. 
D)  0.4 years. 
A)  2.8 years. 
B)  6.2 years. 
C)  5.1 years. 
D)  0.4 years.

Question 16

If the annual cash flows are not an annuity (equal each period), payback is calculated by

Accepted Answer

A)  dividing the investment required by the average annual cash inflow. 
B)  dividing the average annual cash inflow by the investment required. 
C)  accumulating the net cash flows until they equal the initial investment. 
D)  Payback cannot be calculated for a project with unequal cash flows. 
A)  dividing the investment required by the average annual cash inflow. 
B)  dividing the average annual cash inflow by the investment required. 
C)  accumulating the net cash flows until they equal the initial investment. 
D)  Payback cannot be calculated for a project with unequal cash flows.

Question 17

Why do the NPV method and the IRR method sometimes produce different rankings of mutually exclusive investment projects?

Accepted Answer

A)  The NPV method does not assume reinvestment of cash flows, while the IRR method assumes the cash flows will be reinvested at the internal rate of return. 
B)  The NPV method assumes a reinvestment rate equal to the discount rate, while the IRR method assumes a reinvestment rate equal to the internal rate of return. 
C)  The IRR method does not assume reinvestment of the cash flows, while the NPV method assumes the reinvestment rate is equal to the discount rate. 
D)  The NPV method assumes a reinvestment rate equal to the bank loan interest rate, while the IRR method assumes a reinvestment rate equal to the discount rate. 
A)  The NPV method does not assume reinvestment of cash flows, while the IRR method assumes the cash flows will be reinvested at the internal rate of return. 
B)  The NPV method assumes a reinvestment rate equal to the discount rate, while the IRR method assumes a reinvestment rate equal to the internal rate of return. 
C)  The IRR method does not assume reinvestment of the cash flows, while the NPV method assumes the reinvestment rate is equal to the discount rate. 
D)  The NPV method assumes a reinvestment rate equal to the bank loan interest rate, while the IRR method assumes a reinvestment rate equal to the discount rate.

Question 18

Future cash flows expressed in present value terms are

Accepted Answer

A)  compounded cash flows. 
B)  extended cash flows. 
C)  budgeted cash flows. 
D)  discounted cash flows. 
A)  compounded cash flows. 
B)  extended cash flows. 
C)  budgeted cash flows. 
D)  discounted cash flows.

Question 19

If NPV and IRR produce different rankings, which method should be used in choosing investment projects?

Accepted Answer

A)  payback 
B)  accounting rate of return 
C)  net present value 
D)  internal rate of return 
A)  payback 
B)  accounting rate of return 
C)  net present value 
D)  internal rate of return

Question 20

The present value of £8,000 to be received each year for ten years and earning a 16 per cent return is

Accepted Answer

A)  £1,655. 
B)  £1,816. 
C)  £35,242. 
D)  £38,664. 
A)  £1,655. 
B)  £1,816. 
C)  £35,242. 
D)  £38,664.

Exam 13: Capital Investment Decisions: Appraisal Methods

Why would a company use the accounting rate of return?

Brooks Company invested in a project that is expected to have an annual cash flow of £10,000. The project's life is five years and has an IRR of 14 per cent. How much was the initial investment in the project?

Figure 13-5 -Refer to Figure 13-5. The net present value of the project is

A firm is considering a project with annual cash flows of £75,000. The project would have a 7-year life, and the company uses a discount rate of 10 per cent. What is the maximum amount the company could invest in the project and the project still be acceptable?

Five mutually exclusive projects had the following information: Which project is preferred?

Compare the various quantitative models used to evaluate capital budgeting proposals. Which models are preferred if used as the only criterion?

Which of the following methods consider the time value of money?

When the discount rate is decreased,

If the investment's internal rate of return is more than the required rate of return, the investment should be

Matusadona Company plans to invest £450,000 in a new factory. With a discount rate of 14 per cent, the present value from the factory is £483,000. To yield a 14 per cent internal rate of return, the actual investment cost cannot exceed the £450,000 estimate by more than

Which of the following is a capital investment criterion, but NOT captured in any of the basic capital budgeting models examined in the text?

Ducky Pizza Restaurant purchases a van to deliver pizzas to their customers. The van costs £28,000 and is projected to increase revenues by £10,000 a year and to increase costs by £4,500. The payback period for this van is

If the annual cash flows are not an annuity (equal each period), payback is calculated by

Why do the NPV method and the IRR method sometimes produce different rankings of mutually exclusive investment projects?

Future cash flows expressed in present value terms are

If NPV and IRR produce different rankings, which method should be used in choosing investment projects?

The present value of £8,000 to be received each year for ten years and earning a 16 per cent return is

Introduction to Management Accounting

An Introduction to Cost Terms and Concepts

Cost Assignment

Accounting Entries for a Job Costing System

Process Costing

Joint and By-Product Costing

Income Effects of Alternative Cost Accumulation Systems

Cost-Volume-Profit Analysis

Measuring Relevant Costs and Revenues for Decision-Making

Activity-Based Costing

Pricing Decisions and Profitability Analysis

Decision-Making Under Conditions of Risk and Uncertainty

Capital Investment Decisions: the Impact of Capital Rationing, Taxation, Inflation and Risk

The Budgeting Process

Management Control Systems

Standard Costing and Variance Analysis 1

Standard Costing and Variance Analysis 2: Further Aspects

Divisional Financial Performance Measures

Transfer Pricing in Divisionalized Companies

Cost Management

Strategic Management Accounting

Cost Estimation and Cost Behaviour

Quantitative Models for the Planning and Control of Stocks

The Application of Linear Programming to Management Accounting

Filters