Question 1

Using a profitability index allows management to rank projects of similar risks with different investment amounts.

Accepted Answer

A) True 
 B)False

Question 2

Turk Manufacturing is considering purchasing two machines.Each machine costs $9,000 and will produce cash flows as follows:  Turk Manufacturing uses the net present value method to make the decision,and it requires a 15% annual return on its investments.The present value factors of 1 at 15% are: 1 year,0.8696; 2 years,0.7561; 3 years,0.6575.Which machine should Turk purchase?

Accepted Answer

A) Only Machine A is acceptable. 
B) Only Machine B is acceptable. 
C) Both machines are acceptable,but A should be selected because it has the greater net present value. 
D) Both machines are acceptable,but B should be selected because it has the greater net present value. 
E) Neither machine is acceptable. 
A) Only Machine A is acceptable. 
B) Only Machine B is acceptable. 
C) Both machines are acceptable,but A should be selected because it has the greater net present value. 
D) Both machines are acceptable,but B should be selected because it has the greater net present value. 
E) Neither machine is acceptable.

Question 3

The net present value decision rule is: When an asset's expected cash flows yield a positive net present value when discounted at the required rate of return,the asset should be acquired.

Accepted Answer

A) True 
 B)False

Question 4

A company is considering purchasing a machine for $85,000.The machine is expected to generate a net after-tax income of $11,250 per year.Depreciation expense would be $8,500.What is the payback period for this machine?

Accepted Answer

$85,000/($

Question 5

The time value of money concept works on the principle that a dollar tomorrow is worth more than a dollar today.

Accepted Answer

A) True 
 B)False

Question 6

A company is considering a 5-year project.It plans to invest $62,000 now and it forecasts cash flows for each year of $16,200.The company requires a hurdle rate of 12%.Calculate the internal rate of return to determine whether it should accept this project.Selected factors for a present value of an annuity of 1 for five years are shown below:

Accepted Answer

Investment/Annual net cash flo

Question 7

An advantage of the break-even time (BET)method over the payback period method is that it recognizes the time value of money.

Accepted Answer

A) True 
 B)False

Question 8

A hurdle rate is the minimum acceptable rate of return for an investment.

Accepted Answer

A) True 
 B)False

Question 9

Nestor Company is considering the purchase of an asset for $100,000.It is expected to produce the following net cash flows.The cash flows occur evenly throughout each year.   Compute the payback period for this investment.

Accepted Answer

A) 2.85 years. 
B) 2.57 years. 
C) 3.00 years. 
D) 2.50 years. 
E) 3.62 years. 
A) 2.85 years. 
B) 2.57 years. 
C) 3.00 years. 
D) 2.50 years. 
E) 3.62 years.

Question 10

The payback method of evaluating an investment fails to consider how long the investment will generate cash inflows beyond the payback period.

Accepted Answer

A) True 
 B)False

Question 11

For each of the capital budgeting methods listed below,place an X in the correct column,indicating the measurement basis of each,the ability to make comparison among projects,and whether each method reflects or ignores the time value of money.

Accepted Answer

The answer of For each of the capital budgeting methods...

Question 12

A company is considering two alternative investment opportunities,each of which requires an initial cash outlay of $110,000.The expected net cash flows from the two projects follow:
   Based on a comparison of their net present values,and assuming the same discount rate of 12% is required for both projects,which project is the better investment? Use the table values below to compute the net present value of each project's cash flows.

Accepted Answer

@#IMG-DLM& Select Project Z.It

Question 13

Projects with a profitability index of greater than 1 have a return that is greater than the hurdle rate.

Accepted Answer

A) True 
 B)False

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 accounting rate

Question 15

All projects with a profitability index of less than 1 should be accepted.

Accepted Answer

A) True 
 B)False

Question 16

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 17

When making capital budgeting decisions,companies usually prefer shorter payback periods.Explain why shorter payback periods are desirable.

Accepted Answer

Shorter payback periods increase return

Question 18

The payback period method,unlike the net present value method,does not ignore cash flows after the point of cost recovery.

Accepted Answer

A) True 
 B)False

Question 19

The following relates to a proposed equipment purchase:  
-Ignoring income taxes,the annual net income amount used to calculate the accounting rate of return is:

Accepted Answer

A) $46,100 
B) $11,100 
C) $12,100 
D) $74,000 
E) $48,950 
A) $46,100 
B) $11,100 
C) $12,100 
D) $74,000 
E) $48,950

Question 20

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

Exam 24: Capital Budgeting and Investment Analysis

Using a profitability index allows management to rank projects of similar risks with different investment amounts.

The net present value decision rule is: When an asset's expected cash flows yield a positive net present value when discounted at the required rate of return,the asset should be acquired.

A company is considering purchasing a machine for $85,000.The machine is expected to generate a net after-tax income of $11,250 per year.Depreciation expense would be $8,500.What is the payback period for this machine?

The time value of money concept works on the principle that a dollar tomorrow is worth more than a dollar today.

An advantage of the break-even time (BET)method over the payback period method is that it recognizes the time value of money.

A hurdle rate is the minimum acceptable rate of return for an investment.

Nestor Company is considering the purchase of an asset for $100,000.It is expected to produce the following net cash flows.The cash flows occur evenly throughout each year. Compute the payback period for this investment.

The payback method of evaluating an investment fails to consider how long the investment will generate cash inflows beyond the payback period.

For each of the capital budgeting methods listed below,place an X in the correct column,indicating the measurement basis of each,the ability to make comparison among projects,and whether each method reflects or ignores the time value of money.

Projects with a profitability index of greater than 1 have a return that is greater than the hurdle rate.

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

All projects with a profitability index of less than 1 should be accepted.

When making capital budgeting decisions,companies usually prefer shorter payback periods.Explain why shorter payback periods are desirable.

The payback period method,unlike the net present value method,does not ignore cash flows after the point of cost recovery.

The following relates to a proposed equipment purchase: -Ignoring income taxes,the annual net income amount used to calculate the accounting rate of return is:

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.

Accounting in Business

Accounting for Business Transactions

Adjusting Accounts for Financial Statements

Accounting for Merchandising Operations

Inventories and Cost of Sales

Cash,fraud,and Internal Controls

Accounting for Receivables

Accounting for Long-Term Assets

Accounting for Current Liabilities

Accounting for Long-Term Liabilities

Corporate Reporting and Analysis

Reporting Cash Flows

Analysis of Financial Statements

Managerial Accounting Concepts and Principles

Job Order Costing and Analysis

Process Costing and Analysis

Activity-Based Costing and Analysis

Cost Behavior and Cost-Volume-Profit Analysis

Variable Costing and Analysis

Master Budgets and Performance Planning

Flexible Budgets and Standard Costs

Performance Measurement and Responsibility Accounting

Relevant Costing for Managerial Decisions

Time Value of Money

Investments

Lean Principles and Accounting

Filters