Question 1

The payback method of making capital budgeting decisions gives full consideration to the time value of money.

Accepted Answer

A) True 
 B)False

Question 2

The following data pertain to an investment: $\begin{array} { l r } 
\text { Cost of the Investment } & \$ 18,955 \
\text { Life of the Project } & 5 \text { years } \
\text { Annual Cost Savings } & \$ 5,000 \
\text { Estimated Salvage Value } & \$ 1,000 \
\text { Discount Rate } & 10 \%
\end{array}$ What is the net present value of the proposed investment? (Ignore income taxes in this problem.)

Accepted Answer

A)  ($3,430). 
B)  $0. 
C)  $621. 
D)  $3,355. 
A)  ($3,430). 
B)  $0. 
C)  $621. 
D)  $3,355.

Question 3

If a firm acquires a depreciable asset on September 1,it can add only one-third of the capital cost of the asset to the undepreciated capital cost (UCC)in the calculation of the capital cost allowance (CCA)for the year.

Accepted Answer

A) True 
 B)False

Question 4

The Morgan Company has been awarded a six-year contract to provide repair service to a commercial bus line. Morgan Company has gathered the following data associated with the items needed for this contract:
 
The special equipment is in Class 7 with a maximum 15% CCA rate. The income tax rate is 40%, and Morgan's after-tax cost of capital is 14%. At the end of six years, the working capital will be released for use elsewhere.

-Assume the special equipment will have a zero salvage value (instead of $20,000)at the end of six years.The present value of the total tax savings for all years because of the CCA tax shield is closest to which of the following?

Accepted Answer

A)  $56,373. 
B)  $58,258. 
C)  $60,143. 
D)  $62,069. 
A)  $56,373. 
B)  $58,258. 
C)  $60,143. 
D)  $62,069.

Question 5

The Higgins Company has just purchased a piece of equipment at a cost of $120,000.This equipment will reduce operating costs by $40,000 each year for the next eight years.This equipment replaces old equipment that was sold for $8,000 cash.What is the new equipment's payback period? (Ignore income taxes in this problem.)

Accepted Answer

A)  2.8 years. 
B)  3.0 years. 
C)  8.0 years. 
D)  10.0 years. 
A)  2.8 years. 
B)  3.0 years. 
C)  8.0 years. 
D)  10.0 years.

Question 6

Lambert Manufacturing has $60,000 to invest in either Project A or Project B. The following data are available on these projects:

Both projects have a useful life of six years. At the end of six years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%. (Ignore income taxes in this problem.)
-The net present value of Project B is closest to which of the following?

Accepted Answer

A)  $55,005. 
B)  $77,805. 
C)  $105,005. 
D)  $127,805. 
A)  $55,005. 
B)  $77,805. 
C)  $105,005. 
D)  $127,805.

Question 7

Bradley Company's required rate of return is 14%. The company has an opportunity to be the exclusive distributor of a very popular consumer item. No new equipment would be needed, but the company would have to use one-fourth of the space in a warehouse it owns. The warehouse cost $200,000 new. The warehouse is currently half-empty, and there are no other plans to use the empty space. In addition, the company would have to invest $100,000 in working capital to carry inventories and accounts receivable for the new product line. The company would have the distributorship for only five years. The distributorship would generate a $17,000 net annual cash inflow. (Ignore income taxes in this problem.)

Required:

What is the net present value of the project at a discount rate of 14%? Should the project be accepted?

Accepted Answer

Yes,the distributors

Question 8

If a company is operating at a profit,all cash inflows associated with an investment project should be multiplied by one minus the tax rate to be placed on an after-tax basis.

Accepted Answer

A) True 
 B)False

Question 9

Some investment projects require that a company expand its working capital to service the greater volume of business that will be generated.Under the net present value method,how should the investment of working capital be treated?

Accepted Answer

A)  An initial cash outflow for which no discounting is necessary. 
B)  A future cash inflow for which discounting is necessary. 
C)  Both an initial cash outflow for which no discounting is necessary and a future cash inflow for which discounting is necessary. 
D)  Irrelevant to the net present value analysis. 
A)  An initial cash outflow for which no discounting is necessary. 
B)  A future cash inflow for which discounting is necessary. 
C)  Both an initial cash outflow for which no discounting is necessary and a future cash inflow for which discounting is necessary. 
D)  Irrelevant to the net present value analysis.

Question 10

Hanley Company has purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year. (Ignore income taxes in this problem.)
-What is the payback period for this investment?

Accepted Answer

A)  2.1 years. 
B)  2.3 years. 
C)  2.8 years. 
D)  4.2 years. 
A)  2.1 years. 
B)  2.3 years. 
C)  2.8 years. 
D)  4.2 years.

Question 11

Layton Company is replacing an old delivery van with a new van. The following data relate to this investment decision:
 
The old van is in Class 10 with a maximum CCA rate of 30% and will last for six more years. The new van is also in Class 10 with a maximum CCA rate of 30%. The income tax rate is 40%, and the company's after-tax cost of capital is 10%.
-What is the approximate present value of the after-tax net savings in cash operating costs for all the years?

Accepted Answer

A)  $3,484. 
B)  $5,226. 
C)  $8,711. 
D)  $12,000. 
A)  $3,484. 
B)  $5,226. 
C)  $8,711. 
D)  $12,000.

Question 12

How are the following items used in the calculation of the net present value of a proposed project? (Ignore income tax considerations.)

$\begin{array}{lll}
\underline { \text { Depreciation Expense } }&\underline { \text { Salvage Value } }\
\text { A) Include } & \text { Include } \
\text { B) Include } & \text { Exclude } \
\text { C) Exclude } & \text { Include } \
\text { D) Exclude } & \text { Exclude }
\end{array}$

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 13

Bugle's Bagel Bakery is investigating the purchase of a new bagel-making machine. This machine would provide an annual operating cost savings of $3,650 for each of the next four years. In addition, this new machine would allow the production of one new type of bagel that would result in selling 1,500 dozen more bagels each year. The company earns a contribution margin of $0.90 on each dozen bagels sold. The purchase price of this machine is $13,450, and it will have a four-year useful life. Bugle's discount rate is 14%. (Ignore income taxes in this problem.)
-What is the total annual cash inflow from this machine for capital budgeting purposes?

Accepted Answer

A)  $3,650. 
B)  $4,750. 
C)  $5,000. 
D)  $5,150. 
A)  $3,650. 
B)  $4,750. 
C)  $5,000. 
D)  $5,150.

Question 14

Alpine Company is analyzing two investment projects: P and Q. The following data are available:

The computer equipment for Project P will have a total salvage value of $8,000 at end of eight years. It will belong to Class 10 with a 30% maximum CCA rate. At the end of eight years, the working capital for Project Q will be released for use elsewhere. The income tax rate is 30% and Alpine's after-tax cost of capital is 10%.
-What is the approximate present value of the after-tax net annual operating cash inflows for Project P?

Accepted Answer

A)  $32,010. 
B)  $53,074. 
C)  $74,690. 
D)  $106,699. 
A)  $32,010. 
B)  $53,074. 
C)  $74,690. 
D)  $106,699.

Question 15

The following data are available on a proposed investment project: $\begin{array} { l r } 
\text { Initial Investment } & \$ 142,500 \
\text { Annual Cash Inflows } & \$ 30,000 \
\text { Life of the Investment. } & 8 \text { years } \
\text { Required Rate of Return } & 10 \%
\end{array}$ Which of the following statements best describes the internal rate of return on the proposed investment project? (Ignore income taxes in this problem.)

Accepted Answer

A)  It is between 11% and 12%. 
B)  It is between 12% and 13%. 
C)  It is between 13% and 14%. 
D)  It is less than the required rate of return. 
A)  It is between 11% and 12%. 
B)  It is between 12% and 13%. 
C)  It is between 13% and 14%. 
D)  It is less than the required rate of return.

Question 16

Shields Company has gathered the following data on a proposed investment project:
 
(Ignore income taxes in this problem.)
-The internal rate of return on the investment is closest to which of the following?

Accepted Answer

A)  11%. 
B)  13%. 
C)  15%. 
D)  17%. 
A)  11%. 
B)  13%. 
C)  15%. 
D)  17%.

Question 17

Treads Corporation is considering the replacement of an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation for five more years. If Treads decides to replace the old machine, Picco Company has offered to purchase the old machine for $60,000. The old machine would have no salvage value in five years.

The new machine would be acquired from Hillcrest Industries for $1,000,000 in cash. The new machine has an expected useful life of five years with no salvage value. Due to the increased efficiency of the new machine, estimated annual cash savings of $300,000 would be generated.

Treads Corporation uses a discount rate of 12%. (Ignore income taxes in this problem.)

-The net present value of the project is closest to which of the following?

Accepted Answer

A)  $136,400. 
B)  $141,500. 
C)  $171,000. 
D)  $560,000. 
A)  $136,400. 
B)  $141,500. 
C)  $171,000. 
D)  $560,000.

Question 18

Last year,the sales at Jersey Company were $200,000 and were all cash sales.The tax-deductible expenses at Jersey were $125,000 and were all cash expenses.The tax rate was 30%.What was the after-tax net cash inflow at Jersey last year from these operations?

Accepted Answer

A)  $22,500. 
B)  $37,500. 
C)  $52,500. 
D)  $60,000. 
A)  $22,500. 
B)  $37,500. 
C)  $52,500. 
D)  $60,000.

Question 19

Eureka Company is considering replacing an old computer with a new computer. The following data relate to this investment decision:

The new computer will belong to Class 10 with a maximum CCA rate of 30%. The income tax rate is also 30%, and the company's after-tax cost of capital is 12%
-What is the approximate present value of the tax savings for all years because of the CCA tax shield?

Accepted Answer

A)  $7,786. 
B)  $6,975. 
C)  $8,245. 
D)  $8,438. 
A)  $7,786. 
B)  $6,975. 
C)  $8,245. 
D)  $8,438.

Question 20

Shields Company has gathered the following data on a proposed investment project:
 
(Ignore income taxes in this problem.)
-The payback period for the investment is closest to which of the following?

Accepted Answer

A)  0.2 years. 
B)  1.0 years. 
C)  3.0 years. 
D)  5.0 years. 
A)  0.2 years. 
B)  1.0 years. 
C)  3.0 years. 
D)  5.0 years.

The payback method of making capital budgeting decisions gives full consideration to the time value of money.

The following data pertain to an investment: Cost of the Investment \ 18,955 Life of the Project 5 years Annual Cost Savings \ 5,000 Estimated Salvage Value \ 1,000 Discount Rate 10\% What is the net present value of the proposed investment? (Ignore income taxes in this problem.)

If a firm acquires a depreciable asset on September 1,it can add only one-third of the capital cost of the asset to the undepreciated capital cost (UCC)in the calculation of the capital cost allowance (CCA)for the year.

If a company is operating at a profit,all cash inflows associated with an investment project should be multiplied by one minus the tax rate to be placed on an after-tax basis.

Some investment projects require that a company expand its working capital to service the greater volume of business that will be generated.Under the net present value method,how should the investment of working capital be treated?

How are the following items used in the calculation of the net present value of a proposed project? (Ignore income tax considerations.) A) Include Include B) Include Exclude C) Exclude Include D) Exclude Exclude

Shields Company has gathered the following data on a proposed investment project: (Ignore income taxes in this problem.) -The internal rate of return on the investment is closest to which of the following?

Last year,the sales at Jersey Company were $200,000 and were all cash sales.The tax-deductible expenses at Jersey were $125,000 and were all cash expenses.The tax rate was 30%.What was the after-tax net cash inflow at Jersey last year from these operations?

Shields Company has gathered the following data on a proposed investment project: (Ignore income taxes in this problem.) -The payback period for the investment is closest to which of the following?

Managerial Accounting and the Business Environment

Cost Terms, Concepts, and Classifications

Systems Design: Job-Order Costing

Systems Design: Process Costing

Activity-Based Costing: A Tool to Aid Decision Making

Cost Behaviour: Analysis and Use

Cost-Volume-Profit Relationships

Variable Costing: A Tool for Management

Budgeting

Standard Costs and Overhead Analysis

Reporting for Control

Relevant Costs for Decision Making

Financial Statement Analysis

Filters

Exam 13: Capital Budgeting Decisions

The payback method of making capital budgeting decisions gives full consideration to the time value of money.

The following data pertain to an investment: Cost of the Investment \ 18,955 Life of the Project 5 years Annual Cost Savings \ 5,000 Estimated Salvage Value \ 1,000 Discount Rate 10\% What is the net present value of the proposed investment? (Ignore income taxes in this problem.)

If a firm acquires a depreciable asset on September 1,it can add only one-third of the capital cost of the asset to the undepreciated capital cost (UCC)in the calculation of the capital cost allowance (CCA)for the year.

If a company is operating at a profit,all cash inflows associated with an investment project should be multiplied by one minus the tax rate to be placed on an after-tax basis.

Some investment projects require that a company expand its working capital to service the greater volume of business that will be generated.Under the net present value method,how should the investment of working capital be treated?

How are the following items used in the calculation of the net present value of a proposed project? (Ignore income tax considerations.) A) Include Include B) Include Exclude C) Exclude Include D) Exclude Exclude

Shields Company has gathered the following data on a proposed investment project: (Ignore income taxes in this problem.) -The internal rate of return on the investment is closest to which of the following?

Last year,the sales at Jersey Company were $200,000 and were all cash sales.The tax-deductible expenses at Jersey were $125,000 and were all cash expenses.The tax rate was 30%.What was the after-tax net cash inflow at Jersey last year from these operations?

Shields Company has gathered the following data on a proposed investment project: (Ignore income taxes in this problem.) -The payback period for the investment is closest to which of the following?

Managerial Accounting and the Business Environment

Cost Terms, Concepts, and Classifications

Systems Design: Job-Order Costing

Systems Design: Process Costing

Activity-Based Costing: A Tool to Aid Decision Making

Cost Behaviour: Analysis and Use

Cost-Volume-Profit Relationships

Variable Costing: A Tool for Management

Budgeting

Standard Costs and Overhead Analysis

Reporting for Control

Relevant Costs for Decision Making

Financial Statement Analysis

Filters