Question 1

is not a phase of capital budgeting.

Accepted Answer

A)  A post- audit of the investment 
B)  The identification of possible sources of funds for the investment 
C)  The identification of potential investments 
D)  The selection of the investment to undertake 
A)  A post- audit of the investment 
B)  The identification of possible sources of funds for the investment 
C)  The identification of potential investments 
D)  The selection of the investment to undertake B

Question 2

Identify which one of the following is a reason to study a simpler model such as the payback method.

Accepted Answer

A)  Simpler models are more accurate because they require less estimation. 
B)  Simpler models might provide some useful information to supplement the discounted- cash- flows analysis. 
C)  Simpler models are conceptually superior to discounted- cash- flows analysis. 
D)  The payback method is the most popular method of capital budgeting. 
A)  Simpler models are more accurate because they require less estimation. 
B)  Simpler models might provide some useful information to supplement the discounted- cash- flows analysis. 
C)  Simpler models are conceptually superior to discounted- cash- flows analysis. 
D)  The payback method is the most popular method of capital budgeting. B

Question 3

An approach that compares two alternatives by computing the differences in cash flows between alternatives and then converting these differences in cash flows to their present values

Accepted Answer

Differential approach

Question 4

The cash inflow effect of a disposal at a gain is equal to the:

Accepted Answer

A)  selling price minus the tax paid 
B)  selling price plus the tax paid 
C)  amount of the loss plus the tax paid 
D)  amount of the loss minus the tax paid 
A)  selling price minus the tax paid 
B)  selling price plus the tax paid 
C)  amount of the loss plus the tax paid 
D)  amount of the loss minus the tax paid

Question 5

A capital- budgeting model that determines the interest rate at which the NPV equals zero

Accepted Answer

Internal r

Question 6

An asset with a book value of $50,000 is sold at a loss (before taxes are considered) of $20,000. The applicable tax rate is 40%. is the tax effect of the loss.

Accepted Answer

A)  $16,000 cash inflow 
B)  $8,000 cash inflow 
C)  $28,000 cash inflow 
D)  $8,000 cash outflow 
A)  $16,000 cash inflow 
B)  $8,000 cash inflow 
C)  $28,000 cash inflow 
D)  $8,000 cash outflow

Question 7

Iverson Company is considering the purchase of a new machine. It will cost $270,000, last for 8 years, and have a zero terminal salvage value at the end of that time. If purchased, the machine is expected to increase revenues by $250,000 per year, but additional cash outlays to operate the machine will equal $200,000 per year.
Use straight- line depreciation and ignore income taxes. Compute:
a. Net present value if the minimum desired rate of return is 10%
b. Payback period
c. Accounting rate of return using initial investment

Accepted Answer

a. [($250,000 - $200,000) x 5.3349] - $2

Question 8

Primarily, working capital = receivables + inventories + payables.

Accepted Answer

A) True 
 B)False

Question 9

An initial investment of $42,000 is expected to generate annual cash flows of $10,000, $15,000, $15,000, and $12,000, respectively. Assume straight- line depreciation and ignore income taxes. The payback period is:

Accepted Answer

A)  3.83 years 
B)  3 years 
C)  3.17 years 
D)  indeterminable because the cash flows are uneven 
A)  3.83 years 
B)  3 years 
C)  3.17 years 
D)  indeterminable because the cash flows are uneven

Question 10

The later a company takes the depreciation on its assets, the greater the present value of the income tax savings.

Accepted Answer

A) True 
 B)False

Question 11

When choosing among several investments, managers should pick the one with the lowest net present value.

Accepted Answer

A) True 
 B)False

Question 12

Sam Butcher Company will purchase a van for $40,000. It will have a depreciable life of 5 years and no terminal salvage value. Assume a tax rate of 40% and a required after- tax rate of return of 12%. The present value of the total after- tax savings from depreciation, if the straight- line method is used, is:

Accepted Answer

A)  $16,000 
B)  $24,000 
C)  $11,535 
D)  $17,303 
A)  $16,000 
B)  $24,000 
C)  $11,535 
D)  $17,303

Question 13

Two common methods for comparing alternatives are (1) the total project approach and (2) the conversion approach.

Accepted Answer

A) True 
 B)False

Question 14

A follow- up evaluation of capital- budgeting decisions

Accepted Answer

The answer of A follow- up evaluation of capital- budgeting...

Question 15

When choosing among several investments:

Accepted Answer

A)  the cost of capital is irrelevant 
B)  risk should not be a factor 
C)  the one with the largest positive present value should be chosen 
D)  the one with the greatest net present value is the least desirable 
A)  the cost of capital is irrelevant 
B)  risk should not be a factor 
C)  the one with the largest positive present value should be chosen 
D)  the one with the greatest net present value is the least desirable

Question 16

The disposal value at the date of termination of a project is:

Accepted Answer

A)  a decrease in the cash outflow in the year acquired 
B)  an increase in the cash inflow in the year of disposal 
C)  an increase in the cash outflow in the year of disposal 
D)  a decrease in the cash inflow in the year acquired 
A)  a decrease in the cash outflow in the year acquired 
B)  an increase in the cash inflow in the year of disposal 
C)  an increase in the cash outflow in the year of disposal 
D)  a decrease in the cash inflow in the year acquired

Question 17

Because a loss on the sale of an asset is tax deductible, companies often benefit more from losses than from gains.

Accepted Answer

A) True 
 B)False

Question 18

When using the NPV model, it is assumed that capital markets are perfect.

Accepted Answer

A) True 
 B)False

Question 19

An asset with a book value of $320,000 is sold at a $240,000 pre- tax gain in a year when the tax rate is 40%. is the net after- tax cash inflow resulting from this transaction.

Accepted Answer

A)  $656,000 
B)  $464,000 
C)  $144,000 
D)  $560,000 
A)  $656,000 
B)  $464,000 
C)  $144,000 
D)  $560,000

Question 20

Federal income taxes are based on the value of a company's assets.

Accepted Answer

A) True 
 B)False

is not a phase of capital budgeting.

Identify which one of the following is a reason to study a simpler model such as the payback method.

An approach that compares two alternatives by computing the differences in cash flows between alternatives and then converting these differences in cash flows to their present values

The cash inflow effect of a disposal at a gain is equal to the:

A capital- budgeting model that determines the interest rate at which the NPV equals zero

An asset with a book value of $50,000 is sold at a loss (before taxes are considered) of $20,000. The applicable tax rate is 40%. is the tax effect of the loss.

Primarily, working capital = receivables + inventories + payables.

An initial investment of $42,000 is expected to generate annual cash flows of $10,000, $15,000, $15,000, and $12,000, respectively. Assume straight- line depreciation and ignore income taxes. The payback period is:

The later a company takes the depreciation on its assets, the greater the present value of the income tax savings.

When choosing among several investments, managers should pick the one with the lowest net present value.

Two common methods for comparing alternatives are (1) the total project approach and (2) the conversion approach.

A follow- up evaluation of capital- budgeting decisions

When choosing among several investments:

The disposal value at the date of termination of a project is:

Because a loss on the sale of an asset is tax deductible, companies often benefit more from losses than from gains.

When using the NPV model, it is assumed that capital markets are perfect.

An asset with a book value of $320,000 is sold at a $240,000 pre- tax gain in a year when the tax rate is 40%. is the net after- tax cash inflow resulting from this transaction.

Federal income taxes are based on the value of a company's assets.

Managerial Accounting and the Business Organization

Introduction to Cost Behavior and Cost Volume Relationships

Measurement of Cost Behavior

Cost Management Systems and Activity-Based Costing

Relevant Information and Decision-Making: Marketing Decisions

Relevant Information and Decision-Making: Product Decisions

The Master Budget

Flexible Budget and Variance Analysis

Management Control Systems and Responsibility Accounting

Management Control in Decentralized Organizations

Cost Allocation

Job-Costing

Process-Costing Systems

Overhead Application: Variable and Absorbtion Costing

Basic Accounting Concepts, Techniques, and Conventions

Understanding Corporate Annual Reports: Basic Financial Statements

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Exam 11: Capital Budgeting

is not a phase of capital budgeting.

Identify which one of the following is a reason to study a simpler model such as the payback method.

An approach that compares two alternatives by computing the differences in cash flows between alternatives and then converting these differences in cash flows to their present values

The cash inflow effect of a disposal at a gain is equal to the:

A capital- budgeting model that determines the interest rate at which the NPV equals zero

An asset with a book value of $50,000 is sold at a loss (before taxes are considered) of $20,000. The applicable tax rate is 40%. is the tax effect of the loss.

Primarily, working capital = receivables + inventories + payables.

An initial investment of $42,000 is expected to generate annual cash flows of $10,000, $15,000, $15,000, and $12,000, respectively. Assume straight- line depreciation and ignore income taxes. The payback period is:

The later a company takes the depreciation on its assets, the greater the present value of the income tax savings.

When choosing among several investments, managers should pick the one with the lowest net present value.

Two common methods for comparing alternatives are (1) the total project approach and (2) the conversion approach.

A follow- up evaluation of capital- budgeting decisions

When choosing among several investments:

The disposal value at the date of termination of a project is:

Because a loss on the sale of an asset is tax deductible, companies often benefit more from losses than from gains.

When using the NPV model, it is assumed that capital markets are perfect.

An asset with a book value of $320,000 is sold at a $240,000 pre- tax gain in a year when the tax rate is 40%. is the net after- tax cash inflow resulting from this transaction.

Federal income taxes are based on the value of a company's assets.

Managerial Accounting and the Business Organization

Introduction to Cost Behavior and Cost Volume Relationships

Measurement of Cost Behavior

Cost Management Systems and Activity-Based Costing

Relevant Information and Decision-Making: Marketing Decisions

Relevant Information and Decision-Making: Product Decisions

The Master Budget

Flexible Budget and Variance Analysis

Management Control Systems and Responsibility Accounting

Management Control in Decentralized Organizations

Cost Allocation

Job-Costing

Process-Costing Systems

Overhead Application: Variable and Absorbtion Costing

Basic Accounting Concepts, Techniques, and Conventions

Understanding Corporate Annual Reports: Basic Financial Statements

Filters