Question 1

Which of the following capital budgeting methods uses accrual accounting information?

Accepted Answer

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

Question 2

Cortes Company is considering three investment opportunities with the following payback periods:   Use the decision rule for payback to rank the projects from most desirable to least desirable, all else being equal.

Accepted Answer

A) Y, Z, X 
B) X, Y, Z 
C) Z, Y, X 
D) Y, X, Z 
A) Y, Z, X 
B) X, Y, Z 
C) Z, Y, X 
D) Y, X, Z

Question 3

Newman Automobiles Manufacturing is considering two alternative investment proposals with the following data:   Calculate accounting rate of return for Proposal Y.

Accepted Answer

A) 8.95% 
B) 10.21% 
C) 7.50% 
D) 6.57% 
A) 8.95% 
B) 10.21% 
C) 7.50% 
D) 6.57%

Question 4

Nylan Company is considering an investment in new equipment costing $850,000. The equipment will be depreciated on a straight-line basis over a five-year life and is expected to have a salvage value of $50,000. The equipment is expected to generate net cash inflows of $1,000,000 in total during the five years life. What is the accounting rate of return associated with the equipment investment?

Accepted Answer

A) 9.99% 
B) 8.89% 
C) 7.56% 
D) 9.32% 
A) 9.99% 
B) 8.89% 
C) 7.56% 
D) 9.32%

Question 5

Net present value and internal rate of return consider the time value of money, so they are appropriate for longer-term capital investments

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) $742,340 
B) $650,070 
C) $568,650 
D) $599,700 
A) $742,340 
B) $650,070 
C) $568,650 
D) $599,700

Question 7

At the internal rate of return (IRR), the present value of cash inflows will be equal to:

Accepted Answer

A) initial investment. 
B) residual value. 
C) average operating income. 
D) profit from the project. 
A) initial investment. 
B) residual value. 
C) average operating income. 
D) profit from the project.

Question 8

Which of the following describes the word "capital budgeting"?

Accepted Answer

A) It involves budgeting for yearly operational expenses. 
B) It involves preparing the sales budget for the coming year. 
C) It involves deciding among various long-term investment decisions. 
D) It involves analyzing various alternatives of financing available to a company. 
A) It involves budgeting for yearly operational expenses. 
B) It involves preparing the sales budget for the coming year. 
C) It involves deciding among various long-term investment decisions. 
D) It involves analyzing various alternatives of financing available to a company.

Question 9

Which of the following best describes the internal rate of return?

Accepted Answer

A) discount rate at which the cost of the investment equals the present value of the net cash inflows from the investment 
B) discount rate that is used to evaluate funds borrowed from a lender for profitability 
C) the ratio of average annual income to average amount invested 
D) the rate at which the profitability of an investment increases 
A) discount rate at which the cost of the investment equals the present value of the net cash inflows from the investment 
B) discount rate that is used to evaluate funds borrowed from a lender for profitability 
C) the ratio of average annual income to average amount invested 
D) the rate at which the profitability of an investment increases

Question 10

Out of all methods of evaluating capital investments, the discounted cash flow methods are superior because they consider both the time value of money and the profitability of the investment.

Accepted Answer

A) True 
 B)False

Question 11

Gamma Company is considering an investment opportunity with the following expected net cash inflows: Year 1, $250,000; Year 2, $350,000; Year 3, $395,000. The company uses a discount rate of 12% and the initial investment is $750,000. The following table is available:
Present Value of $1:   The IRR of the project will be:

Accepted Answer

A) less than 12%. 
B) between 12% and 13%. 
C) between 14% and 15%. 
D) more than 12%. 
A) less than 12%. 
B) between 12% and 13%. 
C) between 14% and 15%. 
D) more than 12%.

Question 12

Nobell Company is evaluating an investment of $1,000,000 which will yield net cash inflows of $142,369 per year for 10 years with no residual value. What is the internal rate of return? Present value of annuity of $1:

Accepted Answer

A) 6% 
B) 7% 
C) 8% 
D) 9% 
A) 6% 
B) 7% 
C) 8% 
D) 9%

Question 13

If $15,000 is invested annually in an account with 9% interest compounding yearly, what will the balance of the account be after five years? Refer to the following Future Value table: Future value of annuity of $1:

Accepted Answer

A) $26,180 
B) $26,211 
C) $58,350 
D) $25,125 
A) $26,180 
B) $26,211 
C) $58,350 
D) $25,125

Question 14

The payback method uses discounted cash flows to make investment decisions.

Accepted Answer

A) True 
 B)False

Question 15

A company is considering an iron ore extraction project which requires an initial investment of $1,000,000 and will yield annual cash flows of $350,263 for 4 years. The company's hurdle rate is 9%. Calculate IRR.

Accepted Answer

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

Question 16

The payback method ignores cash flows that an asset generates, whereas the accounting rate of return includes them.

Accepted Answer

A) True 
 B)False

Question 17

The accounting rate of return method and the payback method are often used as preliminary screening measures, but are insufficient to fully evaluate a capital investment.

Accepted Answer

A) True 
 B)False

Question 18

When comparing several investments with the same initial outlay, the decision should be made on the basis of:

Accepted Answer

A) highest total cash inflows. 
B) longest payback period. 
C) highest NPV. 
D) highest ARR. 
A) highest total cash inflows. 
B) longest payback period. 
C) highest NPV. 
D) highest ARR.

Question 19

If $10,000 is invested annually in an account with 7% interest compounded yearly, what will the balance of the account be after six years? Refer to the following Future Value table: Future value of annuity of $1:

Accepted Answer

A) $79,050 
B) $71,530 
C) $18,020 
D) $83,290 
A) $79,050 
B) $71,530 
C) $18,020 
D) $83,290

Question 20

Two methods of analyzing potential capital investments-payback and accounting rate of return-ignore the time value of money.

Accepted Answer

A) True 
 B)False

Exam 26: Capital Investment Decisions

Which of the following capital budgeting methods uses accrual accounting information?

Cortes Company is considering three investment opportunities with the following payback periods: Use the decision rule for payback to rank the projects from most desirable to least desirable, all else being equal.

Newman Automobiles Manufacturing is considering two alternative investment proposals with the following data: Calculate accounting rate of return for Proposal Y.

Net present value and internal rate of return consider the time value of money, so they are appropriate for longer-term capital investments

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

At the internal rate of return (IRR), the present value of cash inflows will be equal to:

Which of the following describes the word "capital budgeting"?

Which of the following best describes the internal rate of return?

Out of all methods of evaluating capital investments, the discounted cash flow methods are superior because they consider both the time value of money and the profitability of the investment.

Nobell Company is evaluating an investment of $1,000,000 which will yield net cash inflows of $142,369 per year for 10 years with no residual value. What is the internal rate of return? Present value of annuity of $1:

If $15,000 is invested annually in an account with 9% interest compounding yearly, what will the balance of the account be after five years? Refer to the following Future Value table: Future value of annuity of $1:

The payback method uses discounted cash flows to make investment decisions.

A company is considering an iron ore extraction project which requires an initial investment of $1,000,000 and will yield annual cash flows of $350,263 for 4 years. The company's hurdle rate is 9%. Calculate IRR.

The payback method ignores cash flows that an asset generates, whereas the accounting rate of return includes them.

The accounting rate of return method and the payback method are often used as preliminary screening measures, but are insufficient to fully evaluate a capital investment.

When comparing several investments with the same initial outlay, the decision should be made on the basis of:

If $10,000 is invested annually in an account with 7% interest compounded yearly, what will the balance of the account be after six years? Refer to the following Future Value table: Future value of annuity of $1:

Two methods of analyzing potential capital investments-payback and accounting rate of return-ignore 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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