Question 1

The net-present-value method assumes that project funds are reinvested at the:

Accepted Answer

A)  hurdle rate. 
B)  rate of return earned on the project. 
C)  cost of debt capital. 
D)  cost of equity capital. 
E)  internal rate of return. 
A)  hurdle rate. 
B)  rate of return earned on the project. 
C)  cost of debt capital. 
D)  cost of equity capital. 
E)  internal rate of return.

Question 2

When a company is analyzing a capital project by a discounted-cash-flow approach and income taxes are being considered, depreciation:

Accepted Answer

A)  should be ignored. 
B)  should be considered because it results in a tax savings. 
C)  should be considered because it is a fixed cost. 
D)  should be considered because it is a cash inflow. 
E)  should be considered because, like other expenses, it is a cash outlay related to operations. 
A)  should be ignored. 
B)  should be considered because it results in a tax savings. 
C)  should be considered because it is a fixed cost. 
D)  should be considered because it is a cash inflow. 
E)  should be considered because, like other expenses, it is a cash outlay related to operations.

Question 3

Consider the following factors related to an investment:
I. The net income from the investment.
II. The cash flows from the investment.
III. The timing of the cash flows from the investment.
Which of the preceding factors would be important considerations in a net-present-value analysis?

Accepted Answer

A)  I only. 
B)  II only. 
C)  I and II. 
D)  II and III. 
E)  I, II, and III. 
A)  I only. 
B)  II only. 
C)  I and II. 
D)  II and III. 
E)  I, II, and III.

Question 4

The true economic yield produced by an asset is summarized by the asset's:

Accepted Answer

A)  non-discounted cash flows. 
B)  net present value. 
C)  future value. 
D)  annuity discount factor. 
E)  internal rate of return. 
A)  non-discounted cash flows. 
B)  net present value. 
C)  future value. 
D)  annuity discount factor. 
E)  internal rate of return.

Question 5

Both net present value (NPV) and the internal rate of return (IRR) have a reinvestment assumption.
Required:
A. State the assumption for each method.
B. One of the advantages of the NPV method is that users can adjust for risk considerations. Explain how this is done.

Accepted Answer

A. In the NPV method, cash flows are ass

Question 6

Jenkins plans to generate $650,000 of sales revenue if a capital project is implemented. Assuming a 30% tax rate, the sales revenue should be reflected in the analysis by a:

Accepted Answer

A)  $195,000 inflow. 
B)  $195,000 outflow. 
C)  $455,000 inflow. 
D)  $455,000 outflow. 
E)  $650,000 inflow. 
A)  $195,000 inflow. 
B)  $195,000 outflow. 
C)  $455,000 inflow. 
D)  $455,000 outflow. 
E)  $650,000 inflow.

Question 7

The internal-rate-of-return method assumes that project funds are reinvested at the:

Accepted Answer

A)  hurdle rate. 
B)  rate of return earned on the project. 
C)  cost of debt capital. 
D)  cost of equity capital. 
E)  rate of earnings growth (REG). 
A)  hurdle rate. 
B)  rate of return earned on the project. 
C)  cost of debt capital. 
D)  cost of equity capital. 
E)  rate of earnings growth (REG).

Question 8

When making investment decisions that involve advanced manufacturing systems, the use of net present value:

Accepted Answer

A)  presents no special problems for the analyst. 
B)  often gives rise to net-present-value figures that are negative despite a manager's belief that the investment is beneficial for the firm. 
C)  should be coupled with Pareto diagrams. 
D)  often omits a number of factors that are difficult to quantify (e.g., greater manufacturing flexibility, improved product quality, and so forth). 
E)  often gives rise to net-present-value figures that are negative despite a manager's belief that the investment is beneficial for the firm and often omits a number of factors that are difficult to quantify (e.g., greater manufacturing flexibility, improved product quality, and so forth). 
A)  presents no special problems for the analyst. 
B)  often gives rise to net-present-value figures that are negative despite a manager's belief that the investment is beneficial for the firm. 
C)  should be coupled with Pareto diagrams. 
D)  often omits a number of factors that are difficult to quantify (e.g., greater manufacturing flexibility, improved product quality, and so forth). 
E)  often gives rise to net-present-value figures that are negative despite a manager's belief that the investment is beneficial for the firm and often omits a number of factors that are difficult to quantify (e.g., greater manufacturing flexibility, improved product quality, and so forth).

Question 9

If a proposal's profitability index is greater than one:

Accepted Answer

A)  the net present value is negative. 
B)  the net present value is positive. 
C)  the net present value is zero. 
D)  none of these, because the net present value cannot be gauged by the profitability index. 
E)  the proposal should be rejected. 
A)  the net present value is negative. 
B)  the net present value is positive. 
C)  the net present value is zero. 
D)  none of these, because the net present value cannot be gauged by the profitability index. 
E)  the proposal should be rejected.

Question 10

Which of the following project evaluation methods focuses on accounting income rather than cash flows?

Accepted Answer

A)  Net present value. 
B)  Accounting rate of return. 
C)  Internal rate of return. 
D)  Payback period. 
E)  None of the answers is correct. 
A)  Net present value. 
B)  Accounting rate of return. 
C)  Internal rate of return. 
D)  Payback period. 
E)  None of the answers is correct.

Question 11

Coulter Company is studying a capital project that will produce $600,000 of added sales revenue, $400,000 of additional cash operating expenses, and $50,000 of depreciation. Assuming a 30% income tax rate, the company's after-tax cash inflow (outflow) is:

Accepted Answer

A)  $105,000. 
B)  $125,000. 
C)  $155,000. 
D)  $175,000. 
E)  None of the answers is correct. 
A)  $105,000. 
B)  $125,000. 
C)  $155,000. 
D)  $175,000. 
E)  None of the answers is correct.

Question 12

Warner Corporation is considering the acquisition of a new machine that costs $350,000. The machine is expected to have a four-year service life and will produce annual savings in cash operating costs of $100,000. Warner uses the optional straight-line method of depreciation and depreciates the asset over its four-year service life. The company is subject to a 30% income tax rate, has an after-tax hurdle rate of 12%, and rounds calculations to the nearest dollar.
   
Required:
A. Determine the annual after-tax cash flows that result from acquisition of the machine.
B. Calculate the machine's net present value. Is the machine an attractive investment? Why?

Accepted Answer

A. Annual cash operating costs: $(100,00

Question 13

Marker Sail Company plans to purchase $4.5 million of equipment in the not-too-distant future. The equipment will be depreciated by the optional straight-line method over the MACRS life of 5 years. Marker is subject to a 30% income tax rate.
The company's accountant is about to perform a net-present-value analysis, assuming a 10% after-tax hurdle rate.
   
Required:
A. Determine the discounted cash flows that would be reflected in the analysis in year 0 and year 1.
B. Determine the discounted cash flow that would be reflected in the analysis in year 6, assuming that Marker sells the equipment for $450,000,

Accepted Answer

A. Year 0 acquisition cost: $(4,500,000)

Question 14

Under MACRS, an asset's estimated salvage value is not subtracted in computing the asset's depreciation basis.

Accepted Answer

A) True 
 B)False

Question 15

The rule for project acceptance under the net-present-value method is that:

Accepted Answer

A)  NPV should be greater than zero. 
B)  NPV should be less than zero. 
C)  NPV should equal zero. 
D)  NPV should be less than the hurdle rate. 
E)  NPV should equal the hurdle rate. 
A)  NPV should be greater than zero. 
B)  NPV should be less than zero. 
C)  NPV should equal zero. 
D)  NPV should be less than the hurdle rate. 
E)  NPV should equal the hurdle rate.

Question 16

Of the five expenses that follow, which one is most likely treated differently than the others when income taxes are considered in a discounted-cash-flow analysis?

Accepted Answer

A)  Salaries expense. 
B)  Advertising expense. 
C)  Depreciation expense. 
D)  Utilities expense. 
E)  Office expense. 
A)  Salaries expense. 
B)  Advertising expense. 
C)  Depreciation expense. 
D)  Utilities expense. 
E)  Office expense.

Question 17

Which of the following is the proper calculation of a company's depreciation tax shield?

Accepted Answer

A)  Depreciation / tax rate. 
B)  Depreciation / (1 - tax rate). 
C)  Depreciation * tax rate. 
D)  Depreciation * (1 - tax rate). 
E)  Depreciation deduction + income taxes. 
A)  Depreciation / tax rate. 
B)  Depreciation / (1 - tax rate). 
C)  Depreciation * tax rate. 
D)  Depreciation * (1 - tax rate). 
E)  Depreciation deduction + income taxes.

Question 18

Activity-based-costing systems are costly, time-consuming to implement, and do not improve the ability of an analyst to estimate the cash flows associated with a proposed project.

Accepted Answer

A) True 
 B)False

Question 19

When income taxes are considered in capital budgeting, the cash flows related to a company's advertising expense would be correctly figured by taking the cash paid for advertising and:

Accepted Answer

A)  adding the result of multiplying (advertising expense * tax rate). 
B)  adding the tax rate. 
C)  adding the result of multiplying [advertising expense *(1 ‒ tax rate)]. 
D)  subtracting the result of multiplying (advertising expense * tax rate). 
E)  subtracting the result of multiplying [advertising expense * (1 ‒ tax rate)]. 
A)  adding the result of multiplying (advertising expense * tax rate). 
B)  adding the tax rate. 
C)  adding the result of multiplying [advertising expense *(1 ‒ tax rate)]. 
D)  subtracting the result of multiplying (advertising expense * tax rate). 
E)  subtracting the result of multiplying [advertising expense * (1 ‒ tax rate)].

Question 20

St. Michaels School ranks investments by using the profitability index (PI). The following data relate to Project X and Project Y:
 
Which project would be more attractive as judged by its ranking, and why?

Accepted Answer

A)  Project X because the PI is 1.50. 
B)  Project Y because the PI is 1.38. 
C)  Project X because the PI is 0.67. 
D)  Project Y because the PI is 0.72. 
E)  Both projects would be equally attractive in terms of ranking, as indicated by a positive PI. 
A)  Project X because the PI is 1.50. 
B)  Project Y because the PI is 1.38. 
C)  Project X because the PI is 0.67. 
D)  Project Y because the PI is 0.72. 
E)  Both projects would be equally attractive in terms of ranking, as indicated by a positive PI.

The net-present-value method assumes that project funds are reinvested at the:

When a company is analyzing a capital project by a discounted-cash-flow approach and income taxes are being considered, depreciation:

Consider the following factors related to an investment: I. The net income from the investment. II. The cash flows from the investment. III. The timing of the cash flows from the investment. Which of the preceding factors would be important considerations in a net-present-value analysis?

The true economic yield produced by an asset is summarized by the asset's:

Both net present value (NPV) and the internal rate of return (IRR) have a reinvestment assumption. Required: A. State the assumption for each method. B. One of the advantages of the NPV method is that users can adjust for risk considerations. Explain how this is done.

Jenkins plans to generate $650,000 of sales revenue if a capital project is implemented. Assuming a 30% tax rate, the sales revenue should be reflected in the analysis by a:

The internal-rate-of-return method assumes that project funds are reinvested at the:

When making investment decisions that involve advanced manufacturing systems, the use of net present value:

If a proposal's profitability index is greater than one:

Which of the following project evaluation methods focuses on accounting income rather than cash flows?

Coulter Company is studying a capital project that will produce $600,000 of added sales revenue, $400,000 of additional cash operating expenses, and $50,000 of depreciation. Assuming a 30% income tax rate, the company's after-tax cash inflow (outflow) is:

Under MACRS, an asset's estimated salvage value is not subtracted in computing the asset's depreciation basis.

The rule for project acceptance under the net-present-value method is that:

Of the five expenses that follow, which one is most likely treated differently than the others when income taxes are considered in a discounted-cash-flow analysis?

Which of the following is the proper calculation of a company's depreciation tax shield?

Activity-based-costing systems are costly, time-consuming to implement, and do not improve the ability of an analyst to estimate the cash flows associated with a proposed project.

When income taxes are considered in capital budgeting, the cash flows related to a company's advertising expense would be correctly figured by taking the cash paid for advertising and:

St. Michaels School ranks investments by using the profitability index (PI). The following data relate to Project X and Project Y: Which project would be more attractive as judged by its ranking, and why?

The Changing Role of Managerial Accounting in a Dynamic Business Environment

Basic Cost Management Concepts

Product Costing and Cost Accumulation in a Batch Production Environment

Process Costing and Hybrid Product-Costing Systems

Activity-Based Costing and Management

Activity Analysis, Cost Behavior, and Cost Estimation

Cost-Volume-Profit Analysis

Variable Costing and the Costs of Quality and Sustainability

Financial Planning and Analysis: the Master Budget

Standard Costing and Analysis of Direct Costs

Flexible Budgeting and Analysis of Overhead Costs

Responsibility Accounting, Operational Performance Measures, and the Balanced Scorecard

Investment Centers and Transfer Pricing

Decision Making: Relevant Costs and Benefits

Target Costing and Cost Analysis for Pricing Decisions

Allocation of Support Activity Costs and Joint Costs

The Sarbanes-Oxley Act, Internal Controls, and Management Accounting

Compound Interest and the Concept of Present Value

Inventory Management

Filters

Exam 16: Capital Expenditure Decisions

The net-present-value method assumes that project funds are reinvested at the:

When a company is analyzing a capital project by a discounted-cash-flow approach and income taxes are being considered, depreciation:

Consider the following factors related to an investment: I. The net income from the investment. II. The cash flows from the investment. III. The timing of the cash flows from the investment. Which of the preceding factors would be important considerations in a net-present-value analysis?

The true economic yield produced by an asset is summarized by the asset's:

Both net present value (NPV) and the internal rate of return (IRR) have a reinvestment assumption. Required: A. State the assumption for each method. B. One of the advantages of the NPV method is that users can adjust for risk considerations. Explain how this is done.

Jenkins plans to generate $650,000 of sales revenue if a capital project is implemented. Assuming a 30% tax rate, the sales revenue should be reflected in the analysis by a:

The internal-rate-of-return method assumes that project funds are reinvested at the:

When making investment decisions that involve advanced manufacturing systems, the use of net present value:

If a proposal's profitability index is greater than one:

Which of the following project evaluation methods focuses on accounting income rather than cash flows?

Coulter Company is studying a capital project that will produce $600,000 of added sales revenue, $400,000 of additional cash operating expenses, and $50,000 of depreciation. Assuming a 30% income tax rate, the company's after-tax cash inflow (outflow) is:

Under MACRS, an asset's estimated salvage value is not subtracted in computing the asset's depreciation basis.

The rule for project acceptance under the net-present-value method is that:

Of the five expenses that follow, which one is most likely treated differently than the others when income taxes are considered in a discounted-cash-flow analysis?

Which of the following is the proper calculation of a company's depreciation tax shield?

Activity-based-costing systems are costly, time-consuming to implement, and do not improve the ability of an analyst to estimate the cash flows associated with a proposed project.

When income taxes are considered in capital budgeting, the cash flows related to a company's advertising expense would be correctly figured by taking the cash paid for advertising and:

St. Michaels School ranks investments by using the profitability index (PI). The following data relate to Project X and Project Y: Which project would be more attractive as judged by its ranking, and why?

The Changing Role of Managerial Accounting in a Dynamic Business Environment

Basic Cost Management Concepts

Product Costing and Cost Accumulation in a Batch Production Environment

Process Costing and Hybrid Product-Costing Systems

Activity-Based Costing and Management

Activity Analysis, Cost Behavior, and Cost Estimation

Cost-Volume-Profit Analysis

Variable Costing and the Costs of Quality and Sustainability

Financial Planning and Analysis: the Master Budget

Standard Costing and Analysis of Direct Costs

Flexible Budgeting and Analysis of Overhead Costs

Responsibility Accounting, Operational Performance Measures, and the Balanced Scorecard

Investment Centers and Transfer Pricing

Decision Making: Relevant Costs and Benefits

Target Costing and Cost Analysis for Pricing Decisions

Allocation of Support Activity Costs and Joint Costs

The Sarbanes-Oxley Act, Internal Controls, and Management Accounting

Compound Interest and the Concept of Present Value

Inventory Management

Filters