Question 1

Which of the following items would be considered a capital asset?

Accepted Answer

A) Purchase of office supplies to be used internally over the next year 
B) Payment for this year's advertising campaign 
C) Construction of a new store building 
D) Donation of money to United Way 
A) Purchase of office supplies to be used internally over the next year 
B) Payment for this year's advertising campaign 
C) Construction of a new store building 
D) Donation of money to United Way

Question 2

Fast Foto bought a new high-speed photo copier to offer customers the opportunity to make high-quality copies out of their digital pictures. Its useful life is 7 years. The copier cost $7710 and will generate annual cash inflows of $2110. The residual value of the copier is $1250. The payback period in years is closest to

Accepted Answer

A) 6)17. 
B) 3)65. 
C) 3)06. 
D) 2)65. 
A) 6)17. 
B) 3)65. 
C) 3)06. 
D) 2)65.

Question 3

The profitability index equals the present value of net cash inflows from the investment divided by the cost of the investment.

Accepted Answer

A) True 
 B)False

Question 4

Leonardo Company is deciding whether to automate one phase of its production process. The equipment has a six year life and will cost $450,000. The interest rate is 12%. Net cash inflows per year:
   Present Value of $1
   Present Value of Annuity of $1
   a. What is the present value of the net inflow for year 1?
b. What is the present value of the net inflow for year 5?

Accepted Answer

a. $85,000 × .893 =

Question 5

The term ________ is best described as "a stream of equal installments made at equal time intervals."

Accepted Answer

A) time value of money 
B) capital budgeting 
C) annuity 
D) payback period 
A) time value of money 
B) capital budgeting 
C) annuity 
D) payback period

Question 6

The Pantry Vending Machine Company is looking to expand its business by adding a new line of vending machines. The management team is considering expanding into either soda machines or snack machines. Following is the relevant financial data relating to the decision:   Using the net present value model, which alternative should Pantry Vending Machine Company select?
Present Value of $1
  Present Value of Annuity of $1

Accepted Answer

A) The snack machines should be selected. 
B) The soda machines should be selected. 
C) Both investments should be selected. 
D) Neither investment should be selected. 
A) The snack machines should be selected. 
B) The soda machines should be selected. 
C) Both investments should be selected. 
D) Neither investment should be selected.

Question 7

What will happen to the internal rate of return (IRR)of a project if the discount rate is decreased from 9% to 7%?

Accepted Answer

A) IRR will always increase. 
B) The discount rate change will not affect IRR. 
C) IRR will always decrease. 
D) We cannot determine the direction of the effect on IRR from the information provided. 
A) IRR will always increase. 
B) The discount rate change will not affect IRR. 
C) IRR will always decrease. 
D) We cannot determine the direction of the effect on IRR from the information provided.

Question 8

"A measure of profitability computed by dividing the average annual operating income by the amount of the investment" is best described by which of the following terms?

Accepted Answer

A) Net present value 
B) Discount rate 
C) Internal rate of return 
D) Accounting rate of return 
A) Net present value 
B) Discount rate 
C) Internal rate of return 
D) Accounting rate of return

Question 9

Which of the following is a weakness of the internal rate of return (IRR)?

Accepted Answer

A) IRR assumes that the cash inflows from the project are immediately reinvested at the minimum required rate of return. 
B) IRR ignores the time value of money. 
C) IRR assumes that the cash inflows from the project are immediately reinvested at the internal rate of return. 
D) IRR is not a percentage rate, but is expressed in dollars. 
A) IRR assumes that the cash inflows from the project are immediately reinvested at the minimum required rate of return. 
B) IRR ignores the time value of money. 
C) IRR assumes that the cash inflows from the project are immediately reinvested at the internal rate of return. 
D) IRR is not a percentage rate, but is expressed in dollars.

Question 10

Redwood Corporation is considering two alternative investment proposals with the following data:   How long is the payback period for Proposal X?

Accepted Answer

A) 10.00 years 
B) 6)14 years 
C) 6)15 years 
D) 12.00 years 
A) 10.00 years 
B) 6)14 years 
C) 6)15 years 
D) 12.00 years

Question 11

In what ways are the Payback Period and Accounting Rate of Return methods of capital budgeting alike?

Accepted Answer

A) They both ignore time value of money. 
B) They both focus on the time to recover the initial investment. 
C) They both focus on GAAP. 
D) They both measure the average profitability over the asset's life. 
A) They both ignore time value of money. 
B) They both focus on the time to recover the initial investment. 
C) They both focus on GAAP. 
D) They both measure the average profitability over the asset's life.

Question 12

Sunnyside Corporation is evaluating a capital investment project which would require an initial investment of $200,000 to purchase new machinery. The annual revenues and expenses generated specifically by this project each year during the project's nine year life would be:   The residual value of the machinery at the end of the nine years would be $18,000. The payback period of this potential project in years would be closest to

Accepted Answer

A) 1)8. 
B) 2)3. 
C) 3)2. 
D) 1)20. 
A) 1)8. 
B) 2)3. 
C) 3)2. 
D) 1)20.

Question 13

The ________ capital budgeting methods are based on cash flows, profitability, and the time value of money.

Accepted Answer

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

Which of the following items would be considered a capital asset?

The profitability index equals the present value of net cash inflows from the investment divided by the cost of the investment.

The term ________ is best described as "a stream of equal installments made at equal time intervals."

What will happen to the internal rate of return (IRR)of a project if the discount rate is decreased from 9% to 7%?

"A measure of profitability computed by dividing the average annual operating income by the amount of the investment" is best described by which of the following terms?

Which of the following is a weakness of the internal rate of return (IRR)?

Redwood Corporation is considering two alternative investment proposals with the following data: How long is the payback period for Proposal X?

In what ways are the Payback Period and Accounting Rate of Return methods of capital budgeting alike?

The ________ capital budgeting methods are based on cash flows, profitability, and the time value of money.

Introduction to Managerial Accounting

Building Blocks of Managerial Accounting

Job Costing

Activity-Based Costing, Lean Operations, and the Costs of Quality

Process Costing

Cost Behavior

Cost-Volume-Profit Analysis

Relevant Costs for Short-Term Decisions

The Master Budget

Performance Evalulation

Standard Costs and Variances

Statement of Cash Flows

Financial Statement Analysis

Sustainability

Filters

Exam 12: Capital Investment Decisions and the Time Value of Money

Which of the following items would be considered a capital asset?

The profitability index equals the present value of net cash inflows from the investment divided by the cost of the investment.

The term ________ is best described as "a stream of equal installments made at equal time intervals."

What will happen to the internal rate of return (IRR)of a project if the discount rate is decreased from 9% to 7%?

"A measure of profitability computed by dividing the average annual operating income by the amount of the investment" is best described by which of the following terms?

Which of the following is a weakness of the internal rate of return (IRR)?

Redwood Corporation is considering two alternative investment proposals with the following data: How long is the payback period for Proposal X?

In what ways are the Payback Period and Accounting Rate of Return methods of capital budgeting alike?

The ________ capital budgeting methods are based on cash flows, profitability, and the time value of money.

Introduction to Managerial Accounting

Building Blocks of Managerial Accounting

Job Costing

Activity-Based Costing, Lean Operations, and the Costs of Quality

Process Costing

Cost Behavior

Cost-Volume-Profit Analysis

Relevant Costs for Short-Term Decisions

The Master Budget

Performance Evalulation

Standard Costs and Variances

Statement of Cash Flows

Financial Statement Analysis

Sustainability

Filters