Question 1

The real approach to incorporating inflation into the net present value method predicts ________.

Accepted Answer

A)  cash inflows and outflows in real monetary units and uses a real rate as the required rate of return 
B)  cash inflows and outflows in real monetary units and uses a nominal rate as the required rate of return 
C)  cash inflows and outflows in nominal monetary units and uses a real rate as the required rate of return 
D)  cash inflows and outflows in monetary units that are adjusted for inflation and uses a real rate as the required rate of return 
A)  cash inflows and outflows in real monetary units and uses a real rate as the required rate of return 
B)  cash inflows and outflows in real monetary units and uses a nominal rate as the required rate of return 
C)  cash inflows and outflows in nominal monetary units and uses a real rate as the required rate of return 
D)  cash inflows and outflows in monetary units that are adjusted for inflation and uses a real rate as the required rate of return

Question 2

The galaxy Corporation disposes a capital asset with an original cost of $180,000 and accumulated depreciation of $91,000 for $47,000. The company's tax rate is 40%. Calculate the after-tax cash inflow from the disposal of the capital asset.

Accepted Answer

A)  $16,800 
B)  ($16,800) 
C)  $63,800 
D)  $89,000 
A)  $16,800 
B)  ($16,800) 
C)  $63,800 
D)  $89,000

Question 3

Explain capital budgeting and then briefly discuss each of the five stages of a capital budgeting project?

Accepted Answer

Capital budgeting is long-run planning f

Question 4

How is inflation related to capital budgeting? Discuss.

Accepted Answer

When using the net present value method

Question 5

Griffith Vehicle has received three proposals for its new vehicle-painting machine. Information on each proposal is as follows:
   
Required:
Determine each proposal's payback.

Accepted Answer

Proposal X payback = $240,000/

Question 6

If internal rate of return is less than required rate of return, the net present value is positive.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following best explains why the net present value method of capital budgeting is preferred over the internal rate-of-return method?

Accepted Answer

A)  the net present value method is expressed as a percentage of initial investment 
B)  the net present values of individual projects can be added to determine the effects of accepting a combination of projects 
C)  the percentage return computed under the net present value method is very easy to compare 
D)  the calculation under the net present value method is easy as it does not use time value of money 
A)  the net present value method is expressed as a percentage of initial investment 
B)  the net present values of individual projects can be added to determine the effects of accepting a combination of projects 
C)  the percentage return computed under the net present value method is very easy to compare 
D)  the calculation under the net present value method is easy as it does not use time value of money

Question 8

In situations where the required rate of return is not constant for each year of the project, it is advantageous to use ________.

Accepted Answer

A)  the nominal rate-of-return method 
B)  the internal rate-of-return method 
C)  the net present value method 
D)  the projected income method 
A)  the nominal rate-of-return method 
B)  the internal rate-of-return method 
C)  the net present value method 
D)  the projected income method

Question 9

Capital budgeting is the process of making long-run planning decisions for investments in projects.

Accepted Answer

A) True 
 B)False

Question 10

Net initial investment includes ________.

Accepted Answer

A)  depreciation on new equipment, cash outflow for working capital, and after-tax cash inflow from disposal of the old equipment 
B)  cash outflow to purchase new equipment, depreciation on new equipment, and after-tax cash inflow from disposal of the old equipment 
C)  cash outflow to purchase new equipment, cash outflow for working capital, and after-tax cash inflow from disposal of the old equipment 
D)  cash outflow to purchase new equipment, cash outflow for working capital, and depreciation on new equipment 
A)  depreciation on new equipment, cash outflow for working capital, and after-tax cash inflow from disposal of the old equipment 
B)  cash outflow to purchase new equipment, depreciation on new equipment, and after-tax cash inflow from disposal of the old equipment 
C)  cash outflow to purchase new equipment, cash outflow for working capital, and after-tax cash inflow from disposal of the old equipment 
D)  cash outflow to purchase new equipment, cash outflow for working capital, and depreciation on new equipment

Question 11

The nominal rate of return is made up of a risk-free element when there is no expected inflation, a business-risk element, and an inflation element.

Accepted Answer

A) True 
 B)False

Question 12

While calculating terminal recovery of working capital there are no tax consequences as there is no gain or loss on working capital.

Accepted Answer

A) True 
 B)False

Question 13

The net present value method can be used in situations where the required rate of return varies over the life of the project.

Accepted Answer

A) True 
 B)False

Question 14

What is the difference between nominal approach and real approach to incorporating inflation into the net present value method?

Accepted Answer

Nominal approach predicts cash inflows a

Question 15

The Ambitz Corporation has an annual cash inflow from operations from its investment in a capital asset of $44,000 (excluding the deprecation) each year for seven years. The corporation's income tax rate is 35%. Calculate the total after-tax cash inflow from operations for seven years.

Accepted Answer

A)  $308,000 
B)  $308,002 
C)  $200,200 
D)  $44,000 
A)  $308,000 
B)  $308,002 
C)  $200,200 
D)  $44,000

Question 16

Which of the following is a stage of the capital budgeting process that forecasts all potential cash flows attributable to the alternative projects?

Accepted Answer

A)  identify projects stage 
B)  make decisions by choosing among alternatives stage 
C)  implement the decision, evaluate performance, and learn stage 
D)  make predictions stage 
A)  identify projects stage 
B)  make decisions by choosing among alternatives stage 
C)  implement the decision, evaluate performance, and learn stage 
D)  make predictions stage

Question 17

If there are non-uniform cash flows (cash flows that differ from year-to-year), payback period is calculated by dividing net initial investment by uniform increase in annual future cash flows.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is the numerator in the mathematical expression for accrual accounting rate-of-return (AARR)?

Accepted Answer

A)  increase in expected average investment 
B)  increase in expected average annual after-tax operating income 
C)  increase in expected average cash flow 
D)  increase in expected net initial investment 
A)  increase in expected average investment 
B)  increase in expected average annual after-tax operating income 
C)  increase in expected average cash flow 
D)  increase in expected net initial investment

Question 19

Assume your goal in life is to retire with three million dollars. How much would you need to save at the end of each year if interest rates average 5% and you have a 10-year work life?

Accepted Answer

A)  $15,000 
B)  $1,841,740 
C)  $238,512 
D)  $600,000 
A)  $15,000 
B)  $1,841,740 
C)  $238,512 
D)  $600,000

Question 20

Pearl Manufacturing Company provides glassware machines for major department store retailers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of six years and the new equipment has a value of $319,400 with a six-year life. The expected additional cash inflows are $113,000 per year. What is the payback period for this investment?

Accepted Answer

A)  1.8 years 
B)  3.8 years 
C)  2.8 years 
D)  6 years 
A)  1.8 years 
B)  3.8 years 
C)  2.8 years 
D)  6 years

Exam 21: Capital Budgeting and Cost Analysis

The real approach to incorporating inflation into the net present value method predicts ________.

The galaxy Corporation disposes a capital asset with an original cost of $180,000 and accumulated depreciation of $91,000 for $47,000. The company's tax rate is 40%. Calculate the after-tax cash inflow from the disposal of the capital asset.

Explain capital budgeting and then briefly discuss each of the five stages of a capital budgeting project?

How is inflation related to capital budgeting? Discuss.

Griffith Vehicle has received three proposals for its new vehicle-painting machine. Information on each proposal is as follows: Required: Determine each proposal's payback.

If internal rate of return is less than required rate of return, the net present value is positive.

Which of the following best explains why the net present value method of capital budgeting is preferred over the internal rate-of-return method?

In situations where the required rate of return is not constant for each year of the project, it is advantageous to use ________.

Capital budgeting is the process of making long-run planning decisions for investments in projects.

Net initial investment includes ________.

The nominal rate of return is made up of a risk-free element when there is no expected inflation, a business-risk element, and an inflation element.

While calculating terminal recovery of working capital there are no tax consequences as there is no gain or loss on working capital.

The net present value method can be used in situations where the required rate of return varies over the life of the project.

What is the difference between nominal approach and real approach to incorporating inflation into the net present value method?

The Ambitz Corporation has an annual cash inflow from operations from its investment in a capital asset of $44,000 (excluding the deprecation) each year for seven years. The corporation's income tax rate is 35%. Calculate the total after-tax cash inflow from operations for seven years.

Which of the following is a stage of the capital budgeting process that forecasts all potential cash flows attributable to the alternative projects?

If there are non-uniform cash flows (cash flows that differ from year-to-year), payback period is calculated by dividing net initial investment by uniform increase in annual future cash flows.

Which of the following is the numerator in the mathematical expression for accrual accounting rate-of-return (AARR)?

Assume your goal in life is to retire with three million dollars. How much would you need to save at the end of each year if interest rates average 5% and you have a 10-year work life?

The Manager and Management Accounting

An Introduction to Cost Terms and Purposes

Cost-Volume-Profit Analysis

Job Costing

Activity-Based Costing and Activity-Based Management

Master Budget and Responsibility Accounting

Flexible Budgets, Direct-Cost Variances, and Management Control

Flexible Budgets, Overhead Cost Variances, and Management Control

Inventory Costing and Capacity Analysis

Determining How Costs Behave

Decision Making and Relevant Information

Strategy, Balanced Scorecard, and Strategic Profitability Analysis

Pricing Decisions and Cost Management

Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis

Allocation of Support-Department Costs, Common Costs, and Revenues

Cost Allocation: Joint Products and Byproducts

Process Costing

Spoilage, Rework, and Scrap

Balanced Scorecard: Quality and Time

Inventory Management, Just-in-Time, and Simplified Costing Methods

Management Control Systems, Transfer Pricing, and Multinational Considerations

Performance Measurement, Compensation, and Multinational Considerations

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