Question 1

Which of the following items would complete the net-present-value method calculation?

Accepted Answer

A) A project's immediate cash flows. 
B) A project's immediate cash flows, and cash flows during a project's life. 
C) A project's immediate cash flows, cash flows during a project's life, and the time value of money. 
D) Cash flows during a project's life, and the time value of money. 
E) Cash flows during a project's life. 
A) A project's immediate cash flows. 
B) A project's immediate cash flows, and cash flows during a project's life. 
C) A project's immediate cash flows, cash flows during a project's life, and the time value of money. 
D) Cash flows during a project's life, and the time value of money. 
E) Cash flows during a project's life.

Question 2

Pittsburg Township is studying a 500-acre site for a new community park. The new site is estimated to generate $50,000 in annual operating costs for 15 years. Other data are:
Purchase price per acre: $620
Site preparation costs: $70,000
Hurdle rate: 8%
Ignore income taxes.
Required:
A. Use the net-present-value method and determine whether the site should be acquired.
B. Determine the proposal's approximate internal rate of return.

Accepted Answer

None

Question 3

The mayor of Elizabethtown, Ontario is considering the purchase of a new computer system for the municipality's tax department. The system costs $75,000 and has an expected life of five years. The mayor estimates the following savings will result if the system is purchased: $\begin{array} { | c | r | r | } 
\hline \text { Year } && \text { Savings } \
\hline 1 & &\$ 20.000 \
\hline 2 & & 25.000 \
\hline 3 & & 30.000 \
\hline 4 & & 15.000 \
\hline 5 & & 12.000 \
\hline
\end{array}$ A salesperson from a different computer company claims that his machine, which costs $85,000 and has an estimated service life of four years, will generate annual savings for Elizabethtown in the amount of $32,000. If the discount rate is 10%, the net present value of this system would be:

Accepted Answer

A) $1,080. 
B) $23,175. 
C) $63,512. 
D) $101,440. 
E) $133,279. 
A) $1,080. 
B) $23,175. 
C) $63,512. 
D) $101,440. 
E) $133,279.

Question 4

The internal rate of return on an asset can be calculated:

Accepted Answer

A) if the return is greater than the hurdle rate. 
B) if the asset's cash flows are identical to the future value of a series of cash flows. 
C) if the future value of a series of cash flows can be arrived at by the annuity accumulation factor. 
D) by finding a discount rate that yields a zero net present value. 
E) by finding a discount rate that yields a positive net present value. 
A) if the return is greater than the hurdle rate. 
B) if the asset's cash flows are identical to the future value of a series of cash flows. 
C) if the future value of a series of cash flows can be arrived at by the annuity accumulation factor. 
D) by finding a discount rate that yields a zero net present value. 
E) by finding a discount rate that yields a positive net present value.

Question 5

Capital budgeting tends to focus primarily on:

Accepted Answer

A) revenues. 
B) costs. 
C) cost centres. 
D) programs or projects. 
E) allocation tools. 
A) revenues. 
B) costs. 
C) cost centres. 
D) programs or projects. 
E) allocation tools.

Question 6

On January 2, 2010, Marissa Foresta purchased 800 shares of Rushdie Publishing's common stock at $35 per share. The company paid a $1.50 dividend per share on December 28 of that year, and raised the amount by $0.50 per share for a distribution on December 28, 2011. Marissa sold her entire investment on December 30, 2012, generating a $5,000 gain on the sale of stock.
Required:
A. Prepare a dated listing of the cash inflows and outflows related to Marissa's stock investment. Ignore income taxes.
B. Assume that Marissa has a 10% hurdle rate for all investments. Rounding to the nearest dollar, compute the net present value of her investment in Rushdie and determine whether she achieved her 10% goal.

Accepted Answer

None

Question 7

Forrester Inc. purchased a $150,000 machine that has a five-year life and no salvage value. The company uses straight-line depreciation on all asset acquisitions and is subject to a 20% tax rate. The proper cash flow to show in a discounted-cash-flow analysis as occurring at time 0 would be:

Accepted Answer

A) $(150,000). 
B) $(120,000). 
C) $(30,000). 
D) $30,000. 
E) $150,000. 
A) $(150,000). 
B) $(120,000). 
C) $(30,000). 
D) $30,000. 
E) $150,000.

Question 8

Ivory Corporation is reviewing an investment proposal that has an initial cost of $52,500. An estimate of the investment's end-of-year book value, the yearly after-tax net cash inflows, and the yearly net income are presented in the schedule below. The investment's salvage value at the end of each year is equal to book value, and there will be no salvage value at the end of the investment's life. $\begin{array}{lrrl}
&&\text {Yearly After-}\
&\text {Initial Cost and}&\text {Tax Net}&\text {Yearly Net.}\
\underline {\text { Year } }& \underline {\text { Book Value }} & \underline {\text { Cash Inflows }}&\underline { \text { Income }} \
1 & \$ 35,000 & \$ 20,000 & \$ 2,500 \
2 & 21,000 & 17,500 & 3,500 \
3 & 10,500 & 15,000 & 4,500 \
4 & 3,500 & 12,500 & 5,500 \
5 & \ldots & \underline {10,000} &\underline { 6,500}\
&&\underline {\$ 75,000}&\underline {\$ 22500}\
\end{array}$ Ivory uses a 14% after-tax target rate of return for new investment proposals.
Required:
A. Calculate the project's payback period.
B. Calculate the accounting rate of return on the initial investment.
C. Calculate the proposal's net present value. Round to the nearest dollar.

Accepted Answer

A. The project's payback is 3 years. By

Question 9

Cabbie Compartments Corporation is considering the use of accelerated depreciation rather than straight-line depreciation for a new asset acquisition. Which of the following choices correctly shows when the majority of depreciation would be taken (early or late in the asset's life), when most of the tax savings occur (early or late in the asset's life), and which depreciation method would have the higher present value? $\begin{array} { | l | l | l | l | l | } 
\hline & \begin{array} { c } 
\text { When Majority } \
\text { of Depreciation } \
\text { is Taken }
\end{array} & \begin{array} { c } 
\text { When Majority } \
\text { of Tax Savings } \
\text { Occur }
\end{array} & \begin{array} { c } 
\text { Depreciation Method } \
\text { With Higher Present } \
\text { Value }
\end{array} \
\hline 1 & \text { Early in life } & \text { Early in life } & \text { Accelerated } \
\hline 2 & \text {Early in life } & \text { Early in life } & \text { Straight-line } \
\hline 3 & \text { Early in life } & \text { Late in life } & \text { Straight-line } \
\hline 4 & \text { Late in life } & \text { Late in life } &  \text { Straight-line } \
\hline 5 & \text { Late in life } & \text { Early in life } & \text { Accelerated } \
\hline
\end{array}$

Accepted Answer

A) 1 
B) 2 
C) 3 
D) 4 
E) 5 
A) 1 
B) 2 
C) 3 
D) 4 
E) 5

Question 10

The internal-rate-of-return method assumes that project funds are reinvested at the:

Accepted Answer

A) hurdle rate. 
B) rate of return earned on the project. 
C) cost of debt capital. 
D) cost of equity capital. 
E) rate of earnings growth. 
A) hurdle rate. 
B) rate of return earned on the project. 
C) cost of debt capital. 
D) cost of equity capital. 
E) rate of earnings growth.

Question 11

A company that is using the internal rate of return (IRR) to evaluate projects should accept a project if its IRR:

Accepted Answer

A) is greater than the hurdle rate. 
B) is greater than or equal to the firm's hurdle rate. 
C) is greater than zero. 
D) is less than the firm's cost of investment capital. 
E) equates the present value of the project's cash inflows with the present value of the project's cash outflows. 
A) is greater than the hurdle rate. 
B) is greater than or equal to the firm's hurdle rate. 
C) is greater than zero. 
D) is less than the firm's cost of investment capital. 
E) equates the present value of the project's cash inflows with the present value of the project's cash outflows.

Question 12

Discounted-cash-flow analysis focuses primarily on:

Accepted Answer

A) the stability of cash flows. 
B) the timing of cash flows. 
C) the probability of cash flows. 
D) the sensitivity of cash flows. 
E) whether cash flows are increasing or decreasing. 
A) the stability of cash flows. 
B) the timing of cash flows. 
C) the probability of cash flows. 
D) the sensitivity of cash flows. 
E) whether cash flows are increasing or decreasing.

Question 13

Snaptile Company evaluates future projects by using the profitability index. The company is currently reviewing three projects similar in nature and must choose one of the following: $\begin{array} { l l l r } 
\text { Project } & \text { Initial Investment } && \begin{array} { l } 
\text { Present Value of Cash } \
\text { Inflows }
\end{array} \
1 & \$ 400,000 && \$ 300,000 \
2 & 200,000 & & 320,000 \
3 & 350,000 & & 430,000
\end{array}$ Which project should Snaptile select if the decision is based entirely on the profitability index?

Accepted Answer

A) Project 1 with a profitability index of 0.75. 
B) Project 1 with a profitability index of 1.33. 
C) Project 2 with a profitability index of 1.60. 
D) Project 2 with a profitability index of 0.67. 
E) Project 3 with a profitability index of 0.81. 
A) Project 1 with a profitability index of 0.75. 
B) Project 1 with a profitability index of 1.33. 
C) Project 2 with a profitability index of 1.60. 
D) Project 2 with a profitability index of 0.67. 
E) Project 3 with a profitability index of 0.81.

Question 14

The payback method is a popular way to analyze investment proposals.
Required:
A. Explain how the payback period is determined. Generally speaking, from a payback perspective, which projects are viewed to be the most attractive?
B. Does the payback method take income taxes into consideration? Explain.
C. What are the deficiencies of the payback method?

Accepted Answer

A. The payback period is the time requir

Question 15

Cranberry Cross Co. (CCC) is currently purchasing components from an outside supplier for $75 per unit. Because of supplier reliability problems, the company is considering producing the component internally in a currently idle manufacturing plant. Annual volume over the next six years is expected to total 200,000 units at variable manufacturing costs of $60 per unit.
CCC must acquire $60,000 of new equipment if it reopens the plant. The equipment has a five-year service life and a $10,000 salvage value, and will be depreciated by the straight-line method. Repairs and maintenance are expected to average $3,000 per year in years 3-5, and the equipment will be sold at the end of its life. The hurdle rate is 10%.
Required:
Use the net-present-value method (total-cost approach) and determine whether CCC should make or buy the component. Ignore income taxes.

Accepted Answer

None

Question 16

Bing and Associates Inc., which uses net present value to analyze investments, requires an 8% minimum rate of return. One of their entry level associates recently calculated a $200,000 machine's net present value to be $34,560, excluding the impact of straight-line depreciation. If Bing and Associates ignores income taxes and the machine is expected to have a four-year service life, the correct net present value of the machine would be:

Accepted Answer

A) $34,400 
B) $34,560. 
C) $163,250. 
D) $200,000. 
E) $365,600. 
A) $34,400 
B) $34,560. 
C) $163,250. 
D) $200,000. 
E) $365,600.

Question 17

The payback period is best defined as:

Accepted Answer

A) initial investment ÷ annual after-tax cash inflow. 
B) annual after-tax cash inflow ÷ initial investment. 
C) initial investment ÷ useful life of investment. 
D) (present value of the cash flows, exclusive of the initial investment) ÷ initial investment. 
E) initial investment ÷ (present value of the cash flows, exclusive of the initial investment). 
A) initial investment ÷ annual after-tax cash inflow. 
B) annual after-tax cash inflow ÷ initial investment. 
C) initial investment ÷ useful life of investment. 
D) (present value of the cash flows, exclusive of the initial investment) ÷ initial investment. 
E) initial investment ÷ (present value of the cash flows, exclusive of the initial investment).

Question 18

James Company has an asset that cost $5,000 and currently has accumulated depreciation of $2,000. Suppose the firm sold the asset for $2,500 and is subject to a 30% income tax rate. The net after-tax cash flow of the disposal is:

Accepted Answer

A) $2,100. 
B) $2,350. 
C) $2,500. 
D) $2,650. 
E) $3,200. 
A) $2,100. 
B) $2,350. 
C) $2,500. 
D) $2,650. 
E) $3,200.

Question 19

Rocky & Road, which sells ice cream and frozen yoghurt, is considering a new site that will require a $4.2 million investment for land acquisition and construction costs. The following operating results are expected: $\begin{array}{l}

\text { Sales revenue } & & \$ 1,572,000 \
\text { Less operating expenses: }  \
\text { Food \& supplies }& \$ 660,000 & \
\text { Wages \& salaries } & 320,000 &  \
\text { Insurance \& taxes } & 80,000 & \
\text { Utilities } & 15,000 & \
 \text { Depreciation } & \underline {70,000 }& \underline {1,075,000}  \
\text { Operating income } & & \underline {\underline {\$ 497,000}}\
\
\text { Disregard income taxes. }\

\end{array}$ Required:
A. If management requires a payback period of three years or less, should the new site be opened? Why?
B. Compute the accounting rate of return on the initial investment.
C. What significant limitation of payback and the accounting rate of return is overcome by the net-present-value method?

Accepted Answer

A. Annual net cash inflows: $1,572,000 -

Question 20

The net-present-value method assumes that project funds are reinvested at the:

Accepted Answer

A) hurdle rate. 
B) rate of return earned on the project. 
C) cost of debt capital. 
D) cost of equity capital. 
E) internal rate of return. 
A) hurdle rate. 
B) rate of return earned on the project. 
C) cost of debt capital. 
D) cost of equity capital. 
E) internal rate of return.

Which of the following items would complete the net-present-value method calculation?

The internal rate of return on an asset can be calculated:

Capital budgeting tends to focus primarily on:

Forrester Inc. purchased a $150,000 machine that has a five-year life and no salvage value. The company uses straight-line depreciation on all asset acquisitions and is subject to a 20% tax rate. The proper cash flow to show in a discounted-cash-flow analysis as occurring at time 0 would be:

The internal-rate-of-return method assumes that project funds are reinvested at the:

A company that is using the internal rate of return (IRR) to evaluate projects should accept a project if its IRR:

Discounted-cash-flow analysis focuses primarily on:

The payback period is best defined as:

James Company has an asset that cost $5,000 and currently has accumulated depreciation of $2,000. Suppose the firm sold the asset for $2,500 and is subject to a 30% income tax rate. The net after-tax cash flow of the disposal is:

The net-present-value method assumes that project funds are reinvested at the:

The Changing Role of Managerial Accounting

Basic Cost Management Concepts

Product Costing and Cost Accumulation

Process Costing and Hybrid Product-Costing Systems

Activity-Based Costing and Management

Activity Analysis, Cost Behaviour, and Cost Estimation

Cost-Volume-Profit Analysis, Absorption and Variable Costing

Profit Planning and Activity-Based Budgeting

Standard Costing and Flexible Budgeting

Cost Management Tools

Responsibility Accounting, Investment Centres, and Transfer Pricing

Decision Making: Relevant Costs and Benefits

Target Costing and Cost Analysis for Pricing Decisions

Allocation of Support Activity Costs and Joint Costs

Filters

Exam 14: Capital Expenditure Decisions

Which of the following items would complete the net-present-value method calculation?

The internal rate of return on an asset can be calculated:

Capital budgeting tends to focus primarily on:

Forrester Inc. purchased a $150,000 machine that has a five-year life and no salvage value. The company uses straight-line depreciation on all asset acquisitions and is subject to a 20% tax rate. The proper cash flow to show in a discounted-cash-flow analysis as occurring at time 0 would be:

The internal-rate-of-return method assumes that project funds are reinvested at the:

A company that is using the internal rate of return (IRR) to evaluate projects should accept a project if its IRR:

Discounted-cash-flow analysis focuses primarily on:

The payback period is best defined as:

James Company has an asset that cost $5,000 and currently has accumulated depreciation of $2,000. Suppose the firm sold the asset for $2,500 and is subject to a 30% income tax rate. The net after-tax cash flow of the disposal is:

The net-present-value method assumes that project funds are reinvested at the:

The Changing Role of Managerial Accounting

Basic Cost Management Concepts

Product Costing and Cost Accumulation

Process Costing and Hybrid Product-Costing Systems

Activity-Based Costing and Management

Activity Analysis, Cost Behaviour, and Cost Estimation

Cost-Volume-Profit Analysis, Absorption and Variable Costing

Profit Planning and Activity-Based Budgeting

Standard Costing and Flexible Budgeting

Cost Management Tools

Responsibility Accounting, Investment Centres, and Transfer Pricing

Decision Making: Relevant Costs and Benefits

Target Costing and Cost Analysis for Pricing Decisions

Allocation of Support Activity Costs and Joint Costs

Filters