Question 1

Capital budgeting is:

Accepted Answer

A) the process of planning the investment in long-term assets. 
B) preparing the budget for operating expenses. 
C) the process of evaluating the profitability of a business. 
D) the process of making pricing decisions for products. 
A) the process of planning the investment in long-term assets. 
B) preparing the budget for operating expenses. 
C) the process of evaluating the profitability of a business. 
D) the process of making pricing decisions for products.

Question 2

Cash flows used in NPV and IRR analysis ignore:

Accepted Answer

A) future increased sales. 
B) future cost savings. 
C) depreciation expense. 
D) residual value. 
A) future increased sales. 
B) future cost savings. 
C) depreciation expense. 
D) residual value.

Question 3

Zane has received a prize which entitles him to receive annual payments of $10,000 for the next 10 years. Which of the following is to be referred to in order to calculate the total value of the prize today?

Accepted Answer

A) Present Value of $1 
B) Present Value of an Annuity of $1 
C) Future Value of $1 
D) Future Value of an Annuity of $1 
A) Present Value of $1 
B) Present Value of an Annuity of $1 
C) Future Value of $1 
D) Future Value of an Annuity of $1

Question 4

Which of the following best describes a post-audit in capital budgeting?

Accepted Answer

A) an audit of an operating unit of a company 
B) an audit performed after financial statements have been issued 
C) an analysis of an investment's cash flows prior to committing to the initial investment 
D) a comparison of actual results of capital investments with projected results 
A) an audit of an operating unit of a company 
B) an audit performed after financial statements have been issued 
C) an analysis of an investment's cash flows prior to committing to the initial investment 
D) a comparison of actual results of capital investments with projected results

Question 5

Which of the following is the rate of return, based on discounted cash flows, that a company can expect to earn by investing in a capital asset?

Accepted Answer

A) accounting rate of return (ARR) 
B) bank interest rate 
C) internal rate of return (IRR) 
D) return on investment 
A) accounting rate of return (ARR) 
B) bank interest rate 
C) internal rate of return (IRR) 
D) return on investment

Question 6

Paramount Company is considering purchasing new equipment costing $700,000. Company's management has estimated that the equipment will generate cash flows as follows:   The company's required rate of return is 10%. Using the factors in the table below, calculate the present value of the cash inflows. Present value of $1:

Accepted Answer

A) $765,000 
B) $768,921 
C) $798,650 
D) $780,000 
A) $765,000 
B) $768,921 
C) $798,650 
D) $780,000

Question 7

Which of the following is true of projecting future cash flows of an investment?

Accepted Answer

A) Information on cash flow will also include non-cash transactions like depreciation. 
B) Cash inflows and cash outflows are treated separately, rather than being netted together. 
C) Cash flows are projected by accounting personnel without considering input from other business functions. 
D) The initial investment is always treated separately from all other cash flows. 
A) Information on cash flow will also include non-cash transactions like depreciation. 
B) Cash inflows and cash outflows are treated separately, rather than being netted together. 
C) Cash flows are projected by accounting personnel without considering input from other business functions. 
D) The initial investment is always treated separately from all other cash flows.

Question 8

A post-audit in capital budgeting is a comparison of actual results of capital investments with the projected results.

Accepted Answer

A) True 
 B)False

Question 9

An operational asset used for a long period of time is known as a capital asset.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following most accurately describes the discount rate used in NPV analysis?

Accepted Answer

A) the rate of inflation 
B) the rate of interest earned on a savings account 
C) the required rate of return or the hurdle rate 
D) the rate of interest charged for debt financing of an investment 
A) the rate of inflation 
B) the rate of interest earned on a savings account 
C) the required rate of return or the hurdle rate 
D) the rate of interest charged for debt financing of an investment

Question 11

Which of the following is true of discounted cash flow methods like NPV and IRR?

Accepted Answer

A) They use simple interest calculations. 
B) They use net income amounts rather than cash flows. 
C) They focus on the payback period. 
D) They consider discounted cash flows. 
A) They use simple interest calculations. 
B) They use net income amounts rather than cash flows. 
C) They focus on the payback period. 
D) They consider discounted cash flows.

Question 12

Most capital budgeting methods focus on cash flows rather than book income.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is a capital budgeting method that ignores the time value of money?

Accepted Answer

A) payback 
B) internal rate of return 
C) return on assets 
D) net present value 
A) payback 
B) internal rate of return 
C) return on assets 
D) net present value

Question 14

Payback provides management with valuable information about the time period within which the cash invested will be recouped.

Accepted Answer

A) True 
 B)False

Question 15

When a company is evaluating an investment proposal with high risk, a low discount rate should be used, and vice versa.

Accepted Answer

A) True 
 B)False

Question 16

Clapton Corporation is considering an investment in new equipment costing $900,000. The equipment will be depreciated on a straight-line basis over a ten-year life and is expected to have a salvage value of $90,000. The equipment is expected to generate net cash flows of $140,000 for each of the first five years and $100,000 for each of the last five years. What is the accounting rate of return associated with the equipment investment?

Accepted Answer

A) 8.89% 
B) 9.23% 
C) 8.52% 
D) 7.88% 
A) 8.89% 
B) 9.23% 
C) 8.52% 
D) 7.88%

Question 17

When calculating the net present value of future cash flows, dollars that are received in earlier years are worth more than dollars received in later years.

Accepted Answer

A) True 
 B)False

Question 18

Logy Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:   Calculate the payback period for Investment B.

Accepted Answer

A) 3 years 
B) 2 years 
C) 4 years 
D) 5 years 
A) 3 years 
B) 2 years 
C) 4 years 
D) 5 years

Question 19

Compound interest means that interest is calculated only on the principal amount.

Accepted Answer

A) True 
 B)False

Question 20

Caliber Company is considering the purchase of a new machine costing $800,000. The company's management is estimating that the new machine will generate additional cash flows of $180,000 a year for ten years and have a salvage value of $50,000 at the end of ten years. What is the machine's payback period?

Accepted Answer

A) 4.44 years 
B) 6.77 years 
C) 3.33 years 
D) 5.33 years 
A) 4.44 years 
B) 6.77 years 
C) 3.33 years 
D) 5.33 years

Exam 26: Capital Investment Decisions

Capital budgeting is:

Cash flows used in NPV and IRR analysis ignore:

Zane has received a prize which entitles him to receive annual payments of $10,000 for the next 10 years. Which of the following is to be referred to in order to calculate the total value of the prize today?

Which of the following best describes a post-audit in capital budgeting?

Which of the following is the rate of return, based on discounted cash flows, that a company can expect to earn by investing in a capital asset?

Which of the following is true of projecting future cash flows of an investment?

A post-audit in capital budgeting is a comparison of actual results of capital investments with the projected results.

An operational asset used for a long period of time is known as a capital asset.

Which of the following most accurately describes the discount rate used in NPV analysis?

Which of the following is true of discounted cash flow methods like NPV and IRR?

Most capital budgeting methods focus on cash flows rather than book income.

Which of the following is a capital budgeting method that ignores the time value of money?

Payback provides management with valuable information about the time period within which the cash invested will be recouped.

When a company is evaluating an investment proposal with high risk, a low discount rate should be used, and vice versa.

When calculating the net present value of future cash flows, dollars that are received in earlier years are worth more than dollars received in later years.

Logy Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available: Calculate the payback period for Investment B.

Compound interest means that interest is calculated only on the principal amount.

Accounting and the Business Environment

Recording Business Transactions

The Adjusting Process

Completing the Accounting Cycle

Merchandising Operations

Merchandise Inventory

Accounting Information Systems

Internal Control and Cash

Receivables

Plant Assets, Natural Resources, and Intangibles

Current Liabilities and Payroll

Partnerships

Corporations

Long-Term Liabilities

Investments

The Statement of Cash Flows

Financial Statement Analysis

Introduction to Managerial Accounting

Job Order Costing

Process Costing

Cost-Volume-Profit Analysis

Master Budgets

Flexible Budgets and Standard Cost Systems

Cost Allocation and Responsibility Accounting

Short-Term Business Decisions

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