Question 1

Capital budgeting decisions usually involve large investments and often have a significant impact on a company's future profitability.

Accepted Answer

A) True 
 B)False

Question 2

Benaflek Co.purchased some equipment 3 years ago.The company's required rate of return is 12% and the net present value of the project was $(1800).Annual cost savings were: $20000 for year 1; $16000 for year 2; and $12000 for year 3.The amount of the initial investment was $\begin{array} { c c c } 
\underline{\text { Year }} & \begin{array} { c } 
\text { Present Value } \
\underline{\text { of } 1 \text { at } 12 \%}
\end{array} & \begin{array} { c } 
\text { PV of an Annuity } \
\underline{\text { of } 1 \text { at } 12 \%}
\end{array} \
 1 & .893 & .893 \
2 & .797 & 1.690 \
3 & .712 & 2.402
\end{array}$

Accepted Answer

A) $40956. 
B) $36632. 
C) $40232. 
D) $37356. 
A) $40956. 
B) $36632. 
C) $40232. 
D) $37356.

Question 3

The cash payback technique is a quick way to calculate a project's net present value.

Accepted Answer

A) True 
 B)False

Question 4

The profitability index allows comparison of the relative desirability of projects that require differing initial investments.

Accepted Answer

A) True 
 B)False

Question 5

Sloan Inc.recently invested in a project with a 3-year life span.The net present value was $9000 and annual cash inflows were $21000 for year 1; $24000 for year 2; and $27000 for year 3.The initial investment for the project assuming a 15% required rate of return was $\begin{array} { c c c } 
\underline{\text { Year } }& \begin{array} { c } 
\text { Present Value } \
\underline{\text { of } 1 \text { at } 15 \%}
\end{array} & \begin{array} { c } 
\text { PV of an Annuity } \
\underline{\text { of } 1 \text { at } 15 \%}
\end{array} \
 1  & .870 & .870 \
3 & .756 & 1.626 \
3 & .658 & 2.283
\end{array}$

Accepted Answer

A) $45792. 
B) $45180. 
C) $29232. 
D) $38376. 
A) $45792. 
B) $45180. 
C) $29232. 
D) $38376.

Question 6

The cash payback period is computed by dividing the cost of the capital investment by the net annual cash inflow.

Accepted Answer

A) True 
 B)False

Question 7

An approach that uses a number of outcome estimates to get a sense of the variability among potential returns is

Accepted Answer

A) the discounted cash flow technique. 
B) the net present value method. 
C) risk analysis. 
D) sensitivity analysis. 
A) the discounted cash flow technique. 
B) the net present value method. 
C) risk analysis. 
D) sensitivity analysis.

Question 8

Which of the following is not a typical cash flow related to equipment purchase and replacement decisions?

Accepted Answer

A) Increased operating costs 
B) Overhaul of equipment 
C) Salvage value of equipment when project is complete 
D) Depreciation expense 
A) Increased operating costs 
B) Overhaul of equipment 
C) Salvage value of equipment when project is complete 
D) Depreciation expense

Question 9

The annual rate of return method requires dividing a project's annual cash inflows by the economic life of the project.

Accepted Answer

A) True 
 B)False

Question 10

Johnson Corp.has an 8% required rate of return.It's considering a project that would provide annual cost savings of $50000 for 5 years.The most that Johnson would be willing to spend on this project is $\begin{array} { c c c } 
\underline{\text { Year } }& \begin{array} { c } 
\text { Present Value } \
\underline{\text { of } 1 \text { at } 8 \%}
\end{array} & \begin{array} { c } 
\text { PV of an Annuity } \
\underline{\text { of } 1 \text { at } 8 \%}
\end{array} \
1& .926 & .926 \
2 & .857 & 1.783 \
3 & .794 & 2.577 \
4 & .735 & 3.312 \
5 & .681 & 3.993
\end{array}$

Accepted Answer

A) $125910. 
B) $165600. 
C) $199650. 
D) $34050. 
A) $125910. 
B) $165600. 
C) $199650. 
D) $34050.

Question 11

A company has a minimum required rate of return of 8%.It is considering investing in a project that costs $91116 and is expected to generate cash inflows of $36000 each year for three years.The approximate internal rate of return on this project is

Accepted Answer

A) 8%. 
B) 9%. 
C) 10%. 
D) less than the required 8%. 
A) 8%. 
B) 9%. 
C) 10%. 
D) less than the required 8%.

Question 12

The primary capital budgeting method that uses discounted cash flow techniques is the

Accepted Answer

A) net present value method. 
B) cash payback technique. 
C) annual rate of return method. 
D) profitability index method. 
A) net present value method. 
B) cash payback technique. 
C) annual rate of return method. 
D) profitability index method.

Question 13

The payback period is often compared to an asset's

Accepted Answer

A) estimated useful life. 
B) warranty period. 
C) net present value. 
D) internal rate of return. 
A) estimated useful life. 
B) warranty period. 
C) net present value. 
D) internal rate of return.

Question 14

The rate that a company must pay to obtain funds from creditors and stockholders is known as the

Accepted Answer

A) hurdle rate. 
B) cost of capital. 
C) cutoff rate. 
D) All of these answers are correct. 
A) hurdle rate. 
B) cost of capital. 
C) cutoff rate. 
D) All of these answers are correct.

Question 15

If project A has a lower payback period than project B this may indicate that project A may have a

Accepted Answer

A) lower NPV and be less profitable. 
B) higher NPV and be less profitable. 
C) higher NPV and be more profitable. 
D) lower NPV and be more profitable. 
A) lower NPV and be less profitable. 
B) higher NPV and be less profitable. 
C) higher NPV and be more profitable. 
D) lower NPV and be more profitable.

Question 16

A company is considering purchasing a machine that costs $400000 and is estimated to have no salvage value at the end of its 8-year useful life.If the machine is purchased annual revenues are expected to be $100000 and annual operating expenses exclusive of depreciation expense are expected to be $38000.The straight-line method of depreciation would be used.The cash payback period on the machine is

Accepted Answer

A) 8.0 years. 
B) 7.5 years. 
C) 6.5 years. 
D) 3.2 years. 
A) 8.0 years. 
B) 7.5 years. 
C) 6.5 years. 
D) 3.2 years.

Question 17

Which of the following ignores the time value of money?

Accepted Answer

A) Internal rate of return 
B) Profitability index 
C) Net present value 
D) Cash payback 
A) Internal rate of return 
B) Profitability index 
C) Net present value 
D) Cash payback

Question 18

Post-audits create an incentive for managers to make accurate estimates since managers know that their results will be evaluated.

Accepted Answer

A) True 
 B)False

Question 19

A well-run organization should perform an evaluation called a post-audit of its investment projects before their completion.

Accepted Answer

A) True 
 B)False

Question 20

When a capital budgeting project generates a positive net present value this means that the project earns a return higher than the

Accepted Answer

A) internal rate of return. 
B) annual rate of return. 
C) required rate of return. 
D) profitability index. 
A) internal rate of return. 
B) annual rate of return. 
C) required rate of return. 
D) profitability index.

Capital budgeting decisions usually involve large investments and often have a significant impact on a company's future profitability.

The cash payback technique is a quick way to calculate a project's net present value.

The profitability index allows comparison of the relative desirability of projects that require differing initial investments.

The cash payback period is computed by dividing the cost of the capital investment by the net annual cash inflow.

An approach that uses a number of outcome estimates to get a sense of the variability among potential returns is

Which of the following is not a typical cash flow related to equipment purchase and replacement decisions?

The annual rate of return method requires dividing a project's annual cash inflows by the economic life of the project.

Johnson Corp.has an 8% required rate of return.It's considering a project that would provide annual cost savings of $50000 for 5 years.The most that Johnson would be willing to spend on this project is Present Value PV of an Annuity 1 .926 .926 2 .857 1.783 3 .794 2.577 4 .735 3.312 5 .681 3.993

A company has a minimum required rate of return of 8%.It is considering investing in a project that costs $91116 and is expected to generate cash inflows of $36000 each year for three years.The approximate internal rate of return on this project is

The primary capital budgeting method that uses discounted cash flow techniques is the

The payback period is often compared to an asset's

The rate that a company must pay to obtain funds from creditors and stockholders is known as the

If project A has a lower payback period than project B this may indicate that project A may have a

Which of the following ignores the time value of money?

Post-audits create an incentive for managers to make accurate estimates since managers know that their results will be evaluated.

A well-run organization should perform an evaluation called a post-audit of its investment projects before their completion.

When a capital budgeting project generates a positive net present value this means that the project earns a return higher than the

Introduction to Financial Statements

A Further Look at Financial Statements

The Accounting Information System

Accrual Accounting Concepts

Fraud, Internal Control, and Cash

Reporting and Analyzing Long-Lived Assets

Reporting and Analyzing Liabilities and Stockholders Equity

Financial Analysis: the Big Picture

Managerial Accounting

Cost-Volume-Profit

Incremental Analysis

Budgetary Planning

Budgetary Control and Responsibility Accounting

Standard Costs and Balanced Scorecard

Planning for Capital Investments

Activity Based Costing

Filters

Exam 17: Cost-Volume Profit Analysis: Additional Issues

Capital budgeting decisions usually involve large investments and often have a significant impact on a company's future profitability.

The cash payback technique is a quick way to calculate a project's net present value.

The profitability index allows comparison of the relative desirability of projects that require differing initial investments.

The cash payback period is computed by dividing the cost of the capital investment by the net annual cash inflow.

An approach that uses a number of outcome estimates to get a sense of the variability among potential returns is

Which of the following is not a typical cash flow related to equipment purchase and replacement decisions?

The annual rate of return method requires dividing a project's annual cash inflows by the economic life of the project.

Johnson Corp.has an 8% required rate of return.It's considering a project that would provide annual cost savings of $50000 for 5 years.The most that Johnson would be willing to spend on this project is Present Value PV of an Annuity 1 .926 .926 2 .857 1.783 3 .794 2.577 4 .735 3.312 5 .681 3.993

A company has a minimum required rate of return of 8%.It is considering investing in a project that costs $91116 and is expected to generate cash inflows of $36000 each year for three years.The approximate internal rate of return on this project is

The primary capital budgeting method that uses discounted cash flow techniques is the

The payback period is often compared to an asset's

The rate that a company must pay to obtain funds from creditors and stockholders is known as the

If project A has a lower payback period than project B this may indicate that project A may have a

Which of the following ignores the time value of money?

Post-audits create an incentive for managers to make accurate estimates since managers know that their results will be evaluated.

A well-run organization should perform an evaluation called a post-audit of its investment projects before their completion.

When a capital budgeting project generates a positive net present value this means that the project earns a return higher than the

Introduction to Financial Statements

A Further Look at Financial Statements

The Accounting Information System

Accrual Accounting Concepts

Fraud, Internal Control, and Cash

Reporting and Analyzing Long-Lived Assets

Reporting and Analyzing Liabilities and Stockholders Equity

Financial Analysis: the Big Picture

Managerial Accounting

Cost-Volume-Profit

Incremental Analysis

Budgetary Planning

Budgetary Control and Responsibility Accounting

Standard Costs and Balanced Scorecard

Planning for Capital Investments

Activity Based Costing

Filters