Question 1

A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.

Accepted Answer

A) True 
 B)False

Question 2

If a manager was not concerned with the time value of money, from which two capital budgeting methods should the manager choose?

Accepted Answer

A)  ARR or Payback 
B)  NPV or IRR 
C)  BET or IRR 
D)  BET or NPV 
E)  NPV or Payback 
A)  ARR or Payback 
B)  NPV or IRR 
C)  BET or IRR 
D)  BET or NPV 
E)  NPV or Payback

Question 3

Turk Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows: End of Machine
Year A B
$$\begin{array} { | r | r | r | } 
\hline 1 & \$ 5,000 & \$ 1,000 \
\hline 2 & 4,000 & 2,000 \
\hline 3 & 2,000 & 11,000 \
\hline
\end{array}$$ Turk Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575. Which machine should Turk purchase?

Accepted Answer

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

Question 4

The payback period method, unlike the net present value method, does not ignore cash flows after the point of cost recovery.

Accepted Answer

A) True 
 B)False

Question 5

After-tax net income divided by the average amount invested in a project, is the:

Accepted Answer

A)  Net present value rate. 
B)  Payback rate. 
C)  Accounting rate of return. 
D)  Earnings from investment. 
E)  Profit rate. 
A)  Net present value rate. 
B)  Payback rate. 
C)  Accounting rate of return. 
D)  Earnings from investment. 
E)  Profit rate.

Question 6

The net present value capital budgeting method considers all estimated cash flows for the project's expected life.

Accepted Answer

A) True 
 B)False

Question 7

When making capital budgeting decisions, companies usually prefer shorter payback periods. Explain why shorter payback periods are desirable.

Accepted Answer

Shorter payback periods increase return

Question 8

If a manager were concerned with the time value of money, from which two capital budgeting methods should the manager choose?

Accepted Answer

A)  IRR or Payback. 
B)  BET or IRR. 
C)  BET or Payback. 
D)  NPV or ARR. 
E)  NPV or Payback. 
A)  IRR or Payback. 
B)  BET or IRR. 
C)  BET or Payback. 
D)  NPV or ARR. 
E)  NPV or Payback.

Question 9

The net cash flow of a particular investment project:

Accepted Answer

A)  Does not take income taxes into consideration. 
B)  Equals the total of the cash inflows of the project. 
C)  Equals the total of the cash outflows of the project. 
D)  Does not include depreciation. 
E)  Is equal to operating income each period. 
A)  Does not take income taxes into consideration. 
B)  Equals the total of the cash inflows of the project. 
C)  Equals the total of the cash outflows of the project. 
D)  Does not include depreciation. 
E)  Is equal to operating income each period.

Question 10

A company is trying to decide which of two new product lines to introduce in the coming year. The company requires a 12% return on investment. The predicted revenue and cost data for each product line follows:
 $$\begin{array} { | l | r | r | } 
\hline & \text { Product A } &{ \text { Product B } } \
\hline \text { Unit sales } & 25,000 & 20,000 \
\hline \text { Unit sales price } & \$ 30 & \$ 30 \
\hline \text { Direct materials } & \$ 15,000 & \$ 8,000 \
\hline \text { Direct labor } & \$ 120,000 & \$ 80,000 \
\hline \text { Other cash operating expenses } & \$ 30,000 & \$ 25,000 \
\hline \text { New equipment costs } & \$ 2,500,000 & \$ 1,500,000 \
\hline \text { Estimated useful life (no salvage) } & 5 \text { years } & 5 \text { years } \
\hline
\end{array}$$ The company has a 30% tax rate and it uses the straight-line depreciation method. The present value of an annuity of 1 for 5 years at 12% is 3.6048. Compute the net present value for each piece of equipment under each of the two product lines. Which, if either of these two investments is acceptable?

Accepted Answer

@#IMG-DLM& *Annual depreciation: A $2,500,000/5 yr

Question 11

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
$$\begin{array} { | r | r | r | } 
\hline 1 & \$ 8,000 & \$ 0 \
\hline 2 & 8,000 & 0 \
\hline 3 & 8,000 & 24,000 \
\hline
\end{array}$$ The present value factors of $1 each year at 15% are:
$\begin{array}{llcc}
  \text {1  } &0.8696\
 \text {  2} &0.7561\
 \text { 3 } &0.6575\
\end{array}$

The present value of an annuity of $1 for 3 years at 15% is 2.2832
The net present value of Investment A is:

Accepted Answer

A)  $18,266. 
B)  $(15,000). 
C)  $9,000. 
D)  $(20,549). 
E)  $3,266. 
A)  $18,266. 
B)  $(15,000). 
C)  $9,000. 
D)  $(20,549). 
E)  $3,266.

Question 12

A company wishes to buy new equipment for $9,000. The equipment is expected to generate an additional $2,800 in cash inflows for six years. All cash flows occur at year-end. A bank will make a $9,000 loan to the company at a 10% interest rate so that the company can purchase the equipment. Use the table below to determine break-even time for this equipment: Present Value
Year of 1 at 10%
0 1.0000
1 0.9091
2 0.8265
3 0.7513
4 0.6830
5 0.6209
6 0.5645

Accepted Answer

A)  Break-even time is between two and three years. 
B)  Break-even time is between three and four years. 
C)  Break-even time is between four and five years. 
D)  Break-even time is between five and six years. 
E)  This project will never break-even. 
A)  Break-even time is between two and three years. 
B)  Break-even time is between three and four years. 
C)  Break-even time is between four and five years. 
D)  Break-even time is between five and six years. 
E)  This project will never break-even.

Question 13

Net cash flow can be calculated by adjusting the projected net income from a project for any non-cash revenues and expenses.

Accepted Answer

A) True 
 B)False

Question 14

The following present value factors are provided for use in this problem. $$\begin{array} { c c c } 
\text { Periods } & \text { Presert Value } & \text { Presert Value of an } \
 & \text { of } \$ 1 \text { at } 8 \% & \text { Annuity of } \$ 1 \text { at } 8 \% \
1 & 0.9259 & 0.9259 \
2 & 0.8573 & 1.7833 \
3&0.7938&2.5771\
4 & 0.7938 & 2.5771
\end{array}$$ Cliff Co. wants to purchase a machine for $40,000, but needs to earn an 8% return. The expected year-end net cash flows are $12,000 in each of the first three years, and $16,000 in the fourth year. What is the machine's net present value?

Accepted Answer

A)  $(9,075). 
B)  $2,685. 
C)  $42,685. 
D)  $(28,240). 
E)  $52,000. 
A)  $(9,075). 
B)  $2,685. 
C)  $42,685. 
D)  $(28,240). 
E)  $52,000.

Question 15

The time value of money concept works on the principle that a dollar today is worth more than a dollar tomorrow.

Accepted Answer

A) True 
 B)False

Question 16

A company is considering the purchase of new equipment for $42,000. The projected annual cash inflow is $18,000. The machine has a useful life of 3 years and no salvage value. Management of the company requires a 12% return on investment. The present value of an annuity of $1 for various periods follows:
Period Present value of an annuity of 1 at 12%
1 0.8929
2 1.6901
3 `2.4018
What is the net present value of this machine assuming all cash flows occur at year-end?

Accepted Answer

Present value of net
Net cash

Question 17

A disadvantage of using the payback period to compare investment alternatives is that:

Accepted Answer

A)  It ignores cash flows beyond the payback period. 
B)  It includes the time value of money. 
C)  It cannot be used when cash flows are not uniform. 
D)  It cannot be used if a company records depreciation. 
E)  It cannot be used to compare investments with different initial investments. 
A)  It ignores cash flows beyond the payback period. 
B)  It includes the time value of money. 
C)  It cannot be used when cash flows are not uniform. 
D)  It cannot be used if a company records depreciation. 
E)  It cannot be used to compare investments with different initial investments.

Question 18

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
The annual average investment amount used to calculate the accounting rate of return is:

Accepted Answer

A)  $72,000 
B)  $70,000 
C)  $37,000 
D)  $74,000 
E)  $48,950 
A)  $72,000 
B)  $70,000 
C)  $37,000 
D)  $74,000 
E)  $48,950

Question 19

The calculation of annual net cash flow from a particular investment project should include all of the following except:

Accepted Answer

A)  Income taxes. 
B)  Revenues generated by the investment. 
C)  Cost of products generated by the investment. 
D)  Depreciation expense. 
E)  General and administrative expenses. 
A)  Income taxes. 
B)  Revenues generated by the investment. 
C)  Cost of products generated by the investment. 
D)  Depreciation expense. 
E)  General and administrative expenses.

A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.

If a manager was not concerned with the time value of money, from which two capital budgeting methods should the manager choose?

The payback period method, unlike the net present value method, does not ignore cash flows after the point of cost recovery.

After-tax net income divided by the average amount invested in a project, is the:

The net present value capital budgeting method considers all estimated cash flows for the project's expected life.

When making capital budgeting decisions, companies usually prefer shorter payback periods. Explain why shorter payback periods are desirable.

If a manager were concerned with the time value of money, from which two capital budgeting methods should the manager choose?

The net cash flow of a particular investment project:

Net cash flow can be calculated by adjusting the projected net income from a project for any non-cash revenues and expenses.

The time value of money concept works on the principle that a dollar today is worth more than a dollar tomorrow.

A disadvantage of using the payback period to compare investment alternatives is that:

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 The annual average investment amount used to calculate the accounting rate of return is:

The calculation of annual net cash flow from a particular investment project should include all of the following except:

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

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Exam 11: Capital Budgeting and Investment Analysis

A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.

If a manager was not concerned with the time value of money, from which two capital budgeting methods should the manager choose?

The payback period method, unlike the net present value method, does not ignore cash flows after the point of cost recovery.

After-tax net income divided by the average amount invested in a project, is the:

The net present value capital budgeting method considers all estimated cash flows for the project's expected life.

When making capital budgeting decisions, companies usually prefer shorter payback periods. Explain why shorter payback periods are desirable.

If a manager were concerned with the time value of money, from which two capital budgeting methods should the manager choose?

The net cash flow of a particular investment project:

Net cash flow can be calculated by adjusting the projected net income from a project for any non-cash revenues and expenses.

The time value of money concept works on the principle that a dollar today is worth more than a dollar tomorrow.

A disadvantage of using the payback period to compare investment alternatives is that:

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 The annual average investment amount used to calculate the accounting rate of return is:

The calculation of annual net cash flow from a particular investment project should include all of the following except:

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