Question 1

A common characteristic of the internal rate of return and the accounting rate of return is that both use the concept of a rate of return.

Accepted Answer

A) True 
 B)False

Question 2

A positive net present value indicates that:

Accepted Answer

A)  the IRR is less than the discount rate. 
B)  the cost of capital is greater than the present value of the future cash inflows. 
C)  the projected return on the investment is expected to exceed the cost of capital plus the cost of the initial investment. 
D)  the IRR is less than the cost of capital. 
A)  the IRR is less than the discount rate. 
B)  the cost of capital is greater than the present value of the future cash inflows. 
C)  the projected return on the investment is expected to exceed the cost of capital plus the cost of the initial investment. 
D)  the IRR is less than the cost of capital.

Question 3

First Time Cinema, Inc. is a small company that produces movies for artists who have little prior experience in the film industry. Because of the high risk associated with these projects, the company will not accept projects that have a payback period of more than three years. The company is considering three projects and requests your assistance in evaluating their potential given their projected cash flows.

Accepted Answer

The answer of First Time Cinema, Inc. is a small...

Question 4

Which of the following best expresses the concept of compound interest?

Accepted Answer

A)  Calculating interest on an annuity 
B)  Earning interest on interest already earned 
C)  Making complicated interest calculations 
D)  Making more than one interest payment 
A)  Calculating interest on an annuity 
B)  Earning interest on interest already earned 
C)  Making complicated interest calculations 
D)  Making more than one interest payment

Question 5

Describe the major disadvantages of using the accounting rate of return (ARR) and payback period methods as bases for evaluating capital projects.

Accepted Answer

Disadvantages of ARR

Question 6

Harglo Construction is considering purchasing a radio antenna for broadcasting to service trucks over the airwaves, rather than using telephone lines. The antenna is expected to reduce cash operating costs by $2000 the first year, $2500 the second year, and $3000 the third year. The antenna will cost $6000, will last three years (due to technological advances), and will have no residual value at the end of its life. Harglo's minimum acceptable rate of return is 8%.

Accepted Answer

(a) Cost of capital

Question 7

What is the average annual accounting rate of return on the initial total investment?

Accepted Answer

A)  10% 
B)  20% 
C)  60% 
D)  70% 
A)  10% 
B)  20% 
C)  60% 
D)  70%

Question 8

The payback period is a method used to assist in making decisions about capital investments, and looks at the time required to recover the initial investment.

Accepted Answer

A) True 
 B)False

Question 9

For a project that has an initial outflow of $10 000 and equal inflows of $3400 for four years, the NPV at a minimum rate of return of 20% will be ($1198) and should not be accepted.

Accepted Answer

A) True 
 B)False

Question 10

For mutually exclusive projects, the IRR and NPV can give different rankings, but for independent conventional cash flow projects the rankings will be the same.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is not an advantage of IRR?

Accepted Answer

A)  It uses the concept of a rate of return, which is familiar to many managers. 
B)  It incorporates the time value of money by not treating cash received in different years as equal. 
C)  There is only one IRR for every investment. 
D)  It uses cash flows and not profits, and the payment of cash outflows is more closely aligned with cash inflows than profits would be. 
A)  It uses the concept of a rate of return, which is familiar to many managers. 
B)  It incorporates the time value of money by not treating cash received in different years as equal. 
C)  There is only one IRR for every investment. 
D)  It uses cash flows and not profits, and the payment of cash outflows is more closely aligned with cash inflows than profits would be.

Question 12

The Sloppy Jeans Company is considering the purchase of a machine that would increase the company's cash inflows by $12 000 per year for six years. Operation of the machine would increase the company's cash payments by $400 in each of the first three years, $800 the fourth year, and $1000 in the fifth and sixth years. The machine costs $50 000 and would have a residual value of $2000 at the end of the sixth year.

Accepted Answer

(a)
 @#IMG-DLM& Payback period

Question 13

The Orgonne Milling Company is contemplating the purchase of new equipment. The machinery is expected to generate increased sales of $50 000 per year over its five-year life. Excluding the cost of the machinery, additional costs are expected to be $15 000 per year. If the firm requires a minimum 12% return on its investment, what is the maximum price the company can pay for this equipment? (PV annuity at 12% for five years is 3.604)

Accepted Answer

A)  $180 200 
B)  $175 000 
C)  $126 140 
D)  $54 072 
A)  $180 200 
B)  $175 000 
C)  $126 140 
D)  $54 072

Question 14

Using the tables provided, calculate the IRR of two investments and select the best combination of answers.   Present value of $1 to be received after N periods:
  IRR Project A
IRR Project B

Accepted Answer

A)  9%
12% 
B)  9%
7% 
C)  9%
14% 
D)  10%
12% 
A)  9%
12% 
B)  9%
7% 
C)  9%
14% 
D)  10%
12%

Question 15

An entity is contemplating investing in a long-term project. A comparison of two mutually exclusive projects reveals that Project A has an initial outlay of $10 000 with cash inflows of $3400 for years 1-5; Project B has a cash outlay of $4500 with cash inflows of $1400 for years 1-5. If the minimum rate of return is 20%, which of the following statements is incorrect?

Accepted Answer

A)  The internal rate of return suggests that Project A would be accepted and Project B would not. 
B)  The net present value suggests that Project A would be accepted and Project B would not. 
C)  The net present value for Project B is a negative amount. 
D)  If the projects were not mutually exclusive, the net present values would suggest that both projects should be selected. 
A)  The internal rate of return suggests that Project A would be accepted and Project B would not. 
B)  The net present value suggests that Project A would be accepted and Project B would not. 
C)  The net present value for Project B is a negative amount. 
D)  If the projects were not mutually exclusive, the net present values would suggest that both projects should be selected.

Question 16

Which of the following is not an advantage of the accounting rate of return method?

Accepted Answer

A)  It is easy to understand. 
B)  It includes the time value of money. 
C)  It is simple to calculate. 
D)  The profit ratio is familiar to managers. 
A)  It is easy to understand. 
B)  It includes the time value of money. 
C)  It is simple to calculate. 
D)  The profit ratio is familiar to managers.

Question 17

The Tearess Company can accept either Proposal A or Proposal B (but not both), or it can reject both investment proposals. Proposal A requires an investment of $7000 and promises increased net cash inflows of $2600 for five years. Proposal B requires an investment of $7000 and promises increased net cash inflows of $3000 in each of the first three years, $2000 in the fourth year and $2200 in the fifth year. The company's minimum acceptable rate of return is 20%.
Prepare an analysis to determine which (if either) of the proposals should be selected for investment.
Discount factors for 20%:

Accepted Answer

Investment Proposal A
 @#IMG-DLM& @#IMG-DLM& There

Question 18

Describe the accounting rate of return (ARR) and payback period methods of evaluating capital projects, including the formula and decision criterion associated with each method.

Accepted Answer

ARR: the rate of return is measured usin

Question 19

A series of equal amounts received or paid over a specified number of equal time periods is known as an:

Accepted Answer

A)  allotment. 
B)  apportionment. 
C)  annuity. 
D)  allowance. 
A)  allotment. 
B)  apportionment. 
C)  annuity. 
D)  allowance.

Question 20

What is an advantage of the payback method of reviewing capital investments?

Accepted Answer

A)  It is based on accounting information. 
B)  It considers the timing of all cash flows. 
C)  It is based on non-cash flow information. 
D)  It provides some assessment of risk. 
A)  It is based on accounting information. 
B)  It considers the timing of all cash flows. 
C)  It is based on non-cash flow information. 
D)  It provides some assessment of risk.

A common characteristic of the internal rate of return and the accounting rate of return is that both use the concept of a rate of return.

A positive net present value indicates that:

Which of the following best expresses the concept of compound interest?

Describe the major disadvantages of using the accounting rate of return (ARR) and payback period methods as bases for evaluating capital projects.

What is the average annual accounting rate of return on the initial total investment?

The payback period is a method used to assist in making decisions about capital investments, and looks at the time required to recover the initial investment.

For a project that has an initial outflow of $10 000 and equal inflows of $3400 for four years, the NPV at a minimum rate of return of 20% will be ($1198) and should not be accepted.

For mutually exclusive projects, the IRR and NPV can give different rankings, but for independent conventional cash flow projects the rankings will be the same.

Which of the following is not an advantage of IRR?

Using the tables provided, calculate the IRR of two investments and select the best combination of answers. Present value of $1 to be received after N periods: IRR Project A IRR Project B

Which of the following is not an advantage of the accounting rate of return method?

Describe the accounting rate of return (ARR) and payback period methods of evaluating capital projects, including the formula and decision criterion associated with each method.

A series of equal amounts received or paid over a specified number of equal time periods is known as an:

What is an advantage of the payback method of reviewing capital investments?

Introduction to Accounting

Types of Organisations and the Financial Reporting Framework

Ethics and Corporate Governance

Wealth and the Measurement of Profit

Presentation of Financial Position and the Worksheet

Presentation of Financial Performance and the Worksheet

Presentation of Cash Flows

Accounting for Selected Assets

Liabilities and Sources of Financing

Financial Statement Analysis

Worksheet to Debits and Credits

An Introduction to Management Accounting: a Strategic Perspective

Performance Measurement and the Balanced Scorecard

Costs and Cost Behaviour

Budgets

Cost-Volume-Profit Analysis

Accounting for Decision Making: With and Without Resource Constraints

Filters

Exam 18: Capital Investment Decisions

A common characteristic of the internal rate of return and the accounting rate of return is that both use the concept of a rate of return.

A positive net present value indicates that:

Which of the following best expresses the concept of compound interest?

Describe the major disadvantages of using the accounting rate of return (ARR) and payback period methods as bases for evaluating capital projects.

What is the average annual accounting rate of return on the initial total investment?

The payback period is a method used to assist in making decisions about capital investments, and looks at the time required to recover the initial investment.

For a project that has an initial outflow of $10 000 and equal inflows of $3400 for four years, the NPV at a minimum rate of return of 20% will be ($1198) and should not be accepted.

For mutually exclusive projects, the IRR and NPV can give different rankings, but for independent conventional cash flow projects the rankings will be the same.

Which of the following is not an advantage of IRR?

Using the tables provided, calculate the IRR of two investments and select the best combination of answers. Present value of $1 to be received after N periods: IRR Project A IRR Project B

Which of the following is not an advantage of the accounting rate of return method?

Describe the accounting rate of return (ARR) and payback period methods of evaluating capital projects, including the formula and decision criterion associated with each method.

A series of equal amounts received or paid over a specified number of equal time periods is known as an:

What is an advantage of the payback method of reviewing capital investments?

Introduction to Accounting

Types of Organisations and the Financial Reporting Framework

Ethics and Corporate Governance

Wealth and the Measurement of Profit

Presentation of Financial Position and the Worksheet

Presentation of Financial Performance and the Worksheet

Presentation of Cash Flows

Accounting for Selected Assets

Liabilities and Sources of Financing

Financial Statement Analysis

Worksheet to Debits and Credits

An Introduction to Management Accounting: a Strategic Perspective

Performance Measurement and the Balanced Scorecard

Costs and Cost Behaviour

Budgets

Cost-Volume-Profit Analysis

Accounting for Decision Making: With and Without Resource Constraints

Filters