Question 1

When evaluating a potential investment, managers should use more than one measure for making a sound investment decision.

Accepted Answer

A) True 
 B)False

Question 2

Gamma Company is considering an investment opportunity with the expected net cash inflows of $300,000 for four years. Residual value of the investment would be $70,000. The company uses a discount rate of 14% and the initial investment is $290,000. Calculate the NPV of the investment.
Present value of annuity of $1:   Present value of $1:

Accepted Answer

The answer of Gamma Company is considering an investment opportunity...

Question 3

Gamma Company is considering an investment of $500,000 in a land development project. It will yield cash flows of $200,000 for 5 years. The company uses a discount rate of 9%. What is the net present value of the investment? Present value of annuity of $1:

Accepted Answer

A) $230,000 
B) $278,000 
C) $330,000 
D) $200,000 
A) $230,000 
B) $278,000 
C) $330,000 
D) $200,000

Question 4

The accounting rate of return method uses accrual-based accounting income.

Accepted Answer

A) True 
 B)False

Question 5

The payback considers only those cash flows that occur during the payback period and ignores any cash flows that occur after that period.

Accepted Answer

A) True 
 B)False

Question 6

A company seeking investment opportunities has collected the following information.   If the company makes a decision based on the NPV, the most preferable project would be:

Accepted Answer

A) Project A. 
B) Project B. 
C) Project C. 
D) Project D. 
A) Project A. 
B) Project B. 
C) Project C. 
D) Project D.

Question 7

To determine the investment's net cash inflows, the inflows are netted against the investment's initial cash outflow.

Accepted Answer

A) True 
 B)False

Question 8

A company is evaluating three possible investments. Each uses straight-line method of depreciation. Following information is provided by the company.   What is the accounting rate of return for Project C?

Accepted Answer

A) 15% 
B) 12% 
C) 18% 
D) 10% 
A) 15% 
B) 12% 
C) 18% 
D) 10%

Question 9

John wins the lottery and has the following three payout options for after-tax prize money: 1. $150,000 per year at the end of each of the next six years
2. $300,000 (lump sum)now
3. $500,000 (lump sum)six years from now
The required rate of return is 9%. What is the present value if he selects the second option? Round to nearest whole dollar.
Present value of $1:

Accepted Answer

A) $650,000 
B) $100,000 
C) $400,000 
D) $300,000 
A) $650,000 
B) $100,000 
C) $400,000 
D) $300,000

Question 10

Nylan Manufacturing is considering two alternative investment proposals with the following details:   What is the total present value of future cash inflows from Proposal Y? Present value of annuity of $1:

Accepted Answer

A) $266,750 
B) $291,600 
C) $290,000 
D) $250,000 
A) $266,750 
B) $291,600 
C) $290,000 
D) $250,000

Question 11

If an investment project's IRR is higher than the company's required rate of return, the company should reject the investment.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following best describes the profitability index?

Accepted Answer

A) an index of projects based on their net income 
B) the ratio of present value of net cash inflows to initial investment 
C) the ratio of total cash inflows to initial investment 
D) an array of possible investment outcomes at different discount rates 
A) an index of projects based on their net income 
B) the ratio of present value of net cash inflows to initial investment 
C) the ratio of total cash inflows to initial investment 
D) an array of possible investment outcomes at different discount rates

Question 13

Compound interest assumes that all interest earned will be reinvested at the same rate of interest at which the investment was originally made.

Accepted Answer

A) True 
 B)False

Question 14

The payback method can only be used when the net cash inflows from a capital investment are the same for each period.

Accepted Answer

A) True 
 B)False

Question 15

John wins the lottery and has the following three payout options for after-tax prize money: 1. $150,000 per year at the end of each of the next six years
2. $300,000 (lump sum)now
3. $500,000 (lump sum)six years from now
The required rate of return is 9%. What is the present value if he selects the first option? Round to nearest whole dollar.
Present value of annuity of $1:   Present value of $1:

Accepted Answer

A) $750,000 
B) $672,900 
C) $450,000 
D) $450,050 
A) $750,000 
B) $672,900 
C) $450,000 
D) $450,050

Question 16

Under conditions of limited resources, when a company is comparing several investments with different amounts of initial outlay, the decision should be made on the basis of:

Accepted Answer

A) highest total cash inflows. 
B) shortest payback period. 
C) highest profitability index. 
D) highest NPV. 
A) highest total cash inflows. 
B) shortest payback period. 
C) highest profitability index. 
D) highest NPV.

Question 17

Paramount Company is considering purchasing new equipment costing $700,000. The management has estimated that the equipment will generate cash flows as follows:   Present value of $1:   The company's required rate of return is 8%. Using the factors in the table, calculate the present value of the cash inflows. (Round all calculations to the nearest whole dollar)

Accepted Answer

A) $890,000 
B) $750,000 
C) $850,000 
D) $841,000 
A) $890,000 
B) $750,000 
C) $850,000 
D) $841,000

Question 18

Which of the following best describes the term "capital rationing"?

Accepted Answer

A) a method of determining the period within which the cash invested is recouped 
B) a process of ranking and choosing among alternative capital investments based on the availability of funds 
C) a method which shows the effect of the investment on the company's accrual-based income 
D) a process of controlling operating costs when adequate funds are not available 
A) a method of determining the period within which the cash invested is recouped 
B) a process of ranking and choosing among alternative capital investments based on the availability of funds 
C) a method which shows the effect of the investment on the company's accrual-based income 
D) a process of controlling operating costs when adequate funds are not available

Question 19

Flip Flop company is considering investing in production-management software that costs $600,000, has $60,000 residual value, and should lead to cost savings of $150,000 per year for its five-year life. Calculate the average amount invested in the asset that should be used for calculating the accounting rate of return?

Accepted Answer

A) $660,000 
B) $600,000 
C) $330,000 
D) $60,000 
A) $660,000 
B) $600,000 
C) $330,000 
D) $60,000

Question 20

The fact that invested cash earns income over time is called the time value of money.

Accepted Answer

A) True 
 B)False

Exam 26: Capital Investment Decisions

When evaluating a potential investment, managers should use more than one measure for making a sound investment decision.

Gamma Company is considering an investment of $500,000 in a land development project. It will yield cash flows of $200,000 for 5 years. The company uses a discount rate of 9%. What is the net present value of the investment? Present value of annuity of $1:

The accounting rate of return method uses accrual-based accounting income.

The payback considers only those cash flows that occur during the payback period and ignores any cash flows that occur after that period.

A company seeking investment opportunities has collected the following information. If the company makes a decision based on the NPV, the most preferable project would be:

To determine the investment's net cash inflows, the inflows are netted against the investment's initial cash outflow.

A company is evaluating three possible investments. Each uses straight-line method of depreciation. Following information is provided by the company. What is the accounting rate of return for Project C?

Nylan Manufacturing is considering two alternative investment proposals with the following details: What is the total present value of future cash inflows from Proposal Y? Present value of annuity of $1:

If an investment project's IRR is higher than the company's required rate of return, the company should reject the investment.

Which of the following best describes the profitability index?

Compound interest assumes that all interest earned will be reinvested at the same rate of interest at which the investment was originally made.

The payback method can only be used when the net cash inflows from a capital investment are the same for each period.

Under conditions of limited resources, when a company is comparing several investments with different amounts of initial outlay, the decision should be made on the basis of:

Which of the following best describes the term "capital rationing"?

The fact that invested cash earns income over time is called the time value of money.

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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