Question 1

Match each item with the correct statement below.
-assumes that all future cash inflows earn the same rate of return as the project itself

Accepted Answer

A) Payback period 
B) Accounting rate of return 
C) Net present value 
D) Internal rate of return 
E) Discount rate
F)Annuity
G)Post-audit
H)Compounding of interest 
A) Payback period 
B) Accounting rate of return 
C) Net present value 
D) Internal rate of return 
E) Discount rate
F)Annuity
G)Post-audit
H)Compounding of interest

Question 2

Which of the following is a drawback of the payback period?

Accepted Answer

A)  It ignores a project's total profitability. 
B)  It uses a set discount rate. 
C)  It considers total profitability, requiring the forecasting of all future cash flows. 
D)  It uses before-tax cash flows rather than after-tax cash flows. 
E)  It uses operating income rather than cash flows. 
A)  It ignores a project's total profitability. 
B)  It uses a set discount rate. 
C)  It considers total profitability, requiring the forecasting of all future cash flows. 
D)  It uses before-tax cash flows rather than after-tax cash flows. 
E)  It uses operating income rather than cash flows.

Question 3

Figure 14-11.Present value of an Annuity of $1 in Arrears
  
-Refer to Figure 14-11. Lyster Company wants to buy a new machine that will be able to perform many of the steps in the manufacturing process that they currently have to do manually. The hope is that it will reduce the amount of time it takes to create one unit and reduce the number of defective units. The machine requires an investment of $750,000. The machine will last six years with no expected salvage value. The expected after-tax cash flows associated with the project are as follows:

Accepted Answer

The answer of Figure 14-11.Present value of an Annuity of...

Question 4

Which of the following is true regarding the measurement and use of indirect and intangible benefits in capital investment decision making?

Accepted Answer

A)  ABC has made identifying indirect benefits easier. 
B)  Intangible benefits cannot be measured. 
C)  Indirect and intangible benefits should not be considered, only direct costs and benefits are considered. 
D)  Actions by competitors are not considered. 
E)  None of these. 
A)  ABC has made identifying indirect benefits easier. 
B)  Intangible benefits cannot be measured. 
C)  Indirect and intangible benefits should not be considered, only direct costs and benefits are considered. 
D)  Actions by competitors are not considered. 
E)  None of these.

Question 5

A division manager is considering a project that requires a significant initial investment. The company's top management will not approve any project that does not return at least 12%. The manager will most likely use which of the following capital investment models?

Accepted Answer

A)  payback period 
B)  accounting rate of return 
C)  net present value 
D)  internal rate of return 
E)  None of these. 
A)  payback period 
B)  accounting rate of return 
C)  net present value 
D)  internal rate of return 
E)  None of these.

Question 6

A formula for the accounting rate of return is

Accepted Answer

A)  average income/initial investment. 
B)  initial investment/annual cash flow. 
C)  annual cash flow/initial investment. 
D)  initial investment/average income. 
E)  (average income + initial investment)/initial investment. 
A)  average income/initial investment. 
B)  initial investment/annual cash flow. 
C)  annual cash flow/initial investment. 
D)  initial investment/average income. 
E)  (average income + initial investment)/initial investment.

Question 7

Barker Production Company is considering the purchase of a flexible manufacturing system. The annual cash benefits/savings associated with the system are:
   The system will cost $750,000 and will last ten years. The company's cost of capital is 10%.
Required:

Accepted Answer

The answer of Barker Production Company is considering the purchase...

Question 8

How do NPV and IRR differ?

Accepted Answer

A)  NPV measures profitability in absolute terms, whereas the IRR method measures profitability in relative terms. 
B)  IRR should be used for choosing among competing, mutually exclusive projects. 
C)  NPV considers the time value of money and IRR does not. 
D)  Both NPV and IRR will generate the same decisions. 
A)  NPV measures profitability in absolute terms, whereas the IRR method measures profitability in relative terms. 
B)  IRR should be used for choosing among competing, mutually exclusive projects. 
C)  NPV considers the time value of money and IRR does not. 
D)  Both NPV and IRR will generate the same decisions.

Question 9

Figure 14-2.A company is considering two projects.  
-Refer to Figure 14-2. What is the payback period for Project B?

Accepted Answer

A)  2 years 
B)  4.5 years 
C)  3.5 years 
D)  2.5 years 
E)  3 years 
A)  2 years 
B)  4.5 years 
C)  3.5 years 
D)  2.5 years 
E)  3 years

Question 10

Jerry Hall invested in a project that required an initial amount of $52,160, and returned cash inflows of $10,000 per year for 10 years. A partial table of the present value of an annuity of $1 in arrears is as follows:   What is the internal rate of return for this investment?

Accepted Answer

A)  8% 
B)  10% 
C)  12% 
D)  14% 
E)  16% 
A)  8% 
B)  10% 
C)  12% 
D)  14% 
E)  16%

Question 11

A firm is considering a project with an annual cash flow of $80,000. The project would have a 10-year life, and the company uses a discount rate of 8%. What is the maximum amount the company could invest in the project and have the project still be acceptable (rounded)?

Accepted Answer

A)  $800,000 
B)  $536,800 
C)  $406,420 
D)  $727,208 
A)  $800,000 
B)  $536,800 
C)  $406,420 
D)  $727,208

Question 12

Because of the postaudit, managers are more likely to make capital investment decisions in the best interests of the firm.

Accepted Answer

A) True 
 B)False

Question 13

One disadvantage of the payback period is that

Accepted Answer

A)  it is sometimes used as a crude measure of risk. 
B)  managers may choose investments with quick payback periods to maximize short term criteria on which their own bonuses, etc. may be based. 
C)  it cannot be used for investments with unequal cash inflows. 
D)  it cannot be used if the entire cost of the investment does not occur immediately. 
E)  All of these. 
A)  it is sometimes used as a crude measure of risk. 
B)  managers may choose investments with quick payback periods to maximize short term criteria on which their own bonuses, etc. may be based. 
C)  it cannot be used for investments with unequal cash inflows. 
D)  it cannot be used if the entire cost of the investment does not occur immediately. 
E)  All of these.

Question 14

A division manager was considering a project that required a significant initial investment. If accepted, the project could have a negative impact on certain financial ratios that the firm was required to maintain to satisfy debt contracts. To ensure that the ratios would not be adversely affected by the investment, the manager would use which of the following capital investment models?

Accepted Answer

A)  payback period 
B)  accounting rate of return 
C)  net present value 
D)  internal rate of return 
E)  None of these. 
A)  payback period 
B)  accounting rate of return 
C)  net present value 
D)  internal rate of return 
E)  None of these.

Question 15

A key element in the capital investment process is called a postaudit.

Accepted Answer

A) True 
 B)False

Question 16

The difference between the present value of the cash inflows and outflows associated with a project is the internal rate of return model.

Accepted Answer

A) True 
 B)False

Question 17

Which model is better for independent projects - net present value or internal rate of return? For mutually exclusive projects? Explain your reasoning for each case.

Accepted Answer

For independent projects, both net prese

Question 18

The payback period considers the profitability of a project over its entire life span.

Accepted Answer

A) True 
 B)False

Question 19

Figure 14-10.Present value of $1
   Present value of an Annuity of $1
  
-Refer to Figure 14-10. Ray Corporation is looking to invest in a new piece of equipment. Two manufacturers of this type of equipment are being considered. After-tax inflows for the two competing projects are:
   Both projects require an initial investment of $400,000. In both cases, assume that the equipment has a life of 5 years with no salvage value.
Required:
A. Assuming a discount rate of 8%, compute the net present value of each piece of equipment.
B. A third option is now available for a supplier outside of the country. The cost is also $400,000, but it will produce even cash flows over its 5-year life. What must the annual cash flow be for this equipment to be selected over the other two? Assume an 8% discount rate.

Accepted Answer

@#IMG-DLM& @#IMG-DLM& Therefore in order for the s

Question 20

When comparing the payback method and the accounting rate of return methods, which of the following is true?

Accepted Answer

A)  i 
B)  ii 
C)  iii 
D)  iv 
A)  i 
B)  ii 
C)  iii 
D)  iv

Match each item with the correct statement below. -assumes that all future cash inflows earn the same rate of return as the project itself

Which of the following is a drawback of the payback period?

Which of the following is true regarding the measurement and use of indirect and intangible benefits in capital investment decision making?

A division manager is considering a project that requires a significant initial investment. The company's top management will not approve any project that does not return at least 12%. The manager will most likely use which of the following capital investment models?

A formula for the accounting rate of return is

Barker Production Company is considering the purchase of a flexible manufacturing system. The annual cash benefits/savings associated with the system are: The system will cost $750,000 and will last ten years. The company's cost of capital is 10%. Required:

How do NPV and IRR differ?

Figure 14-2.A company is considering two projects. -Refer to Figure 14-2. What is the payback period for Project B?

Jerry Hall invested in a project that required an initial amount of $52,160, and returned cash inflows of $10,000 per year for 10 years. A partial table of the present value of an annuity of $1 in arrears is as follows: What is the internal rate of return for this investment?

A firm is considering a project with an annual cash flow of $80,000. The project would have a 10-year life, and the company uses a discount rate of 8%. What is the maximum amount the company could invest in the project and have the project still be acceptable (rounded)?

Because of the postaudit, managers are more likely to make capital investment decisions in the best interests of the firm.

One disadvantage of the payback period is that

A key element in the capital investment process is called a postaudit.

The difference between the present value of the cash inflows and outflows associated with a project is the internal rate of return model.

Which model is better for independent projects - net present value or internal rate of return? For mutually exclusive projects? Explain your reasoning for each case.

The payback period considers the profitability of a project over its entire life span.

When comparing the payback method and the accounting rate of return methods, which of the following is true?

Introduction to Managerial Accounting

Basic Managerial Accounting Concepts

Cost Behavior

Cost-Volume-Profit Analysis: a Managerial Planning Tool

Job-Order Costing

Process Costing

Activity-Based Costing and Management

Absorption and Variable Costing, and Inventory Management

Profit Planning

Standard Costing: a Managerial Control Tool

Flexible Budgets and Overhead Analysis

Performance Evaluation and Decentralization

Short-Run Decision Making: Relevant Costing

Statement of Cash Flows

Financial Statement Analysis

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Exam 14: Capital Investment Decisions

Match each item with the correct statement below. -assumes that all future cash inflows earn the same rate of return as the project itself

Which of the following is a drawback of the payback period?

Which of the following is true regarding the measurement and use of indirect and intangible benefits in capital investment decision making?

A division manager is considering a project that requires a significant initial investment. The company's top management will not approve any project that does not return at least 12%. The manager will most likely use which of the following capital investment models?

A formula for the accounting rate of return is

Barker Production Company is considering the purchase of a flexible manufacturing system. The annual cash benefits/savings associated with the system are: The system will cost $750,000 and will last ten years. The company's cost of capital is 10%. Required:

How do NPV and IRR differ?

Figure 14-2.A company is considering two projects. -Refer to Figure 14-2. What is the payback period for Project B?

Jerry Hall invested in a project that required an initial amount of $52,160, and returned cash inflows of $10,000 per year for 10 years. A partial table of the present value of an annuity of $1 in arrears is as follows: What is the internal rate of return for this investment?

A firm is considering a project with an annual cash flow of $80,000. The project would have a 10-year life, and the company uses a discount rate of 8%. What is the maximum amount the company could invest in the project and have the project still be acceptable (rounded)?

Because of the postaudit, managers are more likely to make capital investment decisions in the best interests of the firm.

One disadvantage of the payback period is that

A key element in the capital investment process is called a postaudit.

The difference between the present value of the cash inflows and outflows associated with a project is the internal rate of return model.

Which model is better for independent projects - net present value or internal rate of return? For mutually exclusive projects? Explain your reasoning for each case.

The payback period considers the profitability of a project over its entire life span.

When comparing the payback method and the accounting rate of return methods, which of the following is true?

Introduction to Managerial Accounting

Basic Managerial Accounting Concepts

Cost Behavior

Cost-Volume-Profit Analysis: a Managerial Planning Tool

Job-Order Costing

Process Costing

Activity-Based Costing and Management

Absorption and Variable Costing, and Inventory Management

Profit Planning

Standard Costing: a Managerial Control Tool

Flexible Budgets and Overhead Analysis

Performance Evaluation and Decentralization

Short-Run Decision Making: Relevant Costing

Statement of Cash Flows

Financial Statement Analysis

Filters