Question 1

The net present value method is a discounted cash flow method that concentrates on cash accruals.

Accepted Answer

A) True 
 B)False

Question 2

Use the information below to answer the following question(s).Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine.The existing machine is operable for three more years and will have a zero disposal price.If the machine is disposed of now, it may be sold for $30,000.The new machine will cost $200,000, an additional cash investment in working capital of $60,000 will be required and will be returned at the end of the project.The machine is expected to last 3 years and has an estimated disposal value at that time of $20,000.The new machine will reduce the average amount of time required to wash clothing and will decrease labour costs.The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $150,000 each additional year of use.These cash flows will generally occur throughout the year and are recognized at the end of each year.Income taxes are not considered in this problem.
-Weston Ltd.is considering investing in a new piece of equipment for its factory.It estimates that the machine will generate an additional $120,000 per year in revenues.The contribution margin on these incremental revenues is estimated at 40%.Incremental annual fixed costs are estimated to be $8,200.The equipment would have a salvage value of $14,000 at the end of 6 years.The company's required rate of return is 13%.What is the net present value of this investment if the equipment costs $250,000? (Ignore income taxes.)

Accepted Answer

A) $2,800 
B) ($51,393) 
C) $204,803 
D) $11,768 
E) ($84,173) 
A) $2,800 
B) ($51,393) 
C) $204,803 
D) $11,768 
E) ($84,173)

Question 3

Cost analysis has two dimensions, which are

Accepted Answer

A) financial and non-financial. 
B) present and the future. 
C) project and financial. 
D) project and non-financial. 
E) project and time. 
A) financial and non-financial. 
B) present and the future. 
C) project and financial. 
D) project and non-financial. 
E) project and time.

Question 4

A comparison of year-to-year changes in customer net present value estimates

Accepted Answer

A) is one way to be certain of the customer evaluation process. 
B) highlights whether managers have been successful in maintaining long-run profitable relationships with their customers. 
C) can be used to motivate customers. 
D) is difficult to calculate because of the need to know the customers' cost of capital. 
E) can be used in place of the payback method. 
A) is one way to be certain of the customer evaluation process. 
B) highlights whether managers have been successful in maintaining long-run profitable relationships with their customers. 
C) can be used to motivate customers. 
D) is difficult to calculate because of the need to know the customers' cost of capital. 
E) can be used in place of the payback method.

Question 5

Use the information below to answer the following question(s).Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine.The existing machine is operable for three more years and will have a zero disposal price.If the machine is disposed of now, it may be sold for $30,000.The new machine will cost $200,000, an additional cash investment in working capital of $60,000 will be required and will be returned at the end of the project.The machine is expected to last 3 years and has an estimated disposal value at that time of $20,000.The new machine will reduce the average amount of time required to wash clothing and will decrease labour costs.The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $150,000 each additional year of use.These cash flows will generally occur throughout the year and are recognized at the end of each year.Income taxes are not considered in this problem.
-Which of the following results of net present value analyses is the LEAST acceptable?

Accepted Answer

A) $(15,000) 
B) $(1,000) 
C) $12,000 
D) $0 
E) $20,000 
A) $(15,000) 
B) $(1,000) 
C) $12,000 
D) $0 
E) $20,000

Question 6

The Income Tax Act does not permit a company to deduct depreciation expense in the calculation of taxable income.

Accepted Answer

A) True 
 B)False

Question 7

The terminal disposal price of a replacement machine

Accepted Answer

A) generally increases cash inflow in the year of disposal. 
B) is the total of the salvage values of the old machine and the new machine. 
C) is the salvage value of the old machine. 
D) is the NPV value of the new machine salvage value. 
E) is the NPV of the salvage value of the old machine. 
A) generally increases cash inflow in the year of disposal. 
B) is the total of the salvage values of the old machine and the new machine. 
C) is the salvage value of the old machine. 
D) is the NPV value of the new machine salvage value. 
E) is the NPV of the salvage value of the old machine.

Question 8

Anderson Equipment Manufacturing produces equipment for the natural gas industry.The company management is considering purchasing new controllers for the fabricating machines.The new controllers are expected to increase efficiency and product quality.The engineering staff estimate that annual net cash savings from increased efficiency will be $35,000 per year for four years.The existing controllers can be sold for $8,000.The new controllers have a purchase price of $75,000 and will require installation costs in the amount of $4,500.The annual software contract for the new controllers is $1,700; the controllers will be depreciated using the straight-line method.The salvage value of the new controllers at the end of four years is estimated to be $10,000.The company has a required rate of return of 15%.Required:
a.Determine the net present value of the investment in the new controllers.
b.Calculate the internal rate of return of the investment in the new controllers.

Accepted Answer

CF0 = $8,000 - $75,000 - $4,50

Question 9

Johnson's Mini Mart is considering the purchase of a new electronic bar code scanner that will keep detailed records of every sale transaction.The scanner is likely to have little effect on operating revenues and expenses.Its acquisition is primarily for increasing management information about sales.The scanner costs $4,600 and would be included in Class 8 for tax purposes.Johnson's accountant has stated that due to the fast write-off of Class 8 assets (20% CCA rate), its real cost is less than $4,600.Due to technological obsolescence, it would have zero salvage value.Required:
a.Since the bar code scanner cannot produce a profit or even show short run savings, should it even be evaluated as a capital budgeting expenditure? Explain.
b.Explain whether or not the real cost is less than $4,600.
c.If the company has a 40 percent tax rate and a 10% discount rate, compute the real cost of the bar code scanner.Assume there would be other assets in the class.

Accepted Answer

a.Yes, it represents an expenditure that

Question 10

Use the information below to answer the following question(s).Hawkeye Cleaners has been considering the purchase of an industrial dry-cleaning machine.The existing machine is operable for three more years and will have a zero disposal price.If the machine is disposed of now, it may be sold for $30,000.The new machine will cost $200,000, an additional cash investment in working capital of $60,000 will be required and will be returned at the end of the project.The machine is expected to last 3 years and has an estimated disposal value at that time of $20,000.The new machine will reduce the average amount of time required to wash clothing and will decrease labour costs.The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $150,000 each additional year of use.These cash flows will generally occur throughout the year and are recognized at the end of each year.Income taxes are not considered in this problem.
-Easton Ltd.is considering investing in a new piece of machinery for its factory.The machine costs $340,000 and is expected to last 7 years.It estimates that annual cash flows would be $82,000 and the equipment would have a salvage value of $13,000.The company's hurdle rate is 11%.What is the net present value of this investment? (Ignore income taxes.)

Accepted Answer

A) $87,625 
B) $46,400 
C) $52,662 
D) $234,000 
E) $247,000 
A) $87,625 
B) $46,400 
C) $52,662 
D) $234,000 
E) $247,000

Question 11

Use the information below to answer the following question(s).Albernie Ltd.purchased a CCA Class 8 (CCA rate of 20%)item of equipment for $90,000.The equipment was the only item in the Class 8 capital cost allowance pool.The equipment is expected to generate savings in the amount of $40,000 per year.The company uses straight-line depreciation, estimates a 3 year useful life with $20,000 salvage value for the new equipment.The tax rate is 35%, and Albernie has a required rate of return of 9.0%.
-What is the maximum capital cost allowance that Albernie Ltd.can claim in year 2, if the maximum was claimed in year 1?

Accepted Answer

A) $11,200 
B) $12,600 
C) $18,000 
D) $16,200 
E) $14,400 
A) $11,200 
B) $12,600 
C) $18,000 
D) $16,200 
E) $14,400

Question 12

Use the information below to answer the following question(s).Wet Water Company drills residential and commercial wells.The company is in the process of analyzing the purchase of a new drill.Information on the proposal is provided below:
   Note: Other than the initial investment, cash flows are end of period.The working capital is returned at the end of the investment period.
-In what range is the internal rate of return for the Wet Water Company's new drill?

Accepted Answer

A) 8 percent to 12 percent 
B) 12 percent to 16 percent 
C) 16 percent to 20 percent 
D) 20 percent to 24% 
E) greater than 24% 
A) 8 percent to 12 percent 
B) 12 percent to 16 percent 
C) 16 percent to 20 percent 
D) 20 percent to 24% 
E) greater than 24%

Question 13

A new machine will cost $500,000.It is in a CCA class pool that uses a declining balance rate of 30%.The company's tax rate is 40% and it requires a 15% rate of return on investments.Calculate the present value of the the tax shield the first year assuming the savings occur at year end.

Accepted Answer

A) $126,998.42 
B) $78,214.34 
C) $52,173.91 
D) $119,765.22 
E) $26,086.96 
A) $126,998.42 
B) $78,214.34 
C) $52,173.91 
D) $119,765.22 
E) $26,086.96

Question 14

Use the information below to answer the following question(s).Jupiter Ltd.wants to automate one of its production processes.The new equipment will cost $90,000.In addition, Jupiter will incur installation and testing costs of $5,000 and $4,500 respectively.The expected life of the equipment is 5 years and the salvage value of the equipment is estimated at $12,000.The annual cash savings are estimated at $29,000.The company uses straight-line depreciation and has a required rate of return of 9%.Ignore income taxes.
-Which of the following is TRUE concerning capital budgeting analysis?

Accepted Answer

A) The IRR and AARR consider the time value of money. 
B) The payback method and the AARR both consider profitability. 
C) NPV and IRR consider accruals. 
D) The payback method and the AARR both consider profitability, and NPV and IRR do not consider accruals. 
E) NPV and IRR do not consider accruals, and the IRR considers the time value, but AARR does not. 
A) The IRR and AARR consider the time value of money. 
B) The payback method and the AARR both consider profitability. 
C) NPV and IRR consider accruals. 
D) The payback method and the AARR both consider profitability, and NPV and IRR do not consider accruals. 
E) NPV and IRR do not consider accruals, and the IRR considers the time value, but AARR does not.

Question 15

The net present value method is preferable over the internal rate of return method when an organization does not require the same rate of return each year of the project.

Accepted Answer

A) True 
 B)False

Question 16

A company is considering purchasing a new machine, at a cost of $50,000.This amount will be written off over 5 years at $10,000 per year.In the first year the company will have to increase its accounts receivable by $4,000, and inventory by $8,000.The disposal value of the machine being replaced is $1,500 and will be used to offset the amount borrowed for the new machine.What is the initial working capital investment required for the purpose of capital budgeting?

Accepted Answer

A) $8,000 
B) $60,500 
C) $10,500 
D) $12,000 
E) $4,000 
A) $8,000 
B) $60,500 
C) $10,500 
D) $12,000 
E) $4,000

Question 17

In selecting capital projects, organizations choose

Accepted Answer

A) the alternative that matches the RRR. 
B) the alternative that has revenues that exceed its costs. 
C) the alternative that has the highest revenues. 
D) the alternative that has the longest time horizon, but also exceeds the RRR. 
E) the alternative that provides benefits that exceed predicted costs by the greatest amount. 
A) the alternative that matches the RRR. 
B) the alternative that has revenues that exceed its costs. 
C) the alternative that has the highest revenues. 
D) the alternative that has the longest time horizon, but also exceeds the RRR. 
E) the alternative that provides benefits that exceed predicted costs by the greatest amount.

Question 18

Use the information below to answer the following question(s).Neptune Ltd.wants to expand its operations by manufacturing a new product line.New equipment will cost $225,000.Incremental sales are estimated at $150,000 per year for 6 years.Variable costs of producing the new product line are 52% of sales and incremental annual fixed costs are $25,000.The equipment can be salvaged after 6 years for 16% of its original cost.The company's required rate of return for new projects is 18%.Ignore income taxes.
-The time value of money

Accepted Answer

A) is equal to the rate of inflation. 
B) includes the rate of inflation. 
C) is the same value for all companies. 
D) is equal to the bank prime rate. 
E) is the opportunity cost of not having the money today. 
A) is equal to the rate of inflation. 
B) includes the rate of inflation. 
C) is the same value for all companies. 
D) is equal to the bank prime rate. 
E) is the opportunity cost of not having the money today.

Question 19

The minimum capital cost allowance (CCA)that a corporation may claim in a given year is the undepreciated capital cost of a particular pool times the CCA rate for that pool.

Accepted Answer

A) True 
 B)False

Question 20

A decrease in the tax rate will decrease the net present value (NPV)for a given capital budgeting project.

Accepted Answer

A) True 
 B)False

The net present value method is a discounted cash flow method that concentrates on cash accruals.

Cost analysis has two dimensions, which are

A comparison of year-to-year changes in customer net present value estimates

The Income Tax Act does not permit a company to deduct depreciation expense in the calculation of taxable income.

The terminal disposal price of a replacement machine

A new machine will cost $500,000.It is in a CCA class pool that uses a declining balance rate of 30%.The company's tax rate is 40% and it requires a 15% rate of return on investments.Calculate the present value of the the tax shield the first year assuming the savings occur at year end.

The net present value method is preferable over the internal rate of return method when an organization does not require the same rate of return each year of the project.

In selecting capital projects, organizations choose

The minimum capital cost allowance (CCA)that a corporation may claim in a given year is the undepreciated capital cost of a particular pool times the CCA rate for that pool.

A decrease in the tax rate will decrease the net present value (NPV)for a given capital budgeting project.

The Accountants Vital Role in Decision Making

An Introduction to Cost Terms and Purposes

Cost-Volume-Profit Analysis

Job Costing

Activity-Based Costing and Management

Master Budget and Responsibility Accounting

Flexible Budgets, Variances, and Management Control: I

Flexible Budgets, Variances, and Management Control: II

Income Effects of Denominator Level on Inventory Valuation

Analysis of Cost Behaviour

Decision Making and Relevant Information

Pricing Decisions, Product Profitability Decisions, and Cost Management

Strategy, Balanced Scorecard, and Profitability Analysis

Period Cost Allocation

Cost Allocation: Joint Products and Byproducts

Revenue and Customer Profitability Analysis

Process Costing

Spoilage, Rework, and Scrap

Inventory Cost Management Strategies

Transfer Pricing and Multinational Management Control Systems

Multinational Performance Measurement and Compensation

Filters

Exam 20: Capital Budgeting: Methods of Investment Analysis

The net present value method is a discounted cash flow method that concentrates on cash accruals.

Cost analysis has two dimensions, which are

A comparison of year-to-year changes in customer net present value estimates

The Income Tax Act does not permit a company to deduct depreciation expense in the calculation of taxable income.

The terminal disposal price of a replacement machine

A new machine will cost $500,000.It is in a CCA class pool that uses a declining balance rate of 30%.The company's tax rate is 40% and it requires a 15% rate of return on investments.Calculate the present value of the the tax shield the first year assuming the savings occur at year end.

The net present value method is preferable over the internal rate of return method when an organization does not require the same rate of return each year of the project.

In selecting capital projects, organizations choose

The minimum capital cost allowance (CCA)that a corporation may claim in a given year is the undepreciated capital cost of a particular pool times the CCA rate for that pool.

A decrease in the tax rate will decrease the net present value (NPV)for a given capital budgeting project.

The Accountants Vital Role in Decision Making

An Introduction to Cost Terms and Purposes

Cost-Volume-Profit Analysis

Job Costing

Activity-Based Costing and Management

Master Budget and Responsibility Accounting

Flexible Budgets, Variances, and Management Control: I

Flexible Budgets, Variances, and Management Control: II

Income Effects of Denominator Level on Inventory Valuation

Analysis of Cost Behaviour

Decision Making and Relevant Information

Pricing Decisions, Product Profitability Decisions, and Cost Management

Strategy, Balanced Scorecard, and Profitability Analysis

Period Cost Allocation

Cost Allocation: Joint Products and Byproducts

Revenue and Customer Profitability Analysis

Process Costing

Spoilage, Rework, and Scrap

Inventory Cost Management Strategies

Transfer Pricing and Multinational Management Control Systems

Multinational Performance Measurement and Compensation

Filters