Question 1

The profitability index is also known as

Accepted Answer

A) future value index. 
B) residual value index. 
C) investment index. 
D) present value index. 
A) future value index. 
B) residual value index. 
C) investment index. 
D) present value index.

Question 2

A company is evaluating a variety of different capital investment opportunities. Due to limited funds, the company can only choose one project. What would be the best capital budgeting method for this company to use to select a project?

Accepted Answer

A) Payback method 
B) Accounting rate of return method 
C) Profitability index 
D) Net present value method 
A) Payback method 
B) Accounting rate of return method 
C) Profitability index 
D) Net present value method

Question 3

Matthew Corporation is adding a new product line that will require an investment of $218,000. The product line is estimated to generate cash inflows of $32,000 the first year, $18,000 the second year, and $21,000 each year thereafter for ten more years. What is the payback period?

Accepted Answer

A) 11.17 years 
B) 8)56 years 
C) 10.00 years 
D) 10.42 years 
A) 11.17 years 
B) 8)56 years 
C) 10.00 years 
D) 10.42 years

Question 4

The net present value model differs from the IRR model in that it does NOT show the project's unique rate of return.

Accepted Answer

A) True 
 B)False

Question 5

The principal amount, the interest rate, and the number of periods are all factors needed to calculate the time value of money.

Accepted Answer

A) True 
 B)False

Question 6

Dandy's Family Fun Center bought new go-karts for its recreation facility. The useful life is 7 years. The go-karts had a total cost of $4400 and will generate $1100 total cash inflows each year for the life of the go-karts. The residual value of the go-karts is $550. The payback period in years is closest to

Accepted Answer

A) 4)50. 
B) 4)00. 
C) 3)50. 
D) 2)67. 
A) 4)50. 
B) 4)00. 
C) 3)50. 
D) 2)67.

Question 7

The ________ capital budgeting method uses accrual accounting income.

Accepted Answer

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

Question 8

Accrual-based accounting is not used in determining the accounting rate of return.

Accepted Answer

A) True 
 B)False

Question 9

Smith & Cramer, Computer Repair, is considering an investment in computer and network equipment costing $240,000. This equipment would allow them to offer new programming services to clients. The equipment will be depreciated on the straight-line basis over an eight-year period with an estimated residual value of $50,000. Using the accounting rate of return model, what is the minimum average annual operating income that must be generated from this investment in order to achieve an 11% accounting rate of return?

Accepted Answer

A) $5500 
B) $20,900 
C) $31,900 
D) $26,400 
A) $5500 
B) $20,900 
C) $31,900 
D) $26,400

Question 10

All else being equal, a company would choose to invest in a capital asset if which of the following is true?

Accepted Answer

A) If the payback period equals the amount invested 
B) If the expected accounting rate of return is less than the required rate of return 
C) If the expected accounting rate of return is greater than the required rate of return 
D) If the average amount invested is equal to the net cash inflows 
A) If the payback period equals the amount invested 
B) If the expected accounting rate of return is less than the required rate of return 
C) If the expected accounting rate of return is greater than the required rate of return 
D) If the average amount invested is equal to the net cash inflows

Question 11

Dandy's Fun Park is evaluating the purchase of a new game to be located on its Midway. Dandy's has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game. Financial data about the two choices follows.   What is the net present value of the Whack-A-Mole game?
Present Value of $1
  Present Value of Annuity of $1

Accepted Answer

A) $9520 
B) ($9936) 
C) $9936 
D) ($9520) 
A) $9520 
B) ($9936) 
C) $9936 
D) ($9520)

Question 12

The term ________ is described as a "formal means of analyzing long-range investment alternatives."

Accepted Answer

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

Question 13

The payback method primarily focuses on profitability and not time.

Accepted Answer

A) True 
 B)False

Question 14

Somerville Corporation is considering investing in specialized equipment costing $693,000. The equipment has a useful life of 5 years and a residual value of $53,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are:   Somerville Corporation's required rate of return is 14%.
Is the internal rate of return of the investment equal to, higher than, or lower than 14%?
Present Value of $1
  Present Value of Annuity of $1

Accepted Answer

A) Equal to 14% 
B) higher than 14% 
C) lower than 14% 
D) Cannot be determined from the given data 
A) Equal to 14% 
B) higher than 14% 
C) lower than 14% 
D) Cannot be determined from the given data

Question 15

Assuming an interest rate of 10%, the present value of $20,000 to be received 10 years from now would be closest to: Present Value of $1
  Present Value of Annuity of $1

Accepted Answer

A) $11,280. 
B) $7720. 
C) $51,880. 
D) $47,160. 
A) $11,280. 
B) $7720. 
C) $51,880. 
D) $47,160.

Question 16

What will happen to the net present value (NPV)of a project if the discount rate is increased from 8% to 10%?

Accepted Answer

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

Question 17

Cleveland Cove Enterprises is evaluating the purchase of an elaborate hydraulic lift system for all of its locations to use for the boats brought in for repair. The company has narrowed their choices down to two: the B14 Model and the F54 Model. Financial data about the two choices follows.   What is the net present value of the F54 Model?
Present Value of $1
  Present Value of Annuity of $1

Accepted Answer

A) $42,280 positive 
B) $80,089 negative 
C) $199,911 positive 
D) $332,000 positive 
A) $42,280 positive 
B) $80,089 negative 
C) $199,911 positive 
D) $332,000 positive

Question 18

Capital budgeting techniques such as payback method and net present value are based upon Generally Accepted Accounting Principles (GAAP)and accrual accounting.

Accepted Answer

A) True 
 B)False

Question 19

An accounting student in her first year of college who is working on a 4-year degree receives from her parents $200 in her first year. As an incentive to encourage her to graduate, they promise that in the second year she will receive double the amount of the first year, and in the third year she will receive double the amount of the second year. In her fourth year, she will receive $1,000. If she invests her yearly gifts at a rate of 4% as she receives them, compare the value of the investment after five years with the value of the gift (present value). What is the investment loss if the gift is not invested?
Future Value of $1
   Future Value of Annuity of $1

Accepted Answer

The answer of An accounting student in her first year...

Question 20

Mystic Metal Stamping is analyzing a special investment project. The project will require the purchase of two machines for $25,000 and $10,000 (both machines are required). The total residual value at the end of the project is $1000. The project will generate cash inflows of $11,000 per year over its 10-year life. If Mystic requires a 6% return, what is the net present value (NPV)of this project? Present Value of $1
  Present Value of Annuity of $1

Accepted Answer

A) $45,960 
B) $16,243 
C) $15,380 
D) $46,518 
A) $45,960 
B) $16,243 
C) $15,380 
D) $46,518

The profitability index is also known as

A company is evaluating a variety of different capital investment opportunities. Due to limited funds, the company can only choose one project. What would be the best capital budgeting method for this company to use to select a project?

Matthew Corporation is adding a new product line that will require an investment of $218,000. The product line is estimated to generate cash inflows of $32,000 the first year, $18,000 the second year, and $21,000 each year thereafter for ten more years. What is the payback period?

The net present value model differs from the IRR model in that it does NOT show the project's unique rate of return.

The principal amount, the interest rate, and the number of periods are all factors needed to calculate the time value of money.

The ________ capital budgeting method uses accrual accounting income.

Accrual-based accounting is not used in determining the accounting rate of return.

All else being equal, a company would choose to invest in a capital asset if which of the following is true?

The term ________ is described as a "formal means of analyzing long-range investment alternatives."

The payback method primarily focuses on profitability and not time.

Assuming an interest rate of 10%, the present value of $20,000 to be received 10 years from now would be closest to: Present Value of $1 Present Value of Annuity of $1

What will happen to the net present value (NPV)of a project if the discount rate is increased from 8% to 10%?

Capital budgeting techniques such as payback method and net present value are based upon Generally Accepted Accounting Principles (GAAP)and accrual accounting.

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

The profitability index is also known as

A company is evaluating a variety of different capital investment opportunities. Due to limited funds, the company can only choose one project. What would be the best capital budgeting method for this company to use to select a project?

Matthew Corporation is adding a new product line that will require an investment of $218,000. The product line is estimated to generate cash inflows of $32,000 the first year, $18,000 the second year, and $21,000 each year thereafter for ten more years. What is the payback period?

The net present value model differs from the IRR model in that it does NOT show the project's unique rate of return.

The principal amount, the interest rate, and the number of periods are all factors needed to calculate the time value of money.

The ________ capital budgeting method uses accrual accounting income.

Accrual-based accounting is not used in determining the accounting rate of return.

All else being equal, a company would choose to invest in a capital asset if which of the following is true?

The term ________ is described as a "formal means of analyzing long-range investment alternatives."

The payback method primarily focuses on profitability and not time.

Assuming an interest rate of 10%, the present value of $20,000 to be received 10 years from now would be closest to: Present Value of $1 Present Value of Annuity of $1

What will happen to the net present value (NPV)of a project if the discount rate is increased from 8% to 10%?

Capital budgeting techniques such as payback method and net present value are based upon Generally Accepted Accounting Principles (GAAP)and accrual accounting.

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