Question 1

The compensation a company receives for investing in capital assets is referred to as a return on investment.

Accepted Answer

A) True 
 B)False

Question 2

Select the incorrect statement regarding postaudits of capital investment decisions.

Accepted Answer

A)  A postaudit should be conducted at the end of the project. 
B)  The postaudit helps management determine whether a project that had been accepted should have been rejected. 
C)  A postaudit is only necessary for a capital investment selected using a technique that does not consider the time value of money. 
D)  The goal of a postaudit is to provide feedback that can be used to improve the accuracy of future capital investment decisions. 
A)  A postaudit should be conducted at the end of the project. 
B)  The postaudit helps management determine whether a project that had been accepted should have been rejected. 
C)  A postaudit is only necessary for a capital investment selected using a technique that does not consider the time value of money. 
D)  The goal of a postaudit is to provide feedback that can be used to improve the accuracy of future capital investment decisions.

Question 3

Findell Corporation is considering two projects, A and B, and it has gathered the following estimates for the projects $\begin{array}{lcc}
&\text {Project A}&\text {Project B}\
\text { Useful life } & 5 \text { Years } & 5 \text { Years } \
\text { Present value of cash inflows } & \$ 84,360 & \$ 55,100 \
\text { Present value of cash outflows } & \$ 77,000 & \$ 49.000
\end{array}$ What is the present value index for Project A?

Accepted Answer

A)  1.096 
B)  1.124 
C)  0.889 
D)  0.913 
A)  1.096 
B)  1.124 
C)  0.889 
D)  0.913

Question 4

Southport Company is considering the purchase of a piece of equipment that costs $100,000. The equipment would be depreciated on a straight-line basis to its expected salvage value of $10,000 over its 10-year useful life. Assuming a tax rate of 40%, what is the annual amount of the depreciation tax shield provided by this investment?

Accepted Answer

A)  $4,000 
B)  $9,000 
C)  $3,600 
D)  None of these answers is correct. 
A)  $4,000 
B)  $9,000 
C)  $3,600 
D)  None of these answers is correct.

Question 5

Capital investment decisions involve all of the following, except:

Accepted Answer

A)  the acquisition of short-term operational assets. 
B)  projects requiring relatively long periods of time and large cash flows. 
C)  the acquisition of long-term operational assets. 
D)  None of these answers are correct. 
A)  the acquisition of short-term operational assets. 
B)  projects requiring relatively long periods of time and large cash flows. 
C)  the acquisition of long-term operational assets. 
D)  None of these answers are correct.

Question 6

Describe how the unadjusted rate of return for a capital investment is calculated. Should it be based on the net cost of the investment or the average investment?

Accepted Answer

Answers will vary.Unadjusted rate of ret

Question 7

Cash outflows can be categorized into all of the following groups except:

Accepted Answer

A)  opportunity costs associated with selecting a specific capital project. 
B)  outflows associated with the initial investment. 
C)  working capital commitments. 
D)  increases in operating expenses. 
A)  opportunity costs associated with selecting a specific capital project. 
B)  outflows associated with the initial investment. 
C)  working capital commitments. 
D)  increases in operating expenses.

Question 8

What is a postaudit of a capital investment decision, and how should the postaudit be conducted?

Accepted Answer

Answers will vary.A postaudit is a revie

Question 9

Newton Company is considering the purchase of an asset that will provide a depreciation tax shield of $10,000 per year for 10 years. Assuming the company is subject to a 40% tax rate during the period and a zero salvage value, what is the depreciable cost of the new asset?

Accepted Answer

A)  $100,000 
B)  $250,000 
C)  $400,000 
D)  Can't be determined from the information provided 
A)  $100,000 
B)  $250,000 
C)  $400,000 
D)  Can't be determined from the information provided

Question 10

The purposes of the postaudit for capital investments include all of the following except:

Accepted Answer

A)  continuous improvement. 
B)  rewarding managers for increasing idle cash. 
C)  determining whether the project generated the results expected. 
D)  encouraging managers to closely scrutinize capital investment decisions. 
A)  continuous improvement. 
B)  rewarding managers for increasing idle cash. 
C)  determining whether the project generated the results expected. 
D)  encouraging managers to closely scrutinize capital investment decisions.

Question 11

Pierce Company is considering the purchase of new equipment that will cost $150,000. The equipment will save the company $48,000 per year in cash operating costs. The equipment has an estimated useful life of five years and no expected salvage value. The company's cost of capital is 12%.(PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided.)Required:Assuming the company is subject to a 40% tax rate, compute the net present value.Compute the amount of the annual depreciation tax shield provided by the new equipment.Should the equipment be purchased? Why or why not?

Accepted Answer

To calculate the net present value (NPV)

Question 12

Bristles Hair Salon is considering installing spray-tanning booths. The booths cost $220,000 and have an estimated five-year useful life. Ignore income taxes. The following pro forma income statement is provided:
   Required:Bristles would like to recoup its original investment in less than four years. Compute the payback period for the tanning booth investment. Would you recommend that the booths be purchased? Why or why not?Bristles' minimum acceptable unadjusted rate of return is 11%. Compute the unadjusted rate of return on the original investment. Would you recommend that the booths be purchased? Why or why not?

Accepted Answer

The answer of Bristles Hair Salon is considering installing spray-tanning...

Question 13

Why does a company use its cost of capital as the minimum required rate of return for its capital investment decisions?

Accepted Answer

Answers will vary.The cost of capital me

Question 14

The payback method shows how long will be required to recover the cost of an investment in a capital asset.

Accepted Answer

A) True 
 B)False

Question 15

Omicron Company is considering purchasing equipment that would cost $60,000 and have a useful life of 5 years. The equipment is expected to provide net cash inflows of $16,000 per year. Omicron's cost of capital is 12%.Required:Estimate the internal rate of return for this capital investment. Is this an acceptable investment? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Accepted Answer

The answer of Omicron Company is considering purchasing equipment that...

Question 16

If the net present value for a capital investment is equal to zero, the internal rate of return for the investment is equal to the required rate of return.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements about postaudits is correct?

Accepted Answer

A)  A postaudit should be conducted at the time a capital investment is purchased. 
B)  The postaudit of a capital investment project should be made using the same analytical technique that was used in deciding to make the investment. 
C)  The purpose of postaudits is to improve a company's cost-volume-profit analysis. 
D)  The postaudit process uses expected cash flows and the company's cost of capital.
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
137) Why is the time value of money often taken into account in analyzing a capital investment? 
A)  A postaudit should be conducted at the time a capital investment is purchased. 
B)  The postaudit of a capital investment project should be made using the same analytical technique that was used in deciding to make the investment. 
C)  The purpose of postaudits is to improve a company's cost-volume-profit analysis. 
D)  The postaudit process uses expected cash flows and the company's cost of capital.
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
137) Why is the time value of money often taken into account in analyzing a capital investment?

Question 18

Indicate whether each of the following statements is true or false. A capital investment is a purchase of a long-term operational asset. ______Investments in capital assets normally are recovered by selling the assets. ______The profitability of a business is greatly influenced by the quality of its capital investment decisions. ______A capital investment decision exchanges current cash inflows for future cash outflows. ______The time value of money concept is often used in making capital investment decisions. ______

Accepted Answer

A capital investment is a purchase of a

Question 19

For a capital investment project to be acceptable, it must generate a rate of return:

Accepted Answer

A)  less than the hurdle rate. 
B)  equal to or greater than the cost of capital. 
C)  equal to the conversion rate. 
D)  None of these answers are correct. 
A)  less than the hurdle rate. 
B)  equal to or greater than the cost of capital. 
C)  equal to the conversion rate. 
D)  None of these answers are correct.

Question 20

The rate of return that equates the present value of cash inflows and outflows is the:

Accepted Answer

A)  minimum rate of return. 
B)  internal rate of return. 
C)  desired rate of return. 
D)  hurdle rate. 
A)  minimum rate of return. 
B)  internal rate of return. 
C)  desired rate of return. 
D)  hurdle rate.

The compensation a company receives for investing in capital assets is referred to as a return on investment.

Select the incorrect statement regarding postaudits of capital investment decisions.

Capital investment decisions involve all of the following, except:

Describe how the unadjusted rate of return for a capital investment is calculated. Should it be based on the net cost of the investment or the average investment?

Cash outflows can be categorized into all of the following groups except:

What is a postaudit of a capital investment decision, and how should the postaudit be conducted?

Newton Company is considering the purchase of an asset that will provide a depreciation tax shield of $10,000 per year for 10 years. Assuming the company is subject to a 40% tax rate during the period and a zero salvage value, what is the depreciable cost of the new asset?

The purposes of the postaudit for capital investments include all of the following except:

Why does a company use its cost of capital as the minimum required rate of return for its capital investment decisions?

The payback method shows how long will be required to recover the cost of an investment in a capital asset.

If the net present value for a capital investment is equal to zero, the internal rate of return for the investment is equal to the required rate of return.

Which of the following statements about postaudits is correct?

For a capital investment project to be acceptable, it must generate a rate of return:

The rate of return that equates the present value of cash inflows and outflows is the:

An Introduction to Accounting

Accounting for Accruals and Deferrals

Accounting for Merchandising Businesses

Internal Controls, Accounting for Cash, and Ethics

Accounting for Receivables and Inventory Cost Flow

Accounting for Long-Term Operational Assets

Accounting for Liabilities

Proprietorships, Partnerships, and Corporations

Financial Statement Analysis

An Introduction to Management Accounting

Cost Behavior, Operating Leverage, and Profitability Analysis

Cost Accumulation, Tracing, and Allocation

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Filters

Exam 16: Planning for Capital Investments

The compensation a company receives for investing in capital assets is referred to as a return on investment.

Select the incorrect statement regarding postaudits of capital investment decisions.

Capital investment decisions involve all of the following, except:

Describe how the unadjusted rate of return for a capital investment is calculated. Should it be based on the net cost of the investment or the average investment?

Cash outflows can be categorized into all of the following groups except:

What is a postaudit of a capital investment decision, and how should the postaudit be conducted?

Newton Company is considering the purchase of an asset that will provide a depreciation tax shield of $10,000 per year for 10 years. Assuming the company is subject to a 40% tax rate during the period and a zero salvage value, what is the depreciable cost of the new asset?

The purposes of the postaudit for capital investments include all of the following except:

Why does a company use its cost of capital as the minimum required rate of return for its capital investment decisions?

The payback method shows how long will be required to recover the cost of an investment in a capital asset.

If the net present value for a capital investment is equal to zero, the internal rate of return for the investment is equal to the required rate of return.

Which of the following statements about postaudits is correct?

For a capital investment project to be acceptable, it must generate a rate of return:

The rate of return that equates the present value of cash inflows and outflows is the:

An Introduction to Accounting

Accounting for Accruals and Deferrals

Accounting for Merchandising Businesses

Internal Controls, Accounting for Cash, and Ethics

Accounting for Receivables and Inventory Cost Flow

Accounting for Long-Term Operational Assets

Accounting for Liabilities

Proprietorships, Partnerships, and Corporations

Financial Statement Analysis

An Introduction to Management Accounting

Cost Behavior, Operating Leverage, and Profitability Analysis

Cost Accumulation, Tracing, and Allocation

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Filters