Question 1

The profitability index is computed by dividing the present value of net cash flows by the initial investment.

Accepted Answer

A) True 
 B)False

Question 2

The time value of money concept:

Accepted Answer

A)  Means that a dollar today is worth less than a dollar tomorrow. 
B)  Means that a dollar tomorrow is worth more than a dollar today. 
C)  Means that a dollar today is worth more than a dollar tomorrow. 
D)  Means that "Time is money." 
E)  Does not involve the concept of compound interest. 
A)  Means that a dollar today is worth less than a dollar tomorrow. 
B)  Means that a dollar tomorrow is worth more than a dollar today. 
C)  Means that a dollar today is worth more than a dollar tomorrow. 
D)  Means that "Time is money." 
E)  Does not involve the concept of compound interest.

Question 3

Capital budgeting decisions usually involve analysis of:

Accepted Answer

A)  Cash outflows only. 
B)  Short-term investments only. 
C)  Long-term investments only. 
D)  Investments with certain outcomes only. 
E)  Operating revenues. 
A)  Cash outflows only. 
B)  Short-term investments only. 
C)  Long-term investments only. 
D)  Investments with certain outcomes only. 
E)  Operating revenues.

Question 4

Poe Company is considering the purchase of new equipment costing $80,000. The projected annual cash inflows are $30,200, to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Poe requires a 10% return on its investments. The present value of $1 and present value of an annuity of $1 for different periods is presented below. Compute the net present value of the machine. $$\begin{array} { c c c } 
\text { Periods } & \text { Present Value } & \text { Presert Value of arl } \
 & \text { of } \$ 1 \text { at } 10 \% & \text { Annuity of } \$ 1 \text { at } 10 \% \
1 & 0.9091 & 0.9091 \
2 & 0.8264 & 1.7355 \
3 & 0.7514 & 2.4869 \
4& 0.6830 & 3.1699
\end{array}$$

Accepted Answer

A)  $(15,731). 
B)  $(4,896). 
C)  $15,731. 
D)  $4,896. 
E)  $32,334. 
A)  $(15,731). 
B)  $(4,896). 
C)  $15,731. 
D)  $4,896. 
E)  $32,334.

Question 5

Lower-risk investments require a higher rate of return compared with higher-risk investments.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

Advantages of using the rate of return o

Question 7

Vextra Corporation is considering the purchase of new equipment costing $35,000. The projected annual cash inflow is $11,000, to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Vextra requires a 12% return on its investments. The present value of an annuity of $1 for different periods follows: $$\begin{array} { c l } 
\text { Periods } & 12 \% \
1 & 0.8929 \
2 & 1.6901 \
3 & 2.4018 \
4 & 3.0373
\end{array}$$ What is the net present value of the machine?

Accepted Answer

A)  $(33,410). 
B)  $(3,100). 
C)  $35,000. 
D)  $3,410. 
E)  $(1,590). 
A)  $(33,410). 
B)  $(3,100). 
C)  $35,000. 
D)  $3,410. 
E)  $(1,590).

Question 8

Using accelerated depreciation for tax reporting increases the net present value of an asset's cash flows because it produces larger net cash inflows in the early years of the asset's life.

Accepted Answer

A) True 
 B)False

Question 9

The process of analyzing alternative long-term investments and deciding which assets to acquire or sell is known as:

Accepted Answer

A)  Planning and control. 
B)  Capital budgeting. 
C)  Variance analysis. 
D)  Master budgeting. 
E)  Managerial accounting. 
A)  Planning and control. 
B)  Capital budgeting. 
C)  Variance analysis. 
D)  Master budgeting. 
E)  Managerial accounting.

Question 10

Porter Co. is analyzing two projects for the future. Assume that only one project can be selected. $\begin{array}{|r|r|r|}
\hline & \text { Project X } & \text { Project Y } \
\hline \text { Cost of machine } & \$ 68,000 & \$ 60,000 \
\hline \text { Net cash flow: } & & \
\hline \text { Year 1 }  & 24,000 & 4,000 \
\hline \text { Year 2 } & 24,000 & 26,000 \
\hline \text { Year 3 } & 24,000 & 26,000 \
\hline \text { Year 4 } & 0 & 20,000 \
\hline
\end{array}$
 The payback period in years for Project X is:

Accepted Answer

A)  2.00. 
B)  3.83. 
C)  3.50. 
D)  2.83. 
E)  4.00. 
A)  2.00. 
B)  3.83. 
C)  3.50. 
D)  2.83. 
E)  4.00.

Question 11

Porter Co. is analyzing two projects for the future. Assume that only one project can be selected. $$\begin{array} { | r | r | r | } 
\hline & \text { Project X } & \text { Project Y } \
\hline \text { Cost of machine } & \$ 68,000 & \$ 60,000 \
\hline \text { Net cash flow: } & & \
\hline \text { Year 1 } & 24,000 & 4,000 \
\hline \text { Year 2 } & 24,000 & 26,000 \
\hline \text { Year 3 } & 24,000 & 26,000 \
\hline \text { Year 4 } & 0 & 20,000 \
\hline
\end{array}$$ If the company is using the payback period method and it requires a payback of three years or less, which project should be selected?

Accepted Answer

A)  Project Y. 
B)  Project X. 
C)  Both X and Y are acceptable projects. 
D)  Neither X nor Y is an acceptable project. 
E)  Project Y because it has a lower initial investment. 
A)  Project Y. 
B)  Project X. 
C)  Both X and Y are acceptable projects. 
D)  Neither X nor Y is an acceptable project. 
E)  Project Y because it has a lower initial investment.

Question 12

A company's required rate of return, typically its cost of capital is called the:

Accepted Answer

A)  Internal rate of return. 
B)  Average rate of return. 
C)  Hurdle rate. 
D)  Maximum rate. 
E)  Payback rate. 
A)  Internal rate of return. 
B)  Average rate of return. 
C)  Hurdle rate. 
D)  Maximum rate. 
E)  Payback rate.

Question 13

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. $$\begin{array} { | l | c | } 
\hline & \text { Annual Net Cash Flows } \
\hline \text { Year 1 } & \$ 40,000 \
\hline \text { Year 2 } & \$ 40,000 \
\hline \text { Year 3 } & \$ 35,000 \
\hline \text { Year 4 } & \$ 35,000 \
\hline \text { Year 5 } & \$ 30,000 \
\hline
\end{array}$$ Compute the payback period for this investment. (Round to two decimal places.)

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 14

A capital budgeting method that considers how quickly a project recovers costs is known as ________. An enhancement to this method that also considers the time value of money is called ________.

Accepted Answer

payback pe

Question 15

In ranking choices with the break-even time (BET) method, the investment with the longest BET gets the highest rank.

Accepted Answer

A) True 
 B)False

Question 16

If the straight-line depreciation method is used, the annual average investment amount used in calculating rate of return is calculated as (beginning book value + ending book value)/2.

Accepted Answer

A) True 
 B)False

Question 17

Restating future cash flows in terms of present values and then determining the payback period using these present values is known as:

Accepted Answer

A)  Break-even time (BET) 
B)  Internal rate of return method. 
C)  Accounting rate of return method. 
D)  Net present value method. 
E)  Present value method. 
A)  Break-even time (BET) 
B)  Internal rate of return method. 
C)  Accounting rate of return method. 
D)  Net present value method. 
E)  Present value method.

Question 18

In evaluating capital budgeting alternatives, there are two primary methods that do not consider the time value of money. These methods are ________ and ________. There are also two primary methods that consider the time value of money; these are ________ and ________.

Accepted Answer

payback period; acco

Question 19

A company is planning to purchase a machine that will cost $24,000 with a six-year life and no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. What is the accounting rate of return for this machine? Sales………………………………………… $90,000
Costs:
Manufacturing……………………………… $52,000
Depreciation on machine…………………… 4,000
Selling and administrative expenses……….. 30,000 (86,000)
Income before taxes………………………... $ 4,000
Income tax (50%)…………………………... (2,000)
Net income…………………………………. $ 2,000

Accepted Answer

A)  33.3%. 
B)  16.7%. 
C)  50.0%. 
D)  8.3%. 
E)  4%. 
A)  33.3%. 
B)  16.7%. 
C)  50.0%. 
D)  8.3%. 
E)  4%.

Question 20

Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments. The company is considering two different investments. Each require an initial investment of $15,000 and will produce cash flows as follows: End of Investment
Year A B
$$\begin{array} { | r | r | r | } 
\hline 1 & \$ 8,000 & \$ 0 \
\hline 2 & 8,000 & 0 \
\hline 3 & 8,000 & 24,000 \
\hline
\end{array}$$ Which investment should Alfarsi choose?

Accepted Answer

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

The profitability index is computed by dividing the present value of net cash flows by the initial investment.

The time value of money concept:

Capital budgeting decisions usually involve analysis of:

Lower-risk investments require a higher rate of return compared with higher-risk investments.

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

Using accelerated depreciation for tax reporting increases the net present value of an asset's cash flows because it produces larger net cash inflows in the early years of the asset's life.

The process of analyzing alternative long-term investments and deciding which assets to acquire or sell is known as:

Porter Co. is analyzing two projects for the future. Assume that only one project can be selected. Project X Project Y Cost of machine \ 68,000 \ 60,000 Net cash flow: Year 1 24,000 4,000 Year 2 24,000 26,000 Year 3 24,000 26,000 Year 4 0 20,000 The payback period in years for Project X is:

A company's required rate of return, typically its cost of capital is called the:

A capital budgeting method that considers how quickly a project recovers costs is known as . An enhancement to this method that also considers the time value of money is called .

In ranking choices with the break-even time (BET) method, the investment with the longest BET gets the highest rank.

If the straight-line depreciation method is used, the annual average investment amount used in calculating rate of return is calculated as (beginning book value + ending book value)/2.

Restating future cash flows in terms of present values and then determining the payback period using these present values is known as:

In evaluating capital budgeting alternatives, there are two primary methods that do not consider the time value of money. These methods are and . There are also two primary methods that consider the time value of money; these are and .

Managerial Accounting Concepts and Principles

Job Order Costing and Analysis

Process Costing and Analysis

Activity Based Costing and Analysis

Cost Behavior 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

Reporting Cash Flows

Analysis of Financial Statements

Time Value of Money

Analyzing for Business Transactions

Partnership Accounting

Filters

Exam 11: Capital Budgeting and Investment Analysis

The profitability index is computed by dividing the present value of net cash flows by the initial investment.

The time value of money concept:

Capital budgeting decisions usually involve analysis of:

Lower-risk investments require a higher rate of return compared with higher-risk investments.

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

Using accelerated depreciation for tax reporting increases the net present value of an asset's cash flows because it produces larger net cash inflows in the early years of the asset's life.

The process of analyzing alternative long-term investments and deciding which assets to acquire or sell is known as:

Porter Co. is analyzing two projects for the future. Assume that only one project can be selected. Project X Project Y Cost of machine \ 68,000 \ 60,000 Net cash flow: Year 1 24,000 4,000 Year 2 24,000 26,000 Year 3 24,000 26,000 Year 4 0 20,000 The payback period in years for Project X is:

A company's required rate of return, typically its cost of capital is called the:

A capital budgeting method that considers how quickly a project recovers costs is known as ________. An enhancement to this method that also considers the time value of money is called ________.

In ranking choices with the break-even time (BET) method, the investment with the longest BET gets the highest rank.

If the straight-line depreciation method is used, the annual average investment amount used in calculating rate of return is calculated as (beginning book value + ending book value)/2.

Restating future cash flows in terms of present values and then determining the payback period using these present values is known as:

In evaluating capital budgeting alternatives, there are two primary methods that do not consider the time value of money. These methods are ________ and ________. There are also two primary methods that consider the time value of money; these are ________ and ________.

Managerial Accounting Concepts and Principles

Job Order Costing and Analysis

Process Costing and Analysis

Activity Based Costing and Analysis

Cost Behavior 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

Reporting Cash Flows

Analysis of Financial Statements

Time Value of Money

Analyzing for Business Transactions

Partnership Accounting

Filters

A capital budgeting method that considers how quickly a project recovers costs is known as . An enhancement to this method that also considers the time value of money is called .

In evaluating capital budgeting alternatives, there are two primary methods that do not consider the time value of money. These methods are and . There are also two primary methods that consider the time value of money; these are and .