Question 1

The initial investment in working capital is usually recovered

Accepted Answer

A) in year 0. 
B) in year 1. 
C) when the project is terminated. 
D) in equal portions, with the recovery of the initial investment, based on the matching of revenues and all costs. 
E) as soon as the RRR is achieved. 
A) in year 0. 
B) in year 1. 
C) when the project is terminated. 
D) in equal portions, with the recovery of the initial investment, based on the matching of revenues and all costs. 
E) as soon as the RRR is achieved.

Question 2

Use the information below to answer the following question(s).Saturn Ltd.wants to automate one of its production processes.The new equipment will cost $180,000.In addition, Saturn will incur installation and testing costs of $5,000 and $8,500 respectively.The expected life of the equipment is 8 years and the salvage value of the equipment is estimated at $18,000.The annual cash savings are estimated at $32,000.The company uses straight-line depreciation and has a required rate of return of 14%.Ignore income taxes.
-What is the accrual accounting rate of return for the investment Saturn Ltd.is considering?

Accepted Answer

A) 5.2% 
B) 16.5% 
C) 4.0% 
D) 5.9% 
E) 11.0% 
A) 5.2% 
B) 16.5% 
C) 4.0% 
D) 5.9% 
E) 11.0%

Question 3

Which of the following is NOT a part of the capital budgeting decision process model?

Accepted Answer

A) Determine which investment yields the greatest benefit and the least cost to the organization. 
B) Track realized cash flows, compare against estimated numbers, and revise plans if necessary. 
C) Forecast all potential cash flows attributable to the alternative projects. 
D) Manage the control of non-quantitative factors. 
E) Identify potential capital investments that agree with the organization's strategy. 
A) Determine which investment yields the greatest benefit and the least cost to the organization. 
B) Track realized cash flows, compare against estimated numbers, and revise plans if necessary. 
C) Forecast all potential cash flows attributable to the alternative projects. 
D) Manage the control of non-quantitative factors. 
E) Identify potential capital investments that agree with the organization's strategy.

Question 4

Which of the following statements is TRUE?

Accepted Answer

A) The accounting book value for all assets in a class equals the UCC for that class. 
B) The CCA claimed does not affect cash outflows. 
C) The total CCA available over the life of the asset depends on the method of depreciation used. 
D) Since CCA does not involve a cash expenditure, it can be ignored in capital-budgeting decisions. 
E) The depreciation method used does not affect cash inflows from operations. 
A) The accounting book value for all assets in a class equals the UCC for that class. 
B) The CCA claimed does not affect cash outflows. 
C) The total CCA available over the life of the asset depends on the method of depreciation used. 
D) Since CCA does not involve a cash expenditure, it can be ignored in capital-budgeting decisions. 
E) The depreciation method used does not affect cash inflows from operations.

Question 5

After-tax cash operating flows are equal to

Accepted Answer

A) (one minus the tax rate)times (net income). 
B) (one minus the tax rate)times (operating income)plus CCA. 
C) (one minus the tax rate)times (sales less costs excluding CC
A) . 
D) sales less (one minus the tax rate)times (cash costs). 
E) (one minus the tax rate)times (sales less costs including CC
A) . 
A) (one minus the tax rate)times (net income). 
B) (one minus the tax rate)times (operating income)plus CCA. 
C) (one minus the tax rate)times (sales less costs excluding CC
A) . 
D) sales less (one minus the tax rate)times (cash costs). 
E) (one minus the tax rate)times (sales less costs including CC
A) .

Question 6

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.
-Wagner Ltd.is considering investing in a new piece of equipment for its factory.It estimates that annual cash flows would be $17,000 and the equipment would last for 8 years.The company's required rate of return is 12%.What is the most that the company should be willing to invest in this equipment? (Ignore income taxes.)

Accepted Answer

A) $84,450 
B) $136,000 
C) $61,280 
D) $128,115 
E) $94,580 
A) $84,450 
B) $136,000 
C) $61,280 
D) $128,115 
E) $94,580

Question 7

A new machine will cost $720,000.It is in a CCA class pool that uses a declining balance rate of 20%.The company's tax rate is 42% and it requires a 12% 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) $60,480.00 
B) $54,000.00 
C) $27,000.00 
D) $30,240.00 
E) $37,285.71 
A) $60,480.00 
B) $54,000.00 
C) $27,000.00 
D) $30,240.00 
E) $37,285.71

Question 8

Fabian Company is considering the purchase of a piece of materials-handling equipment:
   Depreciation method: straight line
Required:
a.Calculate the payback period.
b.Calculate the accrual accounting rate of return.

Accepted Answer

a.Payback = $125,000/$35,000 =

Question 9

If the net present value analyses of a project resulted in a positive value and the company does not accept the project, it may be assumed that

Accepted Answer

A) qualitative factors outweigh the benefit of the investment. 
B) an alternative project has a lower NPV. 
C) the net initial investment cannot be recovered. 
D) the return is greater than that required by the company. 
E) quantitative factors outweigh the benefit of the investment. 
A) qualitative factors outweigh the benefit of the investment. 
B) an alternative project has a lower NPV. 
C) the net initial investment cannot be recovered. 
D) the return is greater than that required by the company. 
E) quantitative factors outweigh the benefit of the investment.

Question 10

Businesses may opt not to claim the full amount of available capital cost allowance.

Accepted Answer

A) True 
 B)False

Question 11

A company is considering purchasing two different high-speed photocopiers.The regular model costs $4,500 and the deluxe model costs $6,100.The company has projected cash savings of $800 for the first year, and then $850 annually thereafter for both models, but the vendor is claiming that the deluxe model is $400 cheaper per year to operate than the regular model.What are the payback periods for the Regular and Deluxe models respectively assuming that the vendor is correct?

Accepted Answer

A) 4.88 years; 5.63 years 
B) 5.08 years; 5.29 years 
C) 5.29 years; 4.88 years 
D) 5.29 years; 5.63 years 
E) 5.35 years; 4.92 years 
A) 4.88 years; 5.63 years 
B) 5.08 years; 5.29 years 
C) 5.29 years; 4.88 years 
D) 5.29 years; 5.63 years 
E) 5.35 years; 4.92 years

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.
-Brown Corporation recently purchased a new machine for $339,013.20.The new equipment has a useful life of 10 years.Net cash flows will be $60,000 per year, end of year payments.What is the internal rate of return?

Accepted Answer

A) 10 percent 
B) 12 percent 
C) 14 percent 
D) 16 percent 
E) 18 percent 
A) 10 percent 
B) 12 percent 
C) 14 percent 
D) 16 percent 
E) 18 percent

Question 13

Which of the following is not a relevant cash flow in capital budgeting?

Accepted Answer

A) after-tax cash flow from current disposal of old asset 
B) after-tax cash flow from future disposal of asset at life's end 
C) after-tax cash flow from accumulated depreciation 
D) initial asset investment of the replacement machine 
E) after-tax annual cash flows relating to the new asset 
A) after-tax cash flow from current disposal of old asset 
B) after-tax cash flow from future disposal of asset at life's end 
C) after-tax cash flow from accumulated depreciation 
D) initial asset investment of the replacement machine 
E) after-tax annual cash flows relating to the new asset

Question 14

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 situations where the required rate of return is not constant for each year of the project, it is advantageous to use

Accepted Answer

A) the adjusted rate of return method. 
B) the internal rate of return method. 
C) the net present value method. 
D) sensitivity analysis. 
E) the payback method. 
A) the adjusted rate of return method. 
B) the internal rate of return method. 
C) the net present value method. 
D) sensitivity analysis. 
E) the payback method.

Question 15

Internal rate of return is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.

Accepted Answer

A) True 
 B)False

Question 16

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.
-What is the internal rate of return of the Neptune Ltd.investment?

Accepted Answer

A) 13.62% 
B) 12.75% 
C) 10.00% 
D) 6.86% 
E) 18.00% 
A) 13.62% 
B) 12.75% 
C) 10.00% 
D) 6.86% 
E) 18.00%

Question 17

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 statements about the net present value method is TRUE?

Accepted Answer

A) Projects with higher net present values are preferred when all other factors are equal. 
B) Projects with negative NPV are acceptable, if no positive NPV projects are available. 
C) It focuses on operating income. 
D) The origination of cash flows is not important in the analysis. 
E) Acceptable projects are those with the highest discount rate. 
A) Projects with higher net present values are preferred when all other factors are equal. 
B) Projects with negative NPV are acceptable, if no positive NPV projects are available. 
C) It focuses on operating income. 
D) The origination of cash flows is not important in the analysis. 
E) Acceptable projects are those with the highest discount rate.

Question 18

Capital budgeting focuses on projects over their entire lives to consider all the cash flows or cash savings from investing in a single project.

Accepted Answer

A) True 
 B)False

Question 19

Projects with shorter paybacks always generate more cash flows.

Accepted Answer

A) True 
 B)False

Question 20

Capital cost allowance is the income tax version of financial reporting depreciation.

Accepted Answer

A) True 
 B)False

The initial investment in working capital is usually recovered

Which of the following is NOT a part of the capital budgeting decision process model?

Which of the following statements is TRUE?

After-tax cash operating flows are equal to

A new machine will cost $720,000.It is in a CCA class pool that uses a declining balance rate of 20%.The company's tax rate is 42% and it requires a 12% rate of return on investments.Calculate the present value of the the tax shield the first year assuming the savings occur at year end.

Fabian Company is considering the purchase of a piece of materials-handling equipment: Depreciation method: straight line Required: a.Calculate the payback period. b.Calculate the accrual accounting rate of return.

If the net present value analyses of a project resulted in a positive value and the company does not accept the project, it may be assumed that

Businesses may opt not to claim the full amount of available capital cost allowance.

Which of the following is not a relevant cash flow in capital budgeting?

Internal rate of return is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.

Capital budgeting focuses on projects over their entire lives to consider all the cash flows or cash savings from investing in a single project.

Projects with shorter paybacks always generate more cash flows.

Capital cost allowance is the income tax version of financial reporting depreciation.

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 initial investment in working capital is usually recovered

Which of the following is NOT a part of the capital budgeting decision process model?

Which of the following statements is TRUE?

After-tax cash operating flows are equal to

A new machine will cost $720,000.It is in a CCA class pool that uses a declining balance rate of 20%.The company's tax rate is 42% and it requires a 12% rate of return on investments.Calculate the present value of the the tax shield the first year assuming the savings occur at year end.

Fabian Company is considering the purchase of a piece of materials-handling equipment: Depreciation method: straight line Required: a.Calculate the payback period. b.Calculate the accrual accounting rate of return.

If the net present value analyses of a project resulted in a positive value and the company does not accept the project, it may be assumed that

Businesses may opt not to claim the full amount of available capital cost allowance.

Which of the following is not a relevant cash flow in capital budgeting?

Internal rate of return is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.

Capital budgeting focuses on projects over their entire lives to consider all the cash flows or cash savings from investing in a single project.

Projects with shorter paybacks always generate more cash flows.

Capital cost allowance is the income tax version of financial reporting depreciation.

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