Question 1

The minimum rate under the NPV method is based on the cost of capital.

Accepted Answer

A) True 
 B)False

Question 2

The cost of capital is equal to the interest expense on the money borrowed for the project.

Accepted Answer

A) True 
 B)False

Question 3

The lower the minimum desired rate of return, the lower the present value of each future cash inflow.

Accepted Answer

A) True 
 B)False

Question 4

Managers may use the payback period as a rough estimate of the riskiness of a project.

Accepted Answer

A) True 
 B)False

Question 5

A nondiscounted cash flows model that does not measure profitability, but it provides a rough estimate of risk

Accepted Answer

The answer of A nondiscounted cash flows model that does...

Question 6

Ginger Company is contemplating acquiring one of the following machines: $\begin{array}{lll}&\text { M achine } A&\text { M achine } B\
\text { Initial investment } & \$ 180,000 & \$ 225,000 \
\text { Additional annual: } & & \
\text { R evenues } & \$ 90,000 & \$ 150,000 \
\text { Cash expenses } & \$ 25,000 & \$ 85,000\\text { Terminal salvage value } & -0- & -0- \\text { Estimated useful life }& 5 \text { years } & 5 \text { years } \\text { Minimum desired rate } \\text { of return }& 14 \% & 14 \%
\end{array}$ Assume straight- line depreciation and ignore income taxes. Required:
Calculate the net present value for both machines and choose the best alternative.

Accepted Answer

3.4331 is the present value factor for a

Question 7

A 5- year depreciation period usually means that:

Accepted Answer

A)  the company will depreciate the asset over 5 years for tax purposes 
B)  the company expects to use the asset for 5 years 
C)  the original cost of the asset will be recouped in 5 years 
D)  All of these answers are correct. 
A)  the company will depreciate the asset over 5 years for tax purposes 
B)  the company expects to use the asset for 5 years 
C)  the original cost of the asset will be recouped in 5 years 
D)  All of these answers are correct.

Question 8

Below are two potential investment alternatives: $\begin{array}{lll}&A&B\
\text { Initial capital investment } & & \
\$ 180,000 & \$ 270,000 & \
\text { Estimated useful life } & 3 \text { yrs. } & 3 \text { yrs. } \
\text { Estimated terminal salvage value } & -0- & -0- \
\text { Estimated annual savings in cash } & & \
\text { op erating costs } & \$ 75,000 & \$ 120,00 \
\text { Minimum desired rate of return } & 10 \% & 12 \%
\end{array}$
 Assume straight- line depreciation in all computations, and ignore income taxes. The net present value in investment A is:

Accepted Answer

A)  $75,000 
B)  $6,518 
C)  $(123,652) 
D)  $186,518 
A)  $75,000 
B)  $6,518 
C)  $(123,652) 
D)  $186,518

Question 9

The payback model measures profitability as well as how quickly investment dollars may be recouped.

Accepted Answer

A) True 
 B)False

Question 10

Duncan Company's income tax rate is 30%. Duncan Company wishes to sell a machine with a book value of
$40,000.
Required:
a. Assume that the machine is sold for $45,000. What is the effect on the cash flows, after taxes?
b. Assume that the machine is sold for $35,000. What is the effect on the cash flows, after taxes?

Accepted Answer

a. $45,000 - [($45,000 - $40,0

Question 11

When comparing projects using the differential approach, a manager should:

Accepted Answer

A)  choose the first project considered if the present value is positive 
B)  choose the second project considered if the present value positive 
C)  choose the project with the largest positive net present value 
D)  choose the project with the largest negative net present value 
A)  choose the first project considered if the present value is positive 
B)  choose the second project considered if the present value positive 
C)  choose the project with the largest positive net present value 
D)  choose the project with the largest negative net present value

Question 12

If the IRR is less than the minimum desired rate of return, a project is not desirable.

Accepted Answer

A) True 
 B)False

Question 13

The accounting rate- of- return model shows the effects of an investment on an organization's financial statements.

Accepted Answer

A) True 
 B)False

Question 14

An initial investment of $270,000 is expected to generate $120,000 in annual cost savings over the asset's expected 3- year life. Assume straight- line depreciation and ignore income taxes. The accounting rate of return based on initial investment is:

Accepted Answer

A)  33.33% 
B)  11.11% 
C)  44.44% 
D)  None of these answers is correct. 
A)  33.33% 
B)  11.11% 
C)  44.44% 
D)  None of these answers is correct.

Question 15

The net present value model expresses all cash flows in monetary units measured at time zero.

Accepted Answer

A) True 
 B)False

Question 16

Caribbean Corporation is considering the purchase of equipment for $360,000. The asset will have a 10- year life, no terminal salvage value, and straight- line depreciation will be used for tax purposes. It is expected that annual sales of the product manufactured by the equipment will be $180,000, and that there will be annual production costs, exclusive of depreciation, equal to
$120,000. The tax rate applicable to the company is 30%. The annual net after- tax cash effect of operations, exclusive of depreciation, is a(n):

Accepted Answer

A)  $18,000 inflow 
B)  $42,000 inflow 
C)  $18,000 outflow 
D)  $42,000 outflow 
A)  $18,000 inflow 
B)  $42,000 inflow 
C)  $18,000 outflow 
D)  $42,000 outflow

Question 17

When making capital budgeting decisions, the manager should consider the marginal tax rate, not the average tax rate that applies to the company.

Accepted Answer

A) True 
 B)False

Question 18

When considering the net cash inflows resulting from a capital- budgeting decision, taxes will:

Accepted Answer

A)  increase the amount of the cash savings by (1 - tax rate) 
B)  increase the amount of the cash savings by the tax rate 
C)  reduce the amount of the cash savings by (1 - tax rate) 
D)  reduce the amount of the cash savings by the tax rate 
A)  increase the amount of the cash savings by (1 - tax rate) 
B)  increase the amount of the cash savings by the tax rate 
C)  reduce the amount of the cash savings by (1 - tax rate) 
D)  reduce the amount of the cash savings by the tax rate

Question 19

An asset with a book value of $40,000 is sold at a loss (before taxes are considered) of $20,000. The applicable tax rate is 40%. The net after- tax cash effect of this transaction is a:

Accepted Answer

A)  $28,000 cash inflow 
B)  $12,000 cash outflow 
C)  $48,000 cash inflow 
D)  $20,000 cash inflow 
A)  $28,000 cash inflow 
B)  $12,000 cash outflow 
C)  $48,000 cash inflow 
D)  $20,000 cash inflow

Question 20

DCF methods are not based on the theory of compound interest.

Accepted Answer

A) True 
 B)False

The minimum rate under the NPV method is based on the cost of capital.

The cost of capital is equal to the interest expense on the money borrowed for the project.

The lower the minimum desired rate of return, the lower the present value of each future cash inflow.

Managers may use the payback period as a rough estimate of the riskiness of a project.

A nondiscounted cash flows model that does not measure profitability, but it provides a rough estimate of risk

A 5- year depreciation period usually means that:

The payback model measures profitability as well as how quickly investment dollars may be recouped.

When comparing projects using the differential approach, a manager should:

If the IRR is less than the minimum desired rate of return, a project is not desirable.

The accounting rate- of- return model shows the effects of an investment on an organization's financial statements.

An initial investment of $270,000 is expected to generate $120,000 in annual cost savings over the asset's expected 3- year life. Assume straight- line depreciation and ignore income taxes. The accounting rate of return based on initial investment is:

The net present value model expresses all cash flows in monetary units measured at time zero.

When making capital budgeting decisions, the manager should consider the marginal tax rate, not the average tax rate that applies to the company.

When considering the net cash inflows resulting from a capital- budgeting decision, taxes will:

An asset with a book value of $40,000 is sold at a loss (before taxes are considered) of $20,000. The applicable tax rate is 40%. The net after- tax cash effect of this transaction is a:

DCF methods are not based on the theory of compound interest.

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

The minimum rate under the NPV method is based on the cost of capital.

The cost of capital is equal to the interest expense on the money borrowed for the project.

The lower the minimum desired rate of return, the lower the present value of each future cash inflow.

Managers may use the payback period as a rough estimate of the riskiness of a project.

A nondiscounted cash flows model that does not measure profitability, but it provides a rough estimate of risk

A 5- year depreciation period usually means that:

The payback model measures profitability as well as how quickly investment dollars may be recouped.

When comparing projects using the differential approach, a manager should:

If the IRR is less than the minimum desired rate of return, a project is not desirable.

The accounting rate- of- return model shows the effects of an investment on an organization's financial statements.

An initial investment of $270,000 is expected to generate $120,000 in annual cost savings over the asset's expected 3- year life. Assume straight- line depreciation and ignore income taxes. The accounting rate of return based on initial investment is:

The net present value model expresses all cash flows in monetary units measured at time zero.

When making capital budgeting decisions, the manager should consider the marginal tax rate, not the average tax rate that applies to the company.

When considering the net cash inflows resulting from a capital- budgeting decision, taxes will:

An asset with a book value of $40,000 is sold at a loss (before taxes are considered) of $20,000. The applicable tax rate is 40%. The net after- tax cash effect of this transaction is a:

DCF methods are not based on the theory of compound interest.

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