Question 1

The accounting rate of return (ARR) is computed by dividing a project's after-tax net income by the amount of the initial investment.

Accepted Answer

A) True 
 B)False

Question 2

If the internal rate of return (IRR) of an investment is lower than the hurdle rate, the project should be accepted.

Accepted Answer

A) True 
 B)False

Question 3

A minimum acceptable rate of return for an investment decision is called the:

Accepted Answer

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

Question 4

A company has a decision to make between two investment alternatives. The company requires a 10% return on investment. Predicted data is provided below:
Investment A Investment Z
Projected after-tax net income $ 40,000 $ 42,000
Investment costs $600,000 $675,000
Estimated life 6 years 6 years
The present value of an annuity for 6 years at 10% is 4.3553. This company uses straight-line depreciation.
Required:
(a) Calculate the net present value for each investment.
(b) Which investment should this company select? Explain.

Accepted Answer

@#IMG-DLM& (b) Select Investme

Question 5

The ________ is the rate that yields a net present value of zero for an investment.

Accepted Answer

internal r

Question 6

In business decision-making, managers typically examine the two fundamental factors of:

Accepted Answer

A)  Risk and capital investment. 
B)  Risk and return. 
C)  Capital investment and rate of return. 
D)  Risk and payback. 
E)  Payback and rate of return. 
A)  Risk and capital investment. 
B)  Risk and return. 
C)  Capital investment and rate of return. 
D)  Risk and payback. 
E)  Payback and rate of return.

Question 7

A company is considering purchasing a machine for $21,000. The machine will generate an after-tax net income of $2,000 per year. Annual depreciation expense would be $1,500. The machine has no salvage value. What is the approximate accounting rate of return?

Accepted Answer

A)  19% 
B)  33% 
C)  17% 
D)  10% 
E)  25% 
A)  19% 
B)  33% 
C)  17% 
D)  10% 
E)  25%

Question 8

Identify at least three reasons for managers to favor the internal rate of return (IRR over other capital budgeting approaches.

Accepted Answer

(1) IRR considers the time val

Question 9

The internal rate of return equals the rate that yields a net present value of zero for an investment.

Accepted Answer

A) True 
 B)False

Question 10

The hurdle rate is often set at:

Accepted Answer

A)  The rate the company could earn if the investment were placed in the bank. 
B)  The company's cost of capital. 
C)  10% above the IRR of current projects. 
D)  10% above the ARR of current projects. 
E)  The rate at which the company is taxed on income. 
A)  The rate the company could earn if the investment were placed in the bank. 
B)  The company's cost of capital. 
C)  10% above the IRR of current projects. 
D)  10% above the ARR of current projects. 
E)  The rate at which the company is taxed on income.

Question 11

The following data concerns a proposed equipment purchase: Cost $144,000
Salvage value $ 4,000
Estimated useful life 4 years
Annual net cash flows $ 46,100
Depreciation method Straight-line
Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is (ignore income taxes):

Accepted Answer

A)  62.3%. 
B)  32.0%. 
C)  15.0%. 
D)  7.7%. 
E)  5.0%. 
A)  62.3%. 
B)  32.0%. 
C)  15.0%. 
D)  7.7%. 
E)  5.0%.

Question 12

Capital budgeting is the process of analyzing:

Accepted Answer

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

Question 13

You have evaluated three projects of similar investment amount and risk using the net present value (NPV method. How would you decide which one of the projects to select?

Accepted Answer

The general decision

Question 14

Capital budgeting decisions that relate to investments in technology are not as risky as other types of capital budgeting decisions.

Accepted Answer

A) True 
 B)False

Question 15

When the amount invested differs substantially across projects, NPV is of limited value for comparison purposes. You have evaluated three projects of substantially different investment amounts using the net present value (NPV method. How would you decide which one of the projects to select?

Accepted Answer

One way to compare projects when a compa

Question 16

Two investments with exactly the same payback periods are always equally valuable to an investor.

Accepted Answer

A) True 
 B)False

Question 17

Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?

Accepted Answer

A)  Accounting rate of return. 
B)  Net present value. 
C)  Payback period. 
D)  Cash flow method. 
E)  Return on average investment. 
A)  Accounting rate of return. 
B)  Net present value. 
C)  Payback period. 
D)  Cash flow method. 
E)  Return on average investment.

Question 18

A company is considering two alternative investment opportunities, each of which requires an initial cash outlay of $110,000. The expected net cash flows from the two projects follow:
 $$\begin{array} { | l | r | r | } 
\hline & \text { Project A } & \text { Project Z } \
\hline \text { Year 1 } & \$ 30,000 & \$ 44,000 \
\hline \text { Year 2 } & 44,000 & 70,000 \
\hline \text { Year 3 } & 70,000 & 30,000 \
\hline \text { Totals } & \$ 144,000 & \$ 144,000 \
\hline
\end{array}$$ Required:
(1) Based on a comparison of their net present values, and assuming the same discount rate greater than zero is required for both projects, which project is the better investment?
(2) Use the table values below to find the net present value of the cash flows associated with Project A, discounted at 12%:
Periods Present value of 1 at 12%
1………………. 0.8929
2………………. 0.7972
3………………. 0.7118

Accepted Answer

(1) Project Z because its cash flows are

Question 19

For each of the capital budgeting methods listed below, place an X in the correct column, indicating the measurement basis of each, the ability to make comparison among projects, and whether each method reflects or ignores the time value of money.

Accepted Answer

The answer of For each of the capital budgeting methods...

Question 20

Using a profitability index allows management to rank projects of similar risks with different investment amounts.

Accepted Answer

A) True 
 B)False

The accounting rate of return (ARR) is computed by dividing a project's after-tax net income by the amount of the initial investment.

If the internal rate of return (IRR) of an investment is lower than the hurdle rate, the project should be accepted.

A minimum acceptable rate of return for an investment decision is called the:

The ________ is the rate that yields a net present value of zero for an investment.

In business decision-making, managers typically examine the two fundamental factors of:

A company is considering purchasing a machine for $21,000. The machine will generate an after-tax net income of $2,000 per year. Annual depreciation expense would be $1,500. The machine has no salvage value. What is the approximate accounting rate of return?

Identify at least three reasons for managers to favor the internal rate of return (IRR over other capital budgeting approaches.

The internal rate of return equals the rate that yields a net present value of zero for an investment.

The hurdle rate is often set at:

Capital budgeting is the process of analyzing:

You have evaluated three projects of similar investment amount and risk using the net present value (NPV method. How would you decide which one of the projects to select?

Capital budgeting decisions that relate to investments in technology are not as risky as other types of capital budgeting decisions.

When the amount invested differs substantially across projects, NPV is of limited value for comparison purposes. You have evaluated three projects of substantially different investment amounts using the net present value (NPV method. How would you decide which one of the projects to select?

Two investments with exactly the same payback periods are always equally valuable to an investor.

Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?

For each of the capital budgeting methods listed below, place an X in the correct column, indicating the measurement basis of each, the ability to make comparison among projects, and whether each method reflects or ignores the time value of money.

Using a profitability index allows management to rank projects of similar risks with different investment amounts.

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 accounting rate of return (ARR) is computed by dividing a project's after-tax net income by the amount of the initial investment.

If the internal rate of return (IRR) of an investment is lower than the hurdle rate, the project should be accepted.

A minimum acceptable rate of return for an investment decision is called the:

The ________ is the rate that yields a net present value of zero for an investment.

In business decision-making, managers typically examine the two fundamental factors of:

A company is considering purchasing a machine for $21,000. The machine will generate an after-tax net income of $2,000 per year. Annual depreciation expense would be $1,500. The machine has no salvage value. What is the approximate accounting rate of return?

Identify at least three reasons for managers to favor the internal rate of return (IRR over other capital budgeting approaches.

The internal rate of return equals the rate that yields a net present value of zero for an investment.

The hurdle rate is often set at:

Capital budgeting is the process of analyzing:

You have evaluated three projects of similar investment amount and risk using the net present value (NPV method. How would you decide which one of the projects to select?

Capital budgeting decisions that relate to investments in technology are not as risky as other types of capital budgeting decisions.

When the amount invested differs substantially across projects, NPV is of limited value for comparison purposes. You have evaluated three projects of substantially different investment amounts using the net present value (NPV method. How would you decide which one of the projects to select?

Two investments with exactly the same payback periods are always equally valuable to an investor.

Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?

For each of the capital budgeting methods listed below, place an X in the correct column, indicating the measurement basis of each, the ability to make comparison among projects, and whether each method reflects or ignores the time value of money.

Using a profitability index allows management to rank projects of similar risks with different investment amounts.

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