Question 1

What is capital budgeting? Why are capital budgeting decisions often difficult and risky?

Accepted Answer

Capital budgeting is the process of anal

Question 2

Capital budgeting decisions are generally based on:

Accepted Answer

A) Tentative and potentially unreliable predictions of future outcomes. 
B) Predictions of future outcomes where risk is eliminated. 
C) Results from past outcomes only. 
D) Results from current outcomes only. 
E) Speculation of interest rates and economic performance only. 
A) Tentative and potentially unreliable predictions of future outcomes. 
B) Predictions of future outcomes where risk is eliminated. 
C) Results from past outcomes only. 
D) Results from current outcomes only. 
E) Speculation of interest rates and economic performance only.

Question 3

In ranking choices with the break-even time (BET)method,the investment with the longest BET gets the highest rank.

Accepted Answer

A) True 
 B)False

Question 4

Granfield Company has a piece of manufacturing equipment with a book value of $40,000 and a remaining useful life of four years.At the end of the four years the equipment will have a zero salvage value.The market value of the equipment is currently $22,000.Granfield can purchase a new machine for $120,000 and receive $22,000 in return for trading in its old machine.The new machine will reduce variable manufacturing costs by $19,000 per year over the four-year life of the new machine.The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money)is:

Accepted Answer

A) $22,000 decrease 
B) $76,000 increase 
C) $18,000 decrease 
D) $52,000 increase 
E) $22,000 increase 
A) $22,000 decrease 
B) $76,000 increase 
C) $18,000 decrease 
D) $52,000 increase 
E) $22,000 increase

Question 5

A cost that cannot be avoided or changed because it arises from a past decision,and is irrelevant to future decisions,is called a(n):

Accepted Answer

A) Uncontrollable cost. 
B) Incremental cost. 
C) Opportunity cost. 
D) Out-of-pocket cost. 
E) Sunk cost. 
A) Uncontrollable cost. 
B) Incremental cost. 
C) Opportunity cost. 
D) Out-of-pocket cost. 
E) Sunk cost.

Question 6

If a company has the capacity to produce either 10,000 units of Product A or 10,000 units of Product B;assuming fixed costs are the same,production restrictions are the same for both products,and the markets for both products are unlimited;the company should commit 100% of its capacity to the product that has the higher contribution margin.

Accepted Answer

A) True 
 B)False

Question 7

A company is considering a proposal to invest $40,000 in a project that would provide the following net cash flows:   Compute the project's payback period.

Accepted Answer

@#IMG-DLM& Payback period = 3

Question 8

An estimate of an asset's value to the company,calculated by discounting the future cash flows from the investment at the project's required rate of return and then subtracting the initial amount of the investment,is known as:

Accepted Answer

A) Annual net cash flows. 
B) Rate of return on investment. 
C) Net present value. 
D) Payback period. 
E) Unamortized carrying value. 
A) Annual net cash flows. 
B) Rate of return on investment. 
C) Net present value. 
D) Payback period. 
E) Unamortized carrying value.

Question 9

A company buys a machine for $76,000 that has an expected life of 6 years and no salvage value.The company anticipates a yearly after tax net income of $1,805.What is the accounting rate of return?

Accepted Answer

A) 2.85%. 
B) 4.75%. 
C) 6.65%. 
D) 9.50%. 
E) 42.75%. 
A) 2.85%. 
B) 4.75%. 
C) 6.65%. 
D) 9.50%. 
E) 42.75%.

Question 10

If the internal rate of return (IRR)of an investment is lower than the hurdle rate,the project should be accepted.

Accepted Answer

A) True 
 B)False

Question 11

If net present values are used to evaluate two investments that have equal costs and equal total cash flows,the one with more cash flows in the early years has the higher net present value.

Accepted Answer

A) True 
 B)False

Question 12

Watson Corporation is considering buying a machine for $25,000.Its estimated useful life is 5 years,with no salvage value.Watson anticipates annual net income after taxes of $1,500 from the new machine.What is the accounting rate of return assuming that Watson uses straight-line depreciation and that income is earned uniformly throughout each year?

Accepted Answer

A) 6.0%. 
B) 8.0%. 
C) 8.5%. 
D) 10.0%. 
E) 12.0%. 
A) 6.0%. 
B) 8.0%. 
C) 8.5%. 
D) 10.0%. 
E) 12.0%.

Question 13

A machine costs $180,000 and will have an eight-year life,a $20,000 salvage value,and straight-line depreciation is used.Management estimates the machine will yield an after-tax net income of $12,500 each year.Compute the accounting rate of return for the investment.

Accepted Answer

A) 12.5%. 
B) 26.8%. 
C) 11.8%. 
D) 10.8%. 
E) 22.5%. 
A) 12.5%. 
B) 26.8%. 
C) 11.8%. 
D) 10.8%. 
E) 22.5%.

Question 14

What is one advantage and one disadvantage of using the accounting rate of return to evaluate investment alternatives?

Accepted Answer

Advantages of using the rate of return o

Question 15

Tressor Company is considering a 5-year project.The company plans to invest $90,000 now and it forecasts cash flows for each year of $27,000.The company requires that investments yield a discount rate of at least 14%.Selected factors for a present value of an annuity of 1 for five years are shown below:   Calculate the internal rate of return to determine whether it should accept this project.

Accepted Answer

A) The project should be accepted because it will earn more than 14%. 
B) The project should be accepted because it will earn more than 10%. 
C) The project will earn more than 12% but less than 14%.At a hurdle rate of 14%,the project should be rejected. 
D) The project should be rejected because it will earn less than 14%. 
E) The project should be rejected because it will not earn exactly 14%. 
A) The project should be accepted because it will earn more than 14%. 
B) The project should be accepted because it will earn more than 10%. 
C) The project will earn more than 12% but less than 14%.At a hurdle rate of 14%,the project should be rejected. 
D) The project should be rejected because it will earn less than 14%. 
E) The project should be rejected because it will not earn exactly 14%.

Question 16

Chang Industries has 2,000 defective units of product that have already cost $14 each to produce.A salvage company will purchase the defective units as they are for $5 each.Chang's production manager reports that the defects can be corrected for $6 per unit,enabling them to be sold at their regular market price of $21.Chang should:

Accepted Answer

A) Throw the units away. 
B) Sell the units to the salvage company for $5 per unit. 
C) Sell the units as they are because repairing them will cause their total cost to exceed their selling price. 
D) Sell 1,000 units to the salvage company and repair the remainder. 
E) Correct the defects and sell the units at the regular pricE. 
A) Throw the units away. 
B) Sell the units to the salvage company for $5 per unit. 
C) Sell the units as they are because repairing them will cause their total cost to exceed their selling price. 
D) Sell 1,000 units to the salvage company and repair the remainder. 
E) Correct the defects and sell the units at the regular pricE.

Question 17

Variations Company had the following results of operations for the past year:   A foreign company (whose sales will not affect Variations' regular sales)offers to buy 700 units at $4.00 per unit.In addition to variable manufacturing costs,there would be an export cost of $0.30 per unit.Prepare an analysis of this additional business to show whether Variations should take this order.

Accepted Answer

@#IMG-DLM& Thus,since operatin

Question 18

The process of restating future cash flows in today's dollars is known as:

Accepted Answer

A) Budgeting. 
B) Annualization. 
C) Discounting. 
D) Payback period. 
E) Capitalizing. 
A) Budgeting. 
B) Annualization. 
C) Discounting. 
D) Payback period. 
E) Capitalizing.

Question 19

Mays Company can sell all of product A that it produces but only 160,000 units of Z and it has limited production capacity.It can produce 6 units of A per hour or 10 units of Z per hour,and it has 30,000 production hours available.Contribution margin per unit is $12 for A and $10 for Z.What is the most profitable sales mix for this company?

Accepted Answer

@#IMG-DLM& Because Product Z yields the higher con

Question 20

The calculation of the payback period for an investment when net cash flow is even (equal)is:

Accepted Answer

A) Cost of investment/Annual net cash flow 
B) Cost of investment/Total net cash flow 
C) Annual net cash flow/Cost of investment 
D) Total net cash flow/Cost of investment 
E) Total net cash flow/Annual net cash flow 
A) Cost of investment/Annual net cash flow 
B) Cost of investment/Total net cash flow 
C) Annual net cash flow/Cost of investment 
D) Total net cash flow/Cost of investment 
E) Total net cash flow/Annual net cash flow

What is capital budgeting? Why are capital budgeting decisions often difficult and risky?

Capital budgeting decisions are generally based on:

In ranking choices with the break-even time (BET)method,the investment with the longest BET gets the highest rank.

A cost that cannot be avoided or changed because it arises from a past decision,and is irrelevant to future decisions,is called a(n):

A company is considering a proposal to invest $40,000 in a project that would provide the following net cash flows: Compute the project's payback period.

An estimate of an asset's value to the company,calculated by discounting the future cash flows from the investment at the project's required rate of return and then subtracting the initial amount of the investment,is known as:

A company buys a machine for $76,000 that has an expected life of 6 years and no salvage value.The company anticipates a yearly after tax net income of $1,805.What is the accounting rate of return?

If the internal rate of return (IRR)of an investment is lower than the hurdle rate,the project should be accepted.

If net present values are used to evaluate two investments that have equal costs and equal total cash flows,the one with more cash flows in the early years has the higher net present value.

A machine costs $180,000 and will have an eight-year life,a $20,000 salvage value,and straight-line depreciation is used.Management estimates the machine will yield an after-tax net income of $12,500 each year.Compute the accounting rate of return for the investment.

What is one advantage and one disadvantage of using the accounting rate of return to evaluate investment alternatives?

The process of restating future cash flows in today's dollars is known as:

The calculation of the payback period for an investment when net cash flow is even (equal)is:

Accounting in Business

Analyzing and Recording Transactions

Adjusting Accounts and Preparing Financial Statements

Completing the Accounting Cycle

Accounting for Merchandising Operations

Inventories and Cost of Sales

Accounting Information Systems

Cash and Internal Controls

Accounting for Receivables

Plant Assets, Natural Resources, and Intangibles

Current Liabilities and Payroll Accounting

Accounting for Partnerships

Accounting for Corporations

Long-Term Liabilities

Investments and International Operations

Reporting the Statement of Cash Flows

Analysis of Financial Statements

Managerial Accounting Concepts and Principles

Job Order Cost Accounting

Process Cost Accounting

Cost-Volume-Profit Analysis

Master Budgets and Planning

Flexible Budgets and Standard Costs

Performance Measurement and Responsibility Accounting

Appendix B: Time Value of Money

Appendix C: Activity-Based Costing

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Exam 25: Capital Budgeting and Managerial Decisions

What is capital budgeting? Why are capital budgeting decisions often difficult and risky?

Capital budgeting decisions are generally based on:

In ranking choices with the break-even time (BET)method,the investment with the longest BET gets the highest rank.

A cost that cannot be avoided or changed because it arises from a past decision,and is irrelevant to future decisions,is called a(n):

A company is considering a proposal to invest $40,000 in a project that would provide the following net cash flows: Compute the project's payback period.

An estimate of an asset's value to the company,calculated by discounting the future cash flows from the investment at the project's required rate of return and then subtracting the initial amount of the investment,is known as:

A company buys a machine for $76,000 that has an expected life of 6 years and no salvage value.The company anticipates a yearly after tax net income of $1,805.What is the accounting rate of return?

If the internal rate of return (IRR)of an investment is lower than the hurdle rate,the project should be accepted.

If net present values are used to evaluate two investments that have equal costs and equal total cash flows,the one with more cash flows in the early years has the higher net present value.

A machine costs $180,000 and will have an eight-year life,a $20,000 salvage value,and straight-line depreciation is used.Management estimates the machine will yield an after-tax net income of $12,500 each year.Compute the accounting rate of return for the investment.

What is one advantage and one disadvantage of using the accounting rate of return to evaluate investment alternatives?

The process of restating future cash flows in today's dollars is known as:

The calculation of the payback period for an investment when net cash flow is even (equal)is:

Accounting in Business

Analyzing and Recording Transactions

Adjusting Accounts and Preparing Financial Statements

Completing the Accounting Cycle

Accounting for Merchandising Operations

Inventories and Cost of Sales

Accounting Information Systems

Cash and Internal Controls

Accounting for Receivables

Plant Assets, Natural Resources, and Intangibles

Current Liabilities and Payroll Accounting

Accounting for Partnerships

Accounting for Corporations

Long-Term Liabilities

Investments and International Operations

Reporting the Statement of Cash Flows

Analysis of Financial Statements

Managerial Accounting Concepts and Principles

Job Order Cost Accounting

Process Cost Accounting

Cost-Volume-Profit Analysis

Master Budgets and Planning

Flexible Budgets and Standard Costs

Performance Measurement and Responsibility Accounting

Appendix B: Time Value of Money

Appendix C: Activity-Based Costing

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