Question 1

Neither the net present value nor the internal rate of return methods of evaluating investments consider the time value of money.

Accepted Answer

A) True 
 B)False

Question 2

The payback method, unlike the net present value method, ignores cash flows after the point of cost recovery.

Accepted Answer

A) True 
 B)False

Question 3

The expected amount of time to recover the initial amount of an investment is called the:

Accepted Answer

A)  Amortization period. 
B)  Payback period. 
C)  Interest period. 
D)  Budgeting period. 
E)  Discounted cash flow period. 
A)  Amortization period. 
B)  Payback period. 
C)  Interest period. 
D)  Budgeting period. 
E)  Discounted cash flow period.

Question 4

A company is considering the purchase of a new machine for $48,000. Management predicts that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. The company's after-tax net income, based on a tax rate of 40%, is $2,400. What is the approximate accounting rate of return for the machine?

Accepted Answer

A)  13%. 
B)  17%. 
C)  8%. 
D)  27%. 
E)  10%. 
A)  13%. 
B)  17%. 
C)  8%. 
D)  27%. 
E)  10%.

Question 5

A machine costs $180,000 and will have an eight-year life, a $20,000 salvage value, and straight-line depreciation is used. Management estimates the machine will yield an after-tax net income of $12,500 each year. Compute the accounting rate of return for the investment.

Accepted Answer

A)  12.5%. 
B)  26.8%. 
C)  11.8%. 
D)  10.8%. 
E)  22.5%. 
A)  12.5%. 
B)  26.8%. 
C)  11.8%. 
D)  10.8%. 
E)  22.5%.

Question 6

The accounting rate of return is based on cash flows rather than net income in its calculation.

Accepted Answer

A) True 
 B)False

Question 7

The payback method of evaluating an investment fails to consider how long the investment will generate cash inflows beyond the payback period.

Accepted Answer

A) True 
 B)False

Question 8

The net present value decision rule is: When an asset's expected cash flows yield a positive net present value when discounted at the required rate of return, the asset should be acquired.

Accepted Answer

A) True 
 B)False

Question 9

Three widely used methods of comparing investment alternatives are payback period, net present value, and rate of return on average investment.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is an objective of capital budgeting?

Accepted Answer

A)  To eliminate all risk. 
B)  To discount all future and past cash flows. 
C)  To earn a satisfactory return on investment. 
D)  To reverse past decisions. 
E)  To reduce the number of investment activities. 
A)  To eliminate all risk. 
B)  To discount all future and past cash flows. 
C)  To earn a satisfactory return on investment. 
D)  To reverse past decisions. 
E)  To reduce the number of investment activities.

Question 11

A company is evaluating the purchase of a machine for $750,000 with a six-year useful life and no salvage value. The company uses straight-line depreciation and it assumes that the annual net cash flow from using the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is the company's average investment?

Accepted Answer

($750,000

Question 12

Which methods of evaluating a capital investment project use cash flows as a measurement basis?

Accepted Answer

A)  Net present value, accounting rate of return, and internal rate of return. 
B)  Internal rate of return, payback period, and accounting rate of return. 
C)  Accounting rate of return, net present value, and payback period. 
D)  Payback period, internal rate of return, and net present value. 
E)  Net present value, payback period, accounting rate of return, and internal rate of return. 
A)  Net present value, accounting rate of return, and internal rate of return. 
B)  Internal rate of return, payback period, and accounting rate of return. 
C)  Accounting rate of return, net present value, and payback period. 
D)  Payback period, internal rate of return, and net present value. 
E)  Net present value, payback period, accounting rate of return, and internal rate of return.

Question 13

Capital budgeting decisions are risky because all of the following are true except:

Accepted Answer

A)  The outcome is uncertain. 
B)  Large amounts of money are usually involved. 
C)  The investment involves a long-term commitment. 
D)  The decision could be difficult or impossible to reverse. 
E)  They rarely produce net cash flows. 
A)  The outcome is uncertain. 
B)  Large amounts of money are usually involved. 
C)  The investment involves a long-term commitment. 
D)  The decision could be difficult or impossible to reverse. 
E)  They rarely produce net cash flows.

Question 14

The internal rate of return method of evaluating capital investments cannot be used with uneven cash flows.

Accepted Answer

A) True 
 B)False

Question 15

All projects with a profitability index of less than 1 should be accepted.

Accepted Answer

A) True 
 B)False

Question 16

A company is considering two projects, Project A and Project B. The following information is available for each project:
Project A Project B
Investment $500,000 $2,000,000
Net present value of cash flows $600,000 $800,000
Calculate the profitability index for each project. Based on the profitability index, which project, if any, should the company pursue and why?

Accepted Answer

Calculation Profitability Index
Project

Question 17

Dracor Company is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $280,000 with a 7-year life, no salvage value, and will be depreciated using straight-line depreciation. The expected annual income related to this equipment follows. Compute the (a payback period and (b accounting rate of return for this equipment.
 $$\begin{array} { | l | r | r | } 
\hline \text { Sales } & & \$ 900,000 \
\hline \text { Costs: } & & \
\hline \text { Manufacturing } & \$ 545,000 & \
\hline \text { Depreciation on machine } & 40,000 & \
\hline \text { Selling and administrative expenses } & 249,000 & ( 834,000 ) \
\hline \text { Income before taxes } & & 66,000 \
\hline \text { Income tax } ( 30 \% ) & & ( 19,800 \
\hline \text { Net income } & & \$ 46,200 \
\hline
\end{array}$$

Accepted Answer

a. Payback period = cost of investment/a

Question 18

A company is considering the purchase of a new machine for $48,000. Management predicts that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $12,000 per year including depreciation of $3,000 per year. Income tax expense is $1,600 per year based on a tax rate of 40%. What is the payback period for the new machine?

Accepted Answer

A)  20.0 years. 
B)  6.0 years. 
C)  7.5 years. 
D)  12.0 years. 
E)  8.9 years. 
A)  20.0 years. 
B)  6.0 years. 
C)  7.5 years. 
D)  12.0 years. 
E)  8.9 years.

Question 19

The calculation of the payback period for an investment when net cash flow is even (equal) is:

Accepted Answer

A)  Cost of investment/Annual net cash flow 
B)  Cost of investment/Total net cash flow 
C)  Annual net cash flow/Cost of investment 
D)  Total net cash flow/Cost of investment 
E)  Total net cash flow/Annual net cash flow 
A)  Cost of investment/Annual net cash flow 
B)  Cost of investment/Total net cash flow 
C)  Annual net cash flow/Cost of investment 
D)  Total net cash flow/Cost of investment 
E)  Total net cash flow/Annual net cash flow

Question 20

The payback period reflects the amount of time for the investment to generate enough net cash flow to return the cash initially invested to purchase it.

Accepted Answer

A) True 
 B)False

Neither the net present value nor the internal rate of return methods of evaluating investments consider the time value of money.

The payback method, unlike the net present value method, ignores cash flows after the point of cost recovery.

The expected amount of time to recover the initial amount of an investment is called the:

A machine costs $180,000 and will have an eight-year life, a $20,000 salvage value, and straight-line depreciation is used. Management estimates the machine will yield an after-tax net income of $12,500 each year. Compute the accounting rate of return for the investment.

The accounting rate of return is based on cash flows rather than net income in its calculation.

The payback method of evaluating an investment fails to consider how long the investment will generate cash inflows beyond the payback period.

The net present value decision rule is: When an asset's expected cash flows yield a positive net present value when discounted at the required rate of return, the asset should be acquired.

Three widely used methods of comparing investment alternatives are payback period, net present value, and rate of return on average investment.

Which of the following is an objective of capital budgeting?

Which methods of evaluating a capital investment project use cash flows as a measurement basis?

Capital budgeting decisions are risky because all of the following are true except:

The internal rate of return method of evaluating capital investments cannot be used with uneven cash flows.

All projects with a profitability index of less than 1 should be accepted.

The calculation of the payback period for an investment when net cash flow is even (equal) is:

The payback period reflects the amount of time for the investment to generate enough net cash flow to return the cash initially invested to purchase it.

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

Neither the net present value nor the internal rate of return methods of evaluating investments consider the time value of money.

The payback method, unlike the net present value method, ignores cash flows after the point of cost recovery.

The expected amount of time to recover the initial amount of an investment is called the:

A machine costs $180,000 and will have an eight-year life, a $20,000 salvage value, and straight-line depreciation is used. Management estimates the machine will yield an after-tax net income of $12,500 each year. Compute the accounting rate of return for the investment.

The accounting rate of return is based on cash flows rather than net income in its calculation.

The payback method of evaluating an investment fails to consider how long the investment will generate cash inflows beyond the payback period.

The net present value decision rule is: When an asset's expected cash flows yield a positive net present value when discounted at the required rate of return, the asset should be acquired.

Three widely used methods of comparing investment alternatives are payback period, net present value, and rate of return on average investment.

Which of the following is an objective of capital budgeting?

Which methods of evaluating a capital investment project use cash flows as a measurement basis?

Capital budgeting decisions are risky because all of the following are true except:

The internal rate of return method of evaluating capital investments cannot be used with uneven cash flows.

All projects with a profitability index of less than 1 should be accepted.

The calculation of the payback period for an investment when net cash flow is even (equal) is:

The payback period reflects the amount of time for the investment to generate enough net cash flow to return the cash initially invested to purchase it.

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