Question 1

Most capital budgeting techniques focus on cash flows.

Accepted Answer

A) True 
 B)False

Question 2

Kempf Corporation faces a marginal tax rate of 35 percent.One project that is currently under evaluation has a cash flow in the fourth year of its life that has a present value of $10,000 (after-tax).Kempf Corporation assumes that all cash flows occur at the end of the year and the company uses 11 percent as its discount rate.What is the pre-tax amount of the cash flow in year 4? (Round to the nearest dollar. )Present value tables or a financial calculator are required.

Accepted Answer

A) $15,181 
B) $23,356 
C) $ 9,868 
D) $43,375 
A) $15,181 
B) $23,356 
C) $ 9,868 
D) $43,375

Question 3

Mapleton Company
Mapleton Company is considering an investment in a machine that would reduce annual labor costs by $30,000.The machine has an expected life of 10 years with no salvage value.The machine would be depreciated according to the straight-line method over its useful life.The company's marginal tax rate is 30 percent.
Refer to Mapleton Company.Assume that the company will invest in the machine if it generates an internal rate of return of 16 percent.What is the maximum amount the company can pay for the machine and still meet the internal rate of return criterion? Present value tables or a financial calculator are required.

Accepted Answer

A) $144,990 
B) $180,000 
C) $187,500 
D) $210,000 
A) $144,990 
B) $180,000 
C) $187,500 
D) $210,000

Question 4

When considering risk,a manager will often use a judgmental method of risk adjustment.

Accepted Answer

A) True 
 B)False

Question 5

Superior Armored Car Co.is considering the acquisition of a new armored truck.The truck is expected to cost $300,000.The company's discount rate is 12 percent.The firm has determined that the truck generates a positive net present value of $17,022.However,the firm is uncertain as to whether it has determined a reasonable estimate of the salvage value of the truck.In computing the net present value,the company assumed that the truck would be salvaged at the end of the fifth year for $60,000.What expected salvage value for the truck would cause the investment to generate a net present value of $0? Ignore taxes.Present value tables or a financial calculator are required.

Accepted Answer

A) $30,000 
B) $0 
C) $55,278 
D) $42,978 
A) $30,000 
B) $0 
C) $55,278 
D) $42,978

Question 6

In capital budgeting,a firm's cost of capital is frequently used as the

Accepted Answer

A) internal rate of return. 
B) accounting rate of return. 
C) discount rate. 
D) profitability index. 
A) internal rate of return. 
B) accounting rate of return. 
C) discount rate. 
D) profitability index.

Question 7

The net present value and internal rate of return methods of decision making in capital budgeting are superior to the payback method in that they

Accepted Answer

A) are easier to implement. 
B) consider the time value of money. 
C) require less input. 
D) reflect the effects of sensitivity analysis. 
A) are easier to implement. 
B) consider the time value of money. 
C) require less input. 
D) reflect the effects of sensitivity analysis.

Question 8

All other factors equal,which of the following would affect a project's internal rate of return,net present value,and payback period?

Accepted Answer

A) an increase in the discount rate 
B) a decrease in the life of the project 
C) an increase in the initial cost of the project 
D) all of the above 
A) an increase in the discount rate 
B) a decrease in the life of the project 
C) an increase in the initial cost of the project 
D) all of the above

Question 9

An organization's hurdle rate should be at least equal to the organization's cost of capital.

Accepted Answer

A) True 
 B)False

Question 10

Riley Industries is considering an investment that will require an initial cash outlay of $200,000 to purchase non-depreciable assets.The project promises to return $60,000 per year (after-tax)for eight years with no salvage value.The company's cost of capital is 11 percent.
The company is uncertain about its estimate of the life expectancy of the project.How many years must the project generate the $60,000 per year return for the company to at least be indifferent about its acceptance? (Do not consider the possibility of partial year returns. )
Present value tables or a financial calculator are required.

Accepted Answer

Dividing $200,000/$60,000,gives the annu

Question 11

Accounting rate of return is based on cash flows.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following capital expenditure planning and control techniques has been criticized because it might mistakenly imply that earnings are reinvested at the rate of return earned by the investment?

Accepted Answer

A) payback method 
B) accounting rate of return 
C) net present value method 
D) internal rate of return 
A) payback method 
B) accounting rate of return 
C) net present value method 
D) internal rate of return

Question 13

The net present value method provides the actual rate of return for a project.

Accepted Answer

A) True 
 B)False

Question 14

Assume that a project consists of an initial cash outlay of $100,000 followed by equal annual cash inflows of $40,000 for 4 years.In the formula X = $100,000/$40,000,X represents the

Accepted Answer

A) payback period for the project. 
B) profitability index of the project. 
C) internal rate of return for the project. 
D) project's discount rate. 
A) payback period for the project. 
B) profitability index of the project. 
C) internal rate of return for the project. 
D) project's discount rate.

Question 15

Sunderland Wood Creations
Sunderland Wood Creations is considering a proposal to sell an existing lathe and purchase a new computer-operated lathe.Information on the existing lathe and the computer-operated lathe follow:
                                                                   $\begin{array}{ll}
\text { Existing } & \text { Computer-operated } \
\underline{\text { lathe }} &\underline{\text { lathe }}
\end{array}$
$\begin{array}{lcc}
\text { Cost } & \$ 100,000 & \$ 300,000 \
\text { Accumulated depreciation } & 60,000 & 0 \
\text { Salvage value now } & 20,000 & \
\text { Salvage value in 4 years } & 0 & 60,000 \
\text { Annual depreciation } & 10,000 & 75,000 \
\text { Anmual cash operating costs } & 200,000 &50,000\
\text { Remaining usefull life } & 4 \text { years }& 4 \text { years }
\end{array}$

Refer to Sunderland Wood Creations.If the company uses 10 percent as its discount rate,what is the net present value of the proposed new lathe purchase? Present value tables or a financial calculator are required.

Accepted Answer

A) $236,465 
B) $256,465 
C) $195,485 
D) $30,422 
A) $236,465 
B) $256,465 
C) $195,485 
D) $30,422

Question 16

Reinvestment assumptions are different under each method of ranking capital projects.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following indicates that the first cash flow is at the end of a period?
$\text {\underline{Ordinary annuity } }$                        $\text {\underline{Aniluity due} }$

Accepted Answer

A) yes no 
B) yes yes 
C) no yes 
D) no no 
A) yes no 
B) yes yes 
C) no yes 
D) no no

Question 18

Warning Industries is considering two alternative ways to depreciate a proposed investment.The investment has an initial cost of $100,000 and an expected five-year life.The two alternative depreciation schedules follow:
$\begin{array}{llc}
&\underline{\text { Method 1 }}&\underline{\text { Method2}}  \
\text { Year } 1 \text { depreciation } & \$20,000&\$40,000 \
\text { Year 2 depreciation } & \$ 20,000 & \$ 30,000 \
\text { Year 3 depreciation } & \$ 20,000 & \$ 20,000 \
\text { Year 4 depreciation } & \$ 20,000 & \$ 10,000 \
\text { Year 5 depreciation } & \$ 20,000 & \$ 0
\end{array}$

Assuming that the company faces a marginal tax rate of 40 percent and has a cost of capital of 10 percent,what is the difference between the two methods in the present value of the depreciation tax benefit? Present value tables or a financial calculator are required.

Accepted Answer

A) $7,196 
B) $0 
C) $2,878 
D) $6,342 
A) $7,196 
B) $0 
C) $2,878 
D) $6,342

Question 19

The salvage value of an old lathe is zero.If instead,the salvage value of the old lathe was $20,000,what would be the impact on the net present value of the proposal to purchase a new lathe?

Accepted Answer

A) It would increase the net present value of the proposal. 
B) It would decrease the net present value of the proposal. 
C) It would not affect the net present value of the proposal. 
D) Potentially it could increase or decrease the net present value of the new lathe. 
A) It would increase the net present value of the proposal. 
B) It would decrease the net present value of the proposal. 
C) It would not affect the net present value of the proposal. 
D) Potentially it could increase or decrease the net present value of the new lathe.

Question 20

The pre-tax cost of capital is higher than the after-tax cost of capital because

Accepted Answer

A) interest expense is deductible for tax purposes. 
B) principal payments on debt are deductible for tax purposes. 
C) the cost of capital is a deductible expense for tax purposes. 
D) dividend payments to stockholders are deductible for tax purposes. 
A) interest expense is deductible for tax purposes. 
B) principal payments on debt are deductible for tax purposes. 
C) the cost of capital is a deductible expense for tax purposes. 
D) dividend payments to stockholders are deductible for tax purposes.

Most capital budgeting techniques focus on cash flows.

When considering risk,a manager will often use a judgmental method of risk adjustment.

In capital budgeting,a firm's cost of capital is frequently used as the

The net present value and internal rate of return methods of decision making in capital budgeting are superior to the payback method in that they

All other factors equal,which of the following would affect a project's internal rate of return,net present value,and payback period?

An organization's hurdle rate should be at least equal to the organization's cost of capital.

Accounting rate of return is based on cash flows.

Which of the following capital expenditure planning and control techniques has been criticized because it might mistakenly imply that earnings are reinvested at the rate of return earned by the investment?

The net present value method provides the actual rate of return for a project.

Assume that a project consists of an initial cash outlay of $100,000 followed by equal annual cash inflows of $40,000 for 4 years.In the formula X = $100,000/$40,000,X represents the

Reinvestment assumptions are different under each method of ranking capital projects.

Which of the following indicates that the first cash flow is at the end of a period? $\text {\underline{Ordinary annuity } }$ $\text {\underline{Aniluity due} }$

The salvage value of an old lathe is zero.If instead,the salvage value of the old lathe was $20,000,what would be the impact on the net present value of the proposal to purchase a new lathe?

The pre-tax cost of capital is higher than the after-tax cost of capital because

Introduction to Cost Accounting

Cost Terminology and Cost Behaviors

Predetermined Overhead Rates, Flexible Budgets, and Absorptionvariable Costing

Activity-Based Management and Activity-Based Costing

Job Order Costing

Process Costing

Standard Costing and Variance Analysis

The Master Budget

Break-Even Point and Cost-Volume-Profit Analysis

Relevant Information for Decision Making

Allocation of Joint Costs and Accounting for By-Products

Introduction to Cost Management Systems

Responsibility Accounting,support Department Allocations,and Transfer Pricing

Performance Measurement, balanced Scorecards, and Performance Rewards

Managing Costs and Uncertainty

Implementing Quality Concepts

Inventory and Production Management

Emerging Management Practices

Filters

Exam 15: Capital Budgeting

Most capital budgeting techniques focus on cash flows.

When considering risk,a manager will often use a judgmental method of risk adjustment.

In capital budgeting,a firm's cost of capital is frequently used as the

The net present value and internal rate of return methods of decision making in capital budgeting are superior to the payback method in that they

All other factors equal,which of the following would affect a project's internal rate of return,net present value,and payback period?

An organization's hurdle rate should be at least equal to the organization's cost of capital.

Accounting rate of return is based on cash flows.

Which of the following capital expenditure planning and control techniques has been criticized because it might mistakenly imply that earnings are reinvested at the rate of return earned by the investment?

The net present value method provides the actual rate of return for a project.

Assume that a project consists of an initial cash outlay of $100,000 followed by equal annual cash inflows of $40,000 for 4 years.In the formula X = $100,000/$40,000,X represents the

Reinvestment assumptions are different under each method of ranking capital projects.

Which of the following indicates that the first cash flow is at the end of a period? Ordinary annuity ‾ \text {\underline{Ordinary annuity } }Ordinary annuity ​ Aniluity due‾ \text {\underline{Aniluity due} }Aniluity due​

The salvage value of an old lathe is zero.If instead,the salvage value of the old lathe was $20,000,what would be the impact on the net present value of the proposal to purchase a new lathe?

The pre-tax cost of capital is higher than the after-tax cost of capital because

Introduction to Cost Accounting

Cost Terminology and Cost Behaviors

Predetermined Overhead Rates, Flexible Budgets, and Absorptionvariable Costing

Activity-Based Management and Activity-Based Costing

Job Order Costing

Process Costing

Standard Costing and Variance Analysis

The Master Budget

Break-Even Point and Cost-Volume-Profit Analysis

Relevant Information for Decision Making

Allocation of Joint Costs and Accounting for By-Products

Introduction to Cost Management Systems

Responsibility Accounting,support Department Allocations,and Transfer Pricing

Performance Measurement, balanced Scorecards, and Performance Rewards

Managing Costs and Uncertainty

Implementing Quality Concepts

Inventory and Production Management

Emerging Management Practices

Filters

Which of the following indicates that the first cash flow is at the end of a period? $\text {\underline{Ordinary annuity } }$ $\text {\underline{Aniluity due} }$