Question 1

The rate of return that equates the present value of cash inflows and outflows is the:

Accepted Answer

A)  minimum rate of return. 
B)  internal rate of return. 
C)  desired rate of return. 
D)  hurdle rate. 
A)  minimum rate of return. 
B)  internal rate of return. 
C)  desired rate of return. 
D)  hurdle rate.

Question 2

If a project has a positive net present value,its internal rate of return will exceed the firm's hurdle rate.

Accepted Answer

A) True 
 B)False

Question 3

All of the following are capital investment decisions except:

Accepted Answer

A)  acquiring $100,000 of common stock. 
B)  buying a $5,000,000 manufacturing plant. 
C)  purchasing equipment for $80,000. 
D)  paying $600,000 to renovate a restaurant. 
A)  acquiring $100,000 of common stock. 
B)  buying a $5,000,000 manufacturing plant. 
C)  purchasing equipment for $80,000. 
D)  paying $600,000 to renovate a restaurant.

Question 4

The future value of $1 table should be used to discount lump sum cash flows expected to occur in the future.

Accepted Answer

A) True 
 B)False

Question 5

Generro Company is considering the purchase of equipment that would cost $36,000 and offer annual cash inflows of $10,500 over its useful life of 5 years.Assuming a desired rate of return of 12%,is the project acceptable?

Accepted Answer

A)  No,since the negative net present value indicates the investment will yield a rate of return below the desired rate of return. 
B)  Yes,since the investment will generate $52,500 in future cash flows,which is greater than the purchase cost of $36,000. 
C)  Yes,since the positive net present value indicates the investment will earn a rate of return greater than 12%. 
D)  The answer cannot be determined. 
A)  No,since the negative net present value indicates the investment will yield a rate of return below the desired rate of return. 
B)  Yes,since the investment will generate $52,500 in future cash flows,which is greater than the purchase cost of $36,000. 
C)  Yes,since the positive net present value indicates the investment will earn a rate of return greater than 12%. 
D)  The answer cannot be determined.

Question 6

Janelle Bates has just inherited $250,000 from her uncle's estate.She is considering opening a small sewing and fabric shop.She would need to purchase inventory costing $50,000.Janelle plans to rent a shop in a local shopping center for $12,000 per year.Fixtures,display equipment,and furniture will cost $18,000 and will be depreciated $3,000 per year for 5 years to its expected salvage value of $3,000.Operating costs will amount to $25,000 per year.Janelle estimates her revenues from sales and sewing services will total $65,000.Because Janelle believes she can earn a 10% return by investing in mutual funds,she does not want to start the business unless she can earn at least this rate.Ignore income taxes.
Required:
1)Prepare a schedule of expected cash flows for the proposed investment by completing the table provided below.In column 1 enter a brief description of the cash flow.In column 2 indicate whether the cash flow is an inflow (I)or an outflow (O).In column 3 enter the years in which the cash flow will occur.For example,if the cash flow occurs immediately enter a 0.If the cash flow occurs each year enter 1-5,etc.In column 4 enter the cash flow amount. $\begin{array}{|l|c|c|r|}
\hline \text { Item Description } & \text { Inflow/Outflow } & \text { Years } & \text { Amount } \
\hline(\mathrm{CoL} \mathrm{1)} & (\mathrm{CoL} 2) & (\mathrm{CoL} 3) & (\mathrm{Col} .4) \
\hline  \
\hline  \
\hline   \
\hline  \
\hline  \
\hline   \
\hline  \
\hline
\end{array}$ 2)What is the initial outlay for this capital investment (the amount of the cash flow at time = 0)?
3)What is the amount of the annual net cash flow for this capital investment?
4)What is the net present value of the proposed venture? Should Janelle proceed?

Accepted Answer

Answers will vary
1)Schedule of cash flo

Question 7

A capital investment decision is essentially a decision to exchange current cash outflows for future cash inflows.

Accepted Answer

A) True 
 B)False

Question 8

Indicate whether each of the following statements is

Accepted Answer

Internal rate of return measures the dif

Question 9

The instantaneous computation power of spreadsheet software makes it ideal for answering "what-if" questions regarding present values.

Accepted Answer

A) True 
 B)False

Question 10

Garrison Company has two investment opportunities.A cash flow schedule for the investments is provided below: $\begin{array}{|l|c|c|}
\hline \text { Year } & \text { Investment } A & \text { Investment B } \
\hline 0 & (\$ 5,000) & (\$ 6,000) \
\hline 1 & 2,000 & 3,000 \
\hline 2 & 2,000 & 2,000 \
\hline 3 & 2,000 & 2,000 \
\hline 4 & 2,000 & 1,000 \
\hline
\end{array}$ Considering the unequal investments,which of the following techniques would be most appropriate for choosing between Investment A and Investment B?

Accepted Answer

A)  Payback technique 
B)  Present value index 
C)  Net present value technique 
D)  None of these answers is correct. 
A)  Payback technique 
B)  Present value index 
C)  Net present value technique 
D)  None of these answers is correct.

Question 11

The purposes of the postaudit for capital investments include all of the following except:

Accepted Answer

A)  continuous improvement. 
B)  rewarding managers for increasing idle cash. 
C)  determining whether the project generated the results expected. 
D)  encouraging managers to closely scrutinize capital investment decisions. 
A)  continuous improvement. 
B)  rewarding managers for increasing idle cash. 
C)  determining whether the project generated the results expected. 
D)  encouraging managers to closely scrutinize capital investment decisions.

Question 12

The payback method shows how long will be required to recover the cost of an investment in a capital asset.

Accepted Answer

A) True 
 B)False

Question 13

How does depreciation serve as a tax shield? How is the amount of the annual tax shield calculated?

Accepted Answer

Answers will vary
Recording depreciation

Question 14

Cash inflows from a capital investment may include the terminal value of capital assets and increases in revenues.

Accepted Answer

A) True 
 B)False

Question 15

Indicate whether each of the following statements is

Accepted Answer

An ordinary annuity assumes that cash fl

Question 16

An investment that costs $20,000 will produce annual cash flows of $5,000 for a period of 6 years.Further,the investment has an expected salvage value of $3,000.Given a desired rate of return of 12%,what will the investment generate? (Do not round your intermediate calculations.Round your answer to the nearest whole dollar. )

Accepted Answer

A)  A positive net present value of $2,077. 
B)  A negative net present value of $2,077. 
C)  A positive net present value of $22,077. 
D)  A positive net present value of $557. 
A)  A positive net present value of $2,077. 
B)  A negative net present value of $2,077. 
C)  A positive net present value of $22,077. 
D)  A positive net present value of $557.

Question 17

Saget Company is considering the purchase of equipment that would cost $35,000 and offer annual cash inflows of $10,500 over its useful life of 5 years.Assuming a required rate of return of 8%,what is the net present value of this investment opportunity?

Accepted Answer

A)  $(6,923) 
B)  $17,500 
C)  $6,923 
D)  $41,923 
A)  $(6,923) 
B)  $17,500 
C)  $6,923 
D)  $41,923

Question 18

Indicate whether each of the following statements is

Accepted Answer

A capital investment is a purchase of a

Question 19

When the effect of income taxes is considered in a capital budgeting analysis,the amount of depreciation expense must be added back to after-tax income to calculate the annual cash inflow.

Accepted Answer

A) True 
 B)False

Question 20

Indicate whether each of the following statements is

Accepted Answer

A postaudit should be conducted at the t

The rate of return that equates the present value of cash inflows and outflows is the:

If a project has a positive net present value,its internal rate of return will exceed the firm's hurdle rate.

All of the following are capital investment decisions except:

The future value of $1 table should be used to discount lump sum cash flows expected to occur in the future.

Generro Company is considering the purchase of equipment that would cost $36,000 and offer annual cash inflows of $10,500 over its useful life of 5 years.Assuming a desired rate of return of 12%,is the project acceptable?

A capital investment decision is essentially a decision to exchange current cash outflows for future cash inflows.

Indicate whether each of the following statements is

The instantaneous computation power of spreadsheet software makes it ideal for answering "what-if" questions regarding present values.

The purposes of the postaudit for capital investments include all of the following except:

The payback method shows how long will be required to recover the cost of an investment in a capital asset.

How does depreciation serve as a tax shield? How is the amount of the annual tax shield calculated?

Cash inflows from a capital investment may include the terminal value of capital assets and increases in revenues.

Indicate whether each of the following statements is

Saget Company is considering the purchase of equipment that would cost $35,000 and offer annual cash inflows of $10,500 over its useful life of 5 years.Assuming a required rate of return of 8%,what is the net present value of this investment opportunity?

Indicate whether each of the following statements is

When the effect of income taxes is considered in a capital budgeting analysis,the amount of depreciation expense must be added back to after-tax income to calculate the annual cash inflow.

Indicate whether each of the following statements is

Management Accounting and Corporate Governance

Cost Behavior, Operating Leverage, and Profitability Analysis

Analysis of Cost,Volume,and Pricing to Increase Profitability

Cost Accumulation,Tracing,and Allocation

Cost Management in an Automated Business Environment: ABC, ABM, and TQM

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Responsibility Accounting

Product Costing in Service and Manufacturing Entities

Job-Order, Process, and Hybrid Costing Systems

Financial Statement Analysis

Statement of Cash Flows

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Exam 10: Planning for Capital Investments

The rate of return that equates the present value of cash inflows and outflows is the:

If a project has a positive net present value,its internal rate of return will exceed the firm's hurdle rate.

All of the following are capital investment decisions except:

The future value of $1 table should be used to discount lump sum cash flows expected to occur in the future.

Generro Company is considering the purchase of equipment that would cost $36,000 and offer annual cash inflows of $10,500 over its useful life of 5 years.Assuming a desired rate of return of 12%,is the project acceptable?

A capital investment decision is essentially a decision to exchange current cash outflows for future cash inflows.

Indicate whether each of the following statements is

The instantaneous computation power of spreadsheet software makes it ideal for answering "what-if" questions regarding present values.

The purposes of the postaudit for capital investments include all of the following except:

The payback method shows how long will be required to recover the cost of an investment in a capital asset.

How does depreciation serve as a tax shield? How is the amount of the annual tax shield calculated?

Cash inflows from a capital investment may include the terminal value of capital assets and increases in revenues.

Indicate whether each of the following statements is

Saget Company is considering the purchase of equipment that would cost $35,000 and offer annual cash inflows of $10,500 over its useful life of 5 years.Assuming a required rate of return of 8%,what is the net present value of this investment opportunity?

Indicate whether each of the following statements is

When the effect of income taxes is considered in a capital budgeting analysis,the amount of depreciation expense must be added back to after-tax income to calculate the annual cash inflow.

Indicate whether each of the following statements is

Management Accounting and Corporate Governance

Cost Behavior, Operating Leverage, and Profitability Analysis

Analysis of Cost,Volume,and Pricing to Increase Profitability

Cost Accumulation,Tracing,and Allocation

Cost Management in an Automated Business Environment: ABC, ABM, and TQM

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Responsibility Accounting

Product Costing in Service and Manufacturing Entities

Job-Order, Process, and Hybrid Costing Systems

Financial Statement Analysis

Statement of Cash Flows

Filters