Question 1

The last step in any investment analysis is to determine the cash flows that are relevant to the analysis.

Accepted Answer

A) True 
 B)False

Question 2

Kansas Corporation is reviewing an investment proposal that has an initial cost of $52,500. An estimate of the investment's end-of-year book value, the yearly after-tax net cash inflows, and the yearly net income are presented in the schedule below. Yearly after-tax net cash inflows include savings from the depreciation tax shield. The investment's salvage value at the end of each year is equal to book value, and there will be no salvage value at the end of the investment's life.
   
Kansas uses a 14% after-tax target rate of return for new investment proposals.

Accepted Answer

A. The project's payback is 3 years. By

Question 3

Some investment proposals require additional outlays for working capital.

Accepted Answer

A) True 
 B)False

Question 4

Higgins Company plans to incur $350,000 of salaries expense if a capital project is implemented. Assuming a 30% tax rate, the salaries should be reflected in the analysis by a:

Accepted Answer

A)  $105,000 inflow. 
B)  $105,000 outflow. 
C)  $245,000 inflow. 
D)  $245,000 outflow. 
E)  $350,000 outflow. 
A)  $105,000 inflow. 
B)  $105,000 outflow. 
C)  $245,000 inflow. 
D)  $245,000 outflow. 
E)  $350,000 outflow.

Question 5

The rule for project acceptance under the internal rate of return method is that:

Accepted Answer

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

Question 6

Clear Skies Airline Company is planning a project that is expected to last for six years and generate annual net cash inflows of $75,000. The project will require the purchase of a $280,000 machine, which is expected to have a salvage value of $10,000 at the end of the six-year period. The machine will require a $50,000 overhaul at the end of the fourth year. The company presently has a 12% minimum desired rate of return.
Based on this information, an accountant prepared the following analysis:
   
The accountant recommends that the project be rejected because it does not meet the company's minimum desired rate of return. Ignore income taxes. 
Required:
A. What criticism(s) would you make of the accountant's evaluation?
B. Use the net-present-value method and determine whether the project should be accepted.
C. Based on your answer in requirement "B," is the internal rate of return greater or less than 12%? Explain.

Accepted Answer

A. The accountant is focusing on income

Question 7

A machine costs $25,000; it is expected to generate annual cash revenues of $8,000 and annual cash expenses of $2,000 for five years. The required rate of return is 12%. Using the tables that follow, which of the following statements about the machine's internal rate of return is true?

Accepted Answer

A)  The internal rate of return is greater than 12%. 
B)  The internal rate of return is between 10% and 12%. 
C)  The internal rate of return is less than 10%. 
D)  The internal rate of return must be greater than 15%. 
E)  There is insufficient information to make any judgment about the internal rate of return. 
A)  The internal rate of return is greater than 12%. 
B)  The internal rate of return is between 10% and 12%. 
C)  The internal rate of return is less than 10%. 
D)  The internal rate of return must be greater than 15%. 
E)  There is insufficient information to make any judgment about the internal rate of return.

Question 8

An increased number of companies are investing in advanced manufacturing systems.
Required:
A. Many proposed advanced manufacturing systems have a negative net present value when discounted-cash-flow analysis is used. Explain several causes of this situation.
B. Two major benefits of advanced systems are greater flexibility in the manufacturing process and improvements in product quality. Explain how these benefits can create problems when performing discounted-cash-flow analysis.

Accepted Answer

A. Negative net present values may arise

Question 9

Hampton Company plans to incur $230,000 of additional cash operating expenses and produce $410,000 of additional sales revenue if a capital project is implemented. Assuming a 30% tax rate, these two items collectively should appear in a capital budgeting analysis as:

Accepted Answer

A)  a $57,000 inflow. 
B)  a $57,000 outflow. 
C)  a $126,000 outflow. 
D)  a $126,000 inflow. 
E)  a $161,000 outflow. 
A)  a $57,000 inflow. 
B)  a $57,000 outflow. 
C)  a $126,000 outflow. 
D)  a $126,000 inflow. 
E)  a $161,000 outflow.

Question 10

Workman Company is considering a five-year project that requires a typical investment in working capital, in this case, $100,000. Consider the following statements about this situation:
I. Workman should include a $100,000 outflow that occurs at time 0 in a discounted-cash-flow analysis.
II. Workman should include separate $100,000 outflows in each year of the project's five-year life.
III. Workman should include a $100,000 recovery of its working-capital investment in year 5 of a discounted-cash-flow analysis.
Which of the above statements is (are) correct?

Accepted Answer

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

Question 11

A company used the net-present-value method to analyze an investment and found the investment to be very attractive. If the firm used Modified Accelerated Cost Recovery System (MACRS) and changes to the straight-line depreciation, the investment's net present value will:

Accepted Answer

A)  increase. 
B)  remain the same. 
C)  decrease. 
D)  change, but the direction cannot be determined based on the data presented. 
E)  fluctuate in an erratic manner. 
A)  increase. 
B)  remain the same. 
C)  decrease. 
D)  change, but the direction cannot be determined based on the data presented. 
E)  fluctuate in an erratic manner.

Question 12

The payback period can only be used if net cash inflows are uniform throughout a project's life.

Accepted Answer

A) True 
 B)False

Question 13

A cash flow measured in real dollars:

Accepted Answer

A)  is the actual cash flow that we experience. 
B)  is the actual cash flow adjusted for a change in the dollar's purchasing power. 
C)  reflects the time value of money. 
D)  equals the cash flow measured in nominal dollars. 
E)  coincides with the amount of contemplated new investment. 
A)  is the actual cash flow that we experience. 
B)  is the actual cash flow adjusted for a change in the dollar's purchasing power. 
C)  reflects the time value of money. 
D)  equals the cash flow measured in nominal dollars. 
E)  coincides with the amount of contemplated new investment.

Question 14

The systematic follow-up on a capital project to see how the project actually turns out is commonly known as:

Accepted Answer

A)  capital budgeting assessment (CB
A) . 
B)  a postaudit. 
C)  control of capital expenditures (CC
E) . 
D)  overall cost performance. 
E)  the cost evaluation phase. 
A)  capital budgeting assessment (CB
A) . 
B)  a postaudit. 
C)  control of capital expenditures (CC
E) . 
D)  overall cost performance. 
E)  the cost evaluation phase.

Question 15

In eight years, Shu Company plans to receive $11,000 cash from the sale of a machine that has a $16,000 book value.
 
If the firm is subject to a 30% income tax rate and has a 12% after-tax hurdle rate, the correct discounted net cash flow would be:

Accepted Answer

A)  $606. 
B)  $1,414. 
C)  $3,838. 
D)  $5,050. 
E)  None of the answers is correct. 
A)  $606. 
B)  $1,414. 
C)  $3,838. 
D)  $5,050. 
E)  None of the answers is correct.

Question 16

A machine was sold in December 20x3 for $9,000. It was purchased in January 20x1 for $15,000, and depreciation of $12,000 was recorded from the date of purchase through the date of disposal. Assuming a 40% income tax rate, the after-tax cash inflow at the time of sale is:

Accepted Answer

A)  $3,600. 
B)  $6,600. 
C)  $8,400. 
D)  $9,000. 
E)  $11,400. 
A)  $3,600. 
B)  $6,600. 
C)  $8,400. 
D)  $9,000. 
E)  $11,400.

Question 17

Julio Company purchased a $200,000 machine that has a four-year life and no salvage value. The company uses straight-line depreciation on all asset acquisitions and is subject to a 30% tax rate. The proper cash flow to show in a discounted-cash-flow analysis as occurring at time 0 would be:

Accepted Answer

A)  $(200,000). 
B)  $(140,000). 
C)  $(35,000). 
D)  $15,000. 
E)  $50,000. 
A)  $(200,000). 
B)  $(140,000). 
C)  $(35,000). 
D)  $15,000. 
E)  $50,000.

Question 18

Two widely used methods of discounted-cash-flow analysis are the net-present-value method and the return on assets method.

Accepted Answer

A) True 
 B)False

Question 19

Depreciation is often described as a "tax shield."
Required:
A. Explain how depreciation provides such a shield.
B. MACRS is an accelerated depreciation system. Explain how an accelerated system can provide a more beneficial tax shield than, say, a straight-line depreciation system.

Accepted Answer

A. Depreciation does not require a cash

Question 20

If a proposal's profitability index is greater than one then the net present value is positive.

Accepted Answer

A) True 
 B)False

The last step in any investment analysis is to determine the cash flows that are relevant to the analysis.

Some investment proposals require additional outlays for working capital.

Higgins Company plans to incur $350,000 of salaries expense if a capital project is implemented. Assuming a 30% tax rate, the salaries should be reflected in the analysis by a:

The rule for project acceptance under the internal rate of return method is that:

A machine costs $25,000; it is expected to generate annual cash revenues of $8,000 and annual cash expenses of $2,000 for five years. The required rate of return is 12%. Using the tables that follow, which of the following statements about the machine's internal rate of return is true?

Hampton Company plans to incur $230,000 of additional cash operating expenses and produce $410,000 of additional sales revenue if a capital project is implemented. Assuming a 30% tax rate, these two items collectively should appear in a capital budgeting analysis as:

A company used the net-present-value method to analyze an investment and found the investment to be very attractive. If the firm used Modified Accelerated Cost Recovery System (MACRS) and changes to the straight-line depreciation, the investment's net present value will:

The payback period can only be used if net cash inflows are uniform throughout a project's life.

A cash flow measured in real dollars:

The systematic follow-up on a capital project to see how the project actually turns out is commonly known as:

In eight years, Shu Company plans to receive $11,000 cash from the sale of a machine that has a $16,000 book value. If the firm is subject to a 30% income tax rate and has a 12% after-tax hurdle rate, the correct discounted net cash flow would be:

A machine was sold in December 20x3 for $9,000. It was purchased in January 20x1 for $15,000, and depreciation of $12,000 was recorded from the date of purchase through the date of disposal. Assuming a 40% income tax rate, the after-tax cash inflow at the time of sale is:

Julio Company purchased a $200,000 machine that has a four-year life and no salvage value. The company uses straight-line depreciation on all asset acquisitions and is subject to a 30% tax rate. The proper cash flow to show in a discounted-cash-flow analysis as occurring at time 0 would be:

Two widely used methods of discounted-cash-flow analysis are the net-present-value method and the return on assets method.

Depreciation is often described as a "tax shield." Required: A. Explain how depreciation provides such a shield. B. MACRS is an accelerated depreciation system. Explain how an accelerated system can provide a more beneficial tax shield than, say, a straight-line depreciation system.

If a proposal's profitability index is greater than one then the net present value is positive.

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 last step in any investment analysis is to determine the cash flows that are relevant to the analysis.

Some investment proposals require additional outlays for working capital.

Higgins Company plans to incur $350,000 of salaries expense if a capital project is implemented. Assuming a 30% tax rate, the salaries should be reflected in the analysis by a:

The rule for project acceptance under the internal rate of return method is that:

A machine costs $25,000; it is expected to generate annual cash revenues of $8,000 and annual cash expenses of $2,000 for five years. The required rate of return is 12%. Using the tables that follow, which of the following statements about the machine's internal rate of return is true?

Hampton Company plans to incur $230,000 of additional cash operating expenses and produce $410,000 of additional sales revenue if a capital project is implemented. Assuming a 30% tax rate, these two items collectively should appear in a capital budgeting analysis as:

A company used the net-present-value method to analyze an investment and found the investment to be very attractive. If the firm used Modified Accelerated Cost Recovery System (MACRS) and changes to the straight-line depreciation, the investment's net present value will:

The payback period can only be used if net cash inflows are uniform throughout a project's life.

A cash flow measured in real dollars:

The systematic follow-up on a capital project to see how the project actually turns out is commonly known as:

In eight years, Shu Company plans to receive $11,000 cash from the sale of a machine that has a $16,000 book value. If the firm is subject to a 30% income tax rate and has a 12% after-tax hurdle rate, the correct discounted net cash flow would be:

A machine was sold in December 20x3 for $9,000. It was purchased in January 20x1 for $15,000, and depreciation of $12,000 was recorded from the date of purchase through the date of disposal. Assuming a 40% income tax rate, the after-tax cash inflow at the time of sale is:

Julio Company purchased a $200,000 machine that has a four-year life and no salvage value. The company uses straight-line depreciation on all asset acquisitions and is subject to a 30% tax rate. The proper cash flow to show in a discounted-cash-flow analysis as occurring at time 0 would be:

Two widely used methods of discounted-cash-flow analysis are the net-present-value method and the return on assets method.

Depreciation is often described as a "tax shield." Required: A. Explain how depreciation provides such a shield. B. MACRS is an accelerated depreciation system. Explain how an accelerated system can provide a more beneficial tax shield than, say, a straight-line depreciation system.

If a proposal's profitability index is greater than one then the net present value is positive.

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