Question 1

How does depreciation serve as a tax shield? How is the amount of the annual tax shield calculated?

Accepted Answer

Answers will vary.Recording depreciation

Question 2

The time value of money concept recognizes that a dollar today is worth more than a dollar tomorrow. Which of the following is not a factor in causing the present value of cash inflows to diminish over time?

Accepted Answer

A)  Current expenses. 
B)  Earning potential, such as interest. 
C)  Risk of uncollectibility. 
D)  Inflation reduces future purchasing power. 
A)  Current expenses. 
B)  Earning potential, such as interest. 
C)  Risk of uncollectibility. 
D)  Inflation reduces future purchasing power.

Question 3

Grayson Company is considering a purchase of equipment that costs $49,000 and is expected to offer annual cash inflows of $13,000. Grayson's minimum required rate of return is 10%. How many years must the cash flows last for the investment to be acceptable? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round your intermediate calculations. Round to the nearest whole year.)

Accepted Answer

A)  4 years 
B)  5 years 
C)  3 years 
D)  6 years 
A)  4 years 
B)  5 years 
C)  3 years 
D)  6 years

Question 4

The cost of capital is sometimes referred to as the hurdle or discount rate.

Accepted Answer

A) True 
 B)False

Question 5

Which one of the following statements best describes an ordinary annuity?

Accepted Answer

A)  Series of cash inflows of varying amounts collected at the end of each period 
B)  Series of cash flows of equal amounts collected at the end of each period 
C)  Series of cash flows of varying amounts collected at the beginning of each period 
D)  Series of cash flows of equal amounts collected at the beginning of each period 
A)  Series of cash inflows of varying amounts collected at the end of each period 
B)  Series of cash flows of equal amounts collected at the end of each period 
C)  Series of cash flows of varying amounts collected at the beginning of each period 
D)  Series of cash flows of equal amounts collected at the beginning of each period

Question 6

Benson Corporation is considering an investment in equipment that would cost $50,000 and provide annual cash inflows of $14,000. The company's required rate of return is 12%; the internal rate of return for the investment is 10.5%. Should the company make this investment?

Accepted Answer

A)  No, since the internal rate of return is more than the company's required rate of return. 
B)  Yes, since the internal rate of return is less than the company's required rate of return. 
C)  No, since the internal rate of return is less than the company's required rate of return. 
D)  The answer cannot be determined. 
A)  No, since the internal rate of return is more than the company's required rate of return. 
B)  Yes, since the internal rate of return is less than the company's required rate of return. 
C)  No, since the internal rate of return is less than the company's required rate of return. 
D)  The answer cannot be determined.

Question 7

If a project has a positive net present value, its internal rate of return will exceed the firm's hurdle rate.

Accepted Answer

A) True 
 B)False

Question 8

Because of the expense of applying multiple techniques, managers should use a single capital budgeting technique to analyze potential capital investments.

Accepted Answer

A) True 
 B)False

Question 9

Describe the decision rules management should use for accepting and rejecting capital projects under each of the following capital budgeting models: net present value model, internal rate of return model, payback period, and the unadjusted rate of return model.

Accepted Answer

Answers will vary.Management should acce

Question 10

Capital investments differ from stock and bond investments in that stock and bond investments can be sold in organized markets.

Accepted Answer

A) True 
 B)False

Question 11

Garrison Company has two investment opportunities. A cash flow schedule for the investments is provided below: $\begin{array}{ccc}
\text { Year } & \text { Investment A} &\text { Investment  B} \
0 & \$(5,800) & \$(7,200) \
1 & 2,320 & 3,480 \
2 & 2,320 & 2,320 \
3 & 2,320 & 2,320 \
4 & 2,320 & 1,160
\end{array}$ Considering the unequal investments, which of the following techniques would be most appropriate for choosing between Investment A and Investment B?

Accepted Answer

A)  Payback method 
B)  Present value index 
C)  Net present value method 
D)  None of these answers is correct. 
A)  Payback method 
B)  Present value index 
C)  Net present value method 
D)  None of these answers is correct.

Question 12

The length of time required to recover the initial investment in a capital asset is known as the:

Accepted Answer

A)  rate of return. 
B)  investment period. 
C)  present value period. 
D)  payback period. 
A)  rate of return. 
B)  investment period. 
C)  present value period. 
D)  payback period.

Question 13

A customary assumption in capital budgeting analysis is that:

Accepted Answer

A)  the desired rate of return includes the effects of compounding. 
B)  the cash inflows generated by the investment are not reinvested. 
C)  annual cash flows occur at the beginning of each period. 
D)  the time value of money is ignored. 
A)  the desired rate of return includes the effects of compounding. 
B)  the cash inflows generated by the investment are not reinvested. 
C)  annual cash flows occur at the beginning of each period. 
D)  the time value of money is ignored.

Question 14

An investment that costs $20,000 will produce annual cash flows of $5,000 for a period of 6 years. Further, the investment has an expected salvage value of $3,000. Given a desired rate of return of 12%, what will the investment generate? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round your intermediate calculations. Round your answer to the nearest whole dollar.)

Accepted Answer

A)  A positive net present value of $2,077. 
B)  A negative net present value of $2,077. 
C)  A positive net present value of $22,077. 
D)  A positive net present value of $557. 
A)  A positive net present value of $2,077. 
B)  A negative net present value of $2,077. 
C)  A positive net present value of $22,077. 
D)  A positive net present value of $557.

Question 15

How would an organization benefit from conducting postaudits of its capital investment decisions?

Accepted Answer

Answers will vary.The purpose of postaud

Question 16

Chichester Company is considering investing in the following two mutually exclusive projects:
 $$\begin{array}{l}
\text { Annual cash Inflows }\
\begin{array} { c r r } 
\text { Year } & \text { Project A } & \text { Project B} \
1 & \$ 5,000 & \$ 3,500 \
2 & 4,000 & 3 , 500 \
3 & 3,000 & 3, 500 \
4 & 2,000 &  3, 500 \
\text { Total } & \$ 14,000 & \$ 14,000
\end{array}
\end{array}$$ (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required:Which project is more desirable strictly in terms of cash inflows? Why?Compute the present value of each project's cash inflows assuming the company's required rate of return is 10%.What is the maximum amount Chichester should be willing to pay for each project?Suppose each project costs $10,000. Which project(s) should be accepted?

Accepted Answer

To determine which project is more desir

Question 17

Mary needs to have $20,000 one year from today. The formula to compute the amount of money that must be invested today is future value ÷ (1 − interest rate).

Accepted Answer

A) True 
 B)False

Question 18

Weston Company is considering a capital project that delivers a $59,500 annual net cash flow before tax. The investment will result in annual depreciation expense of $13,800 over the project's four-year useful life. Assuming a tax rate of 40%, what amount of annual after-tax net cash flow will be provided by this project?

Accepted Answer

A)  $45,700 
B)  $18,280 
C)  $41,220 
D)  $27,420 
A)  $45,700 
B)  $18,280 
C)  $41,220 
D)  $27,420

Question 19

Indicate whether each of the following statements is true or false. The payback method does not take the time value of money into account. ______The unadjusted rate of return indicates the length of time required to recover the initial cost of an investment. ______The payback period can only be calculated for capital investments that are expected to provide equal annual cash inflows over their useful lives. ______Generally, investments with shorter payback periods are preferred. ______Use of the payback method to analyze capital investments is the best way of identifying the projects that will make the greatest contribution to a company's profits. ______

Accepted Answer

The payback method does not take the tim

Question 20

Assuming equal time intervals between the payments and a constant rate of return, which of the following cash flow patterns represents an annuity? $\begin{array}{rrrrrrr}
&\text { Year } & \text { Year } & \text { Year } & \text { Year } 4 & \text { Year }5& \text { Year } 6 \
\text {A)}&\$ 1,000 & \$ 1,000 & \$ 1,000 & \$ 1,000 & \$ 1,000 & \$ 1,000 \
\text {B)}&\$ 500 & \$  0 & \$ 500& \$ 500 & \$500& \$0\
\text {C)}&\$100&\$200&\$300&\$400&\$500&\$600
\end{array}$

Accepted Answer

A)  A 
B)  B 
C)  C 
D)  Any of the answers can represent an annuity. 
A)  A 
B)  B 
C)  C 
D)  Any of the answers can represent an annuity.

How does depreciation serve as a tax shield? How is the amount of the annual tax shield calculated?

The time value of money concept recognizes that a dollar today is worth more than a dollar tomorrow. Which of the following is not a factor in causing the present value of cash inflows to diminish over time?

The cost of capital is sometimes referred to as the hurdle or discount rate.

Which one of the following statements best describes an ordinary annuity?

Benson Corporation is considering an investment in equipment that would cost $50,000 and provide annual cash inflows of $14,000. The company's required rate of return is 12%; the internal rate of return for the investment is 10.5%. Should the company make this investment?

If a project has a positive net present value, its internal rate of return will exceed the firm's hurdle rate.

Because of the expense of applying multiple techniques, managers should use a single capital budgeting technique to analyze potential capital investments.

Describe the decision rules management should use for accepting and rejecting capital projects under each of the following capital budgeting models: net present value model, internal rate of return model, payback period, and the unadjusted rate of return model.

Capital investments differ from stock and bond investments in that stock and bond investments can be sold in organized markets.

The length of time required to recover the initial investment in a capital asset is known as the:

A customary assumption in capital budgeting analysis is that:

How would an organization benefit from conducting postaudits of its capital investment decisions?

Mary needs to have $20,000 one year from today. The formula to compute the amount of money that must be invested today is future value ÷ (1 − interest rate).

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

How does depreciation serve as a tax shield? How is the amount of the annual tax shield calculated?

The time value of money concept recognizes that a dollar today is worth more than a dollar tomorrow. Which of the following is not a factor in causing the present value of cash inflows to diminish over time?

The cost of capital is sometimes referred to as the hurdle or discount rate.

Which one of the following statements best describes an ordinary annuity?

Benson Corporation is considering an investment in equipment that would cost $50,000 and provide annual cash inflows of $14,000. The company's required rate of return is 12%; the internal rate of return for the investment is 10.5%. Should the company make this investment?

If a project has a positive net present value, its internal rate of return will exceed the firm's hurdle rate.

Because of the expense of applying multiple techniques, managers should use a single capital budgeting technique to analyze potential capital investments.

Describe the decision rules management should use for accepting and rejecting capital projects under each of the following capital budgeting models: net present value model, internal rate of return model, payback period, and the unadjusted rate of return model.

Capital investments differ from stock and bond investments in that stock and bond investments can be sold in organized markets.

The length of time required to recover the initial investment in a capital asset is known as the:

A customary assumption in capital budgeting analysis is that:

How would an organization benefit from conducting postaudits of its capital investment decisions?

Mary needs to have $20,000 one year from today. The formula to compute the amount of money that must be invested today is future value ÷ (1 − interest rate).

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