Question 1

The true economic yield produced by an asset is summarized by the asset's:

Accepted Answer

A) non-discounted cash flows. 
B) net present value. 
C) future value. 
D) annuity discount factor. 
E) internal rate of return. 
A) non-discounted cash flows. 
B) net present value. 
C) future value. 
D) annuity discount factor. 
E) internal rate of return.

Question 2

Grey is considering the replacement of some machinery that has zero book value and a current market value of $2,800.One possible alternative is to invest in new machinery that costs $30,000.The new equipment has a four-year service life and an estimated salvage value of $3,500,will produce annual cash operating savings of $9,400,and will require a $2,200 overhaul in year 3.The company uses straight-line depreciation.
Required:
Prepare a net-present-value analysis of Grey's replacement decision,assuming an 8% hurdle rate and no income taxes.Should the machinery be acquired? Note: Round calculations to the nearest dollar.

Accepted Answer

@#IMG-DLM& The machinery shoul

Question 3

A company's hurdle rate is generally influenced by:

Accepted Answer

A) the cost of capital. 
B) the firm's depreciable assets. 
C) whether management uses the net-present-value method or the internal-rate-of-return method. 
D) project risk. 
E) items "A" and "D" abovE. 
A) the cost of capital. 
B) the firm's depreciable assets. 
C) whether management uses the net-present-value method or the internal-rate-of-return method. 
D) project risk. 
E) items "A" and "D" abovE.

Question 4

The mayor of Statesville is considering the purchase of a new computer system for the city's tax department.The system costs $75,000 and has an expected life of five years.The mayor estimates the following savings will result if the system is purchased:  
If Statesville uses a 10% discount rate for capital-budgeting decisions,the net present value of the computer system would be:

Accepted Answer

A) $489. 
B) $4,057. 
C) $11,658. 
D) $63,342. 
E) $79,057. 
A) $489. 
B) $4,057. 
C) $11,658. 
D) $63,342. 
E) $79,057.

Question 5

An increased number of companies are investing in advanced manufacturing systems.
Required:
A.Many proposed advanced manufacturing systems have a negative net present value when discounted-cash-flow analysis is used.Explain several causes of this situation.
A.Negative net present values may arise from several factors: the investments are very costly;the hurdle rate may be very high to compensate for project risk;the time horizon may be too short;and a number of benefits associated with the project may have been excluded from the analysis because of related quantification problems.
B.Greater flexibility in the manufacturing process and improvements in product quality are very difficult to quantify.As a result,these items may be excluded from a discounted-cash-flow analysis,decreasing an investment's attractiveness.
B.Two major benefits of advanced systems are greater flexibility in the manufacturing process and improvements in product quality.Explain how these benefits can create problems when performing discounted-cash-flow analysis.

Accepted Answer

A.Negative net present values may arise

Question 6

A depreciation tax shield is a(n):

Accepted Answer

A) after-tax cash outflow. 
B) increase in income tax. 
C) factor that has no affect on cash flows. 
D) reduction in income tax. 
E) sporadic fluctuation in income tax. 
A) after-tax cash outflow. 
B) increase in income tax. 
C) factor that has no affect on cash flows. 
D) reduction in income tax. 
E) sporadic fluctuation in income tax.

Question 7

Green Way Packaging is considering a $600,000 investment in new equipment that is anticipated to produce the following data over a five-year life:  
Ignoring income taxes and assuming that cash flows occur evenly throughout a year,the equipment's approximate payback period is:

Accepted Answer

A) 1 year,7 months. 
B) 2 years,1 month. 
C) 2 years,5 months. 
D) over 5 years. 
E) some other period of time not noted abovE. 
A) 1 year,7 months. 
B) 2 years,1 month. 
C) 2 years,5 months. 
D) over 5 years. 
E) some other period of time not noted abovE.

Question 8

Ruiz Company purchased equipment for $30,000 in December 20x1.The equipment is expected to generate $10,000 per year of additional revenue and incur $2,000 per year of additional cash expenses,beginning in 20x2.Under MACRS,depreciation in 20x2 will be $3,000.If the firm's income tax rate is 40%,the after-tax cash flow in 20x2 would be:

Accepted Answer

A) $3,200. 
B) $3,600. 
C) $4,800. 
D) $6,000. 
E) some other amount. 
A) $3,200. 
B) $3,600. 
C) $4,800. 
D) $6,000. 
E) some other amount.

Question 9

Braselton Company plans to incur $190,000 of salaries expense and produce $320,000 of additional sales revenue if a capital project is implemented.Assuming a 30% tax rate,these two items collectively should appear in a capital budgeting analysis as:

Accepted Answer

A) a $39,000 inflow. 
B) a $39,000 outflow. 
C) a $91,000 inflow. 
D) a $91,000 outflow. 
E) some other amount. 
A) a $39,000 inflow. 
B) a $39,000 outflow. 
C) a $91,000 inflow. 
D) a $91,000 outflow. 
E) some other amount.

Question 10

Discounted-cash-flow analysis focuses primarily on:

Accepted Answer

A) the stability of cash flows. 
B) the timing of cash flows. 
C) the probability of cash flows. 
D) the sensitivity of cash flows. 
E) whether cash flows are increasing or decreasing. 
A) the stability of cash flows. 
B) the timing of cash flows. 
C) the probability of cash flows. 
D) the sensitivity of cash flows. 
E) whether cash flows are increasing or decreasing.

Question 11

Consider the following statements about capital budgeting postaudits:
I.Postaudits can be used to detect desirable projects that were rejected.
II.Postaudits can be used to detect undesirable projects that were accepted.
III.Postaudits may reveal shortcomings in cash-flow projections,providing insights that allow a company to improve future predictions.
Which of the above statements is (are)correct?

Accepted Answer

A) I only. 
B) II only. 
C) III only. 
D) II and III. 
E) I,II,and III. 
A) I only. 
B) II only. 
C) III only. 
D) II and III. 
E) I,II,and III.

Question 12

Which of the following is taken into account by the net-present-value method?

Accepted Answer

A) Choice A 
B) Choice B 
C) Choice C 
D) Choice D 
E) Choice E 
A) Choice A 
B) Choice B 
C) Choice C 
D) Choice D 
E) Choice E

Question 13

Lasley Corporation is considering the acquisition of a new machine that is expected to produce annual savings in cash operating costs of $30,000 before income taxes.The machine costs $100,000,has a useful life of five years,and no salvage value.Lasley uses straight-line depreciation on all assets,is subject to a 30% income tax rate,and has an after-tax hurdle rate of 8%.
Required:
A.Average income: ($30,000 - $20,000)* 0.70 = $7,000
Accounting rate of return: $7,000 / $100,000 = 7%
A.Compute the machine's accounting rate of return on the initial investment.
B.
   
Depreciation tax savings:
Year 1: 10,000 x .3 = 3,000 x .926 = 2,778
Year 2: 20,000 x .3 = 6,000 x .857 = 5,142
Year 3: 20,000 x .3 = 6,000 x .794 = 4,764
Year 4: 20,000 x .3 = 6,000 x .735 = 4,410
Year 5: 20,000 x .3 = 6,000 x .681 = 4,086
Year 6: 10,000 x .3 = 3,000 x .630 = 1,890
TOTAL $23,070
NPV = $106,923 
B.Compute the machine's net present value.

Accepted Answer

A.Average income:($30,000 _- $20,000)*0.70

Question 14

The Warren Machine Tool Company is considering the addition of a computerized lathe to its equipment inventory.The initial cost of the equipment is $600,000,and the lathe is expected to have a useful life of five years and no salvage value.The cost savings and increased capacity attributable to the machine are estimated to generate increases in the firm's annual cash inflows (before considering depreciation)of $180,000.The machine will be depreciated using MACRS for tax purposes.The 5-year MACRS depreciation percentages as computed by the IRS are: Year 1 = 20.00%;Year 2 = 32.00%;Year 3 = 19.20%;Year 4 = 11.52%;Year 5 = 11.52%;Year 6 = 5.76%.
Warren is currently in the 40% income tax bracket.A 10% after-tax rate of return is desired.
Required:
A.What is the net present value of the investment? Round to the nearest dollar.
B.No,the machine should not be acquired because it has a negative net present value.
B.Should the machine be acquired by the firm?
C.
   
The net present value will increase by $37,260.In this case,the machine should be acquired because it has a positive net present value. 
C.Assume that the equipment will be sold at the end of its useful life for $100,000.If the depreciation amounts are not revised,calculate the dollar impact of this change on the total net present valuE.

Accepted Answer

@#IMG-DLM& 
B.No,the machine should not be acquire

Question 15

Wexford Corporation is considering the acquisition of a new machine that costs $350,000.The machine is expected to have a four-year service life and will produce annual savings in cash operating costs of $100,000.Wexford uses the optional straight-line method of depreciation and depreciates the asset over its four-year service life.The company is subject to a 30% income tax rate,has an after-tax hurdle rate of 12%,and rounds calculations to the nearest dollar.
Required:
A.Annual cash operating costs: $(100,000)* 0.7 = $(70,000)
Depreciation tax savings:
Year 1: $43,750 x .3 = 13,125
Year 2: $87,500 x .3 = 26,250
Year 3: $87,500 x .3 = 26,250
Year 4: $87,500 x .3 = 26,250
Year 5: $43,750 x .3 = 13,125
A.Determine the annual after-tax cash flows that result from acquisition of the machine.
B.
   
The machine is not considered an attractive investment because it has a negative net present value. 
B.Calculate the machine's Net present value.Is the machine an attractive investment? Why?

Accepted Answer

A.Annual cash operating costs:$(100,000)

Question 16

The rule for project acceptance under the net-present-value method is that:

Accepted Answer

A) NPV should be greater than zero. 
B) NPV should be less than zero. 
C) NPV should equal zero. 
D) NPV should be less than the hurdle rate. 
E) NPV should equal the hurdle ratE. 
A) NPV should be greater than zero. 
B) NPV should be less than zero. 
C) NPV should equal zero. 
D) NPV should be less than the hurdle rate. 
E) NPV should equal the hurdle ratE.

Question 17

Consider the following statements about the accounting rate of return:
I.The accounting rate of return focuses on a project's income rather than its cash flows.
II.Companies can figure the accounting rate of return on either the initial investment figure or an average investment figure.
III.The accounting rate of return considers the time value of money.
Which of the above statements is (are)correct?

Accepted Answer

A) I only. 
B) II only. 
C) III only. 
D) I and II. 
E) II and III. 
A) I only. 
B) II only. 
C) III only. 
D) I and II. 
E) II and III.

Question 18

On January 2,20x1,Rebecca Brown purchased 800 shares of Bazooka Telecommunications common stock at $35 per share.The company paid a $1.50 dividend per share on December 28 of that year,and raised the amount by $0.50 per share for a distribution on December 28,20x2.Rebecca sold her entire investment on December 30,20x2,generating a $5,000 gain on the sale of stock.
Required:
A.
   
A.Prepare a dated listing of the cash inflows and outflows related to Rebecca's stock investment.Ignore income taxes.
B.Assume that Rebecca has a 10% hurdle rate for all investments.Rounding to the nearest dollar,compute the net present value of her investment in Bazooka and determine whether she achieved her 10% goal.
B.Rebecca achieved her goal,as indicated by the positive net present value.

Accepted Answer

A. @#IMG-DLM& B.Rebecca achiev

Question 19

When income taxes are considered in capital budgeting,the cash flows related to a company's advertising expense would be correctly figured by taking the cash paid for advertising and:

Accepted Answer

A) adding the result of multiplying (advertising expense * tax rate). 
B) adding the tax rate. 
C) adding the result of multiplying [advertising expense * (1 - tax rate)]. 
D) subtracting the result of multiplying (advertising expense * tax rate). 
E) subtracting the result of multiplying [advertising expense * (1 - tax rate)]. 
A) adding the result of multiplying (advertising expense * tax rate). 
B) adding the tax rate. 
C) adding the result of multiplying [advertising expense * (1 - tax rate)]. 
D) subtracting the result of multiplying (advertising expense * tax rate). 
E) subtracting the result of multiplying [advertising expense * (1 - tax rate)].

Question 20

Generally speaking,which of the following would not directly affect a company's income tax payments?

Accepted Answer

A) Advertising expense. 
B) Gain on sale of machinery. 
C) Sales revenue. 
D) Land owned by the firm. 
E) Loss on sale of building. 
A) Advertising expense. 
B) Gain on sale of machinery. 
C) Sales revenue. 
D) Land owned by the firm. 
E) Loss on sale of building.

The true economic yield produced by an asset is summarized by the asset's:

A company's hurdle rate is generally influenced by:

A depreciation tax shield is a(n):

Green Way Packaging is considering a $600,000 investment in new equipment that is anticipated to produce the following data over a five-year life: Ignoring income taxes and assuming that cash flows occur evenly throughout a year,the equipment's approximate payback period is:

Braselton Company plans to incur $190,000 of salaries expense and produce $320,000 of additional sales revenue if a capital project is implemented.Assuming a 30% tax rate,these two items collectively should appear in a capital budgeting analysis as:

Discounted-cash-flow analysis focuses primarily on:

Which of the following is taken into account by the net-present-value method?

The rule for project acceptance under the net-present-value method is that:

When income taxes are considered in capital budgeting,the cash flows related to a company's advertising expense would be correctly figured by taking the cash paid for advertising and:

Generally speaking,which of the following would not directly affect a company's income tax payments?

The Changing Role of Managerial Accounting in a Dynamic Business Environment

Basic Cost Management Concepts and Accounting for Mass Customization Operations

Product Costing and Cost Accumulation in a Batch Production Environment

Process Costing and Hybrid Product-Costing Systems

Activity-Based Costing and Management

Activity Analysis,cost Behavior,and Cost Estimation

Appendix I: The Sarbanes-Oxley Act, Internal Controls, and Management Accounting

Cost-Volume-Profit Analysis

Absorption and Variable Costing

Profit Planning and Activity-Based Budgeting

Standard Costing,Operational Performance Measures,and the Balanced Scorecard

Flexible Budgeting and the Management of Overhead and Support Activity Costs

Responsibility Accounting, Quality Control, and Environmental Cost Management

Investment Centers and Transfer Pricing

Decision Making: Relevant Costs and Benefits

Target Costing and Cost Analysis for Pricing Decisions

Allocation of Support Activity Costs and Joint Costs

compound Interest and the Concept of Present Value

Inventory Management

Filters

Exam 16: Capital Expenditure Decisions

The true economic yield produced by an asset is summarized by the asset's:

A company's hurdle rate is generally influenced by:

A depreciation tax shield is a(n):

Green Way Packaging is considering a $600,000 investment in new equipment that is anticipated to produce the following data over a five-year life: Ignoring income taxes and assuming that cash flows occur evenly throughout a year,the equipment's approximate payback period is:

Braselton Company plans to incur $190,000 of salaries expense and produce $320,000 of additional sales revenue if a capital project is implemented.Assuming a 30% tax rate,these two items collectively should appear in a capital budgeting analysis as:

Discounted-cash-flow analysis focuses primarily on:

Which of the following is taken into account by the net-present-value method?

The rule for project acceptance under the net-present-value method is that:

When income taxes are considered in capital budgeting,the cash flows related to a company's advertising expense would be correctly figured by taking the cash paid for advertising and:

Generally speaking,which of the following would not directly affect a company's income tax payments?

The Changing Role of Managerial Accounting in a Dynamic Business Environment

Basic Cost Management Concepts and Accounting for Mass Customization Operations

Product Costing and Cost Accumulation in a Batch Production Environment

Process Costing and Hybrid Product-Costing Systems

Activity-Based Costing and Management

Activity Analysis,cost Behavior,and Cost Estimation

Appendix I: The Sarbanes-Oxley Act, Internal Controls, and Management Accounting

Cost-Volume-Profit Analysis

Absorption and Variable Costing

Profit Planning and Activity-Based Budgeting

Standard Costing,Operational Performance Measures,and the Balanced Scorecard

Flexible Budgeting and the Management of Overhead and Support Activity Costs

Responsibility Accounting, Quality Control, and Environmental Cost Management

Investment Centers and Transfer Pricing

Decision Making: Relevant Costs and Benefits

Target Costing and Cost Analysis for Pricing Decisions

Allocation of Support Activity Costs and Joint Costs

compound Interest and the Concept of Present Value

Inventory Management

Filters