Question 1

What are the four alternative methods for evaluating capital budgeting projects? What is an advantage and disadvantage of each method?

Accepted Answer

The four methods are: 1. Net Present Val

Question 2

In using the net present value method, only projects with a zero or positive net present value are acceptable because:

Accepted Answer

A) the return from these projects equals or exceeds the cost of capital 
B) a positive net present value on a particular project guarantees company profitability 
C) the company will be able to pay the necessary payments on any loans secured to finance the project 
D) Both A and B are correct. 
A) the return from these projects equals or exceeds the cost of capital 
B) a positive net present value on a particular project guarantees company profitability 
C) the company will be able to pay the necessary payments on any loans secured to finance the project 
D) Both A and B are correct.

Question 3

The payback method of capital budgeting approach to the investment decision highlights:

Accepted Answer

A) cash flow over the life of the investment 
B) the liquidity of the investment 
C) the tax savings of the depreciation amounts 
D) having as lengthy payback time as possible 
A) cash flow over the life of the investment 
B) the liquidity of the investment 
C) the tax savings of the depreciation amounts 
D) having as lengthy payback time as possible

Question 4

Depreciation is usually NOT considered an operating cash flow in capital budgeting because:

Accepted Answer

A) depreciation is usually a constant amount each year over the life of the capital investment 
B) deducting depreciation from operating cash flows would be counting the lump-sum amount twice 
C) depreciation usually does not result in an increase in working capital 
D) depreciation usually has no effect on the disposal price of the machine 
A) depreciation is usually a constant amount each year over the life of the capital investment 
B) deducting depreciation from operating cash flows would be counting the lump-sum amount twice 
C) depreciation usually does not result in an increase in working capital 
D) depreciation usually has no effect on the disposal price of the machine

Question 5

Deducting depreciation from operating cash flows would result in counting the initial investment twice in a discounted cash flow analysis.

Accepted Answer

A) True 
 B)False

Question 6

Using capital budgeting techniques to track and (based on success to date)modify resource levels committed to staged R&D investments is called timed options.

Accepted Answer

A) True 
 B)False

Question 7

All of the following are methods that aid management in analyzing the expected results of capital budgeting decisions EXCEPT:

Accepted Answer

A) accrual accounting rate-of-return method 
B) discounted cash-flow method 
C) future-value cash-flow method 
D) payback method 
A) accrual accounting rate-of-return method 
B) discounted cash-flow method 
C) future-value cash-flow method 
D) payback method

Question 8

Net present value is calculated using the:

Accepted Answer

A) internal rate of return 
B) required rate of return 
C) rate of return required by the investment bankers 
D) None of these answers is correct. 
A) internal rate of return 
B) required rate of return 
C) rate of return required by the investment bankers 
D) None of these answers is correct.

Question 9

All of the following are major categories of cash flows in capital investment decisions EXCEPT:

Accepted Answer

A) the initial investment in machines and working capital 
B) recurring operating cash flows 
C) the initial working capital investment 
D) depreciation expense reported on the income statement 
A) the initial investment in machines and working capital 
B) recurring operating cash flows 
C) the initial working capital investment 
D) depreciation expense reported on the income statement

Question 10

Investment A requires a net investment of $1,600,000. The required rate of return is 12% for the four-year annuity. What are the annual cash inflows if the net present value equals 0? (rounded)

Accepted Answer

A) $378,966 
B) $526,836 
C) $549,696 
D) $591,466 
A) $378,966 
B) $526,836 
C) $549,696 
D) $591,466

Question 11

The stage of the capital budgeting process that distinguishes which types of capital expenditure projects are necessary to accomplish organization objectives is the:

Accepted Answer

A) identify projects stage 
B) make predictions stage 
C) obtain information stage 
D) make decisions by choosing among alternatives stage 
A) identify projects stage 
B) make predictions stage 
C) obtain information stage 
D) make decisions by choosing among alternatives stage

Question 12

The Zeron Corporation recently purchased a new machine for its factory operations at a cost of $921,250. The investment is expected to generate $250,000 in annual cash flows for a period of six years. The required rate of return is 14%. The old machine has a remaining life of six years. The new machine is expected to have zero value at the end of the six-year period. The disposal value of the old machine at the time of replacement is zero. What is the internal rate of return?

Accepted Answer

A) 15% 
B) 16% 
C) 17% 
D) 18% 
A) 15% 
B) 16% 
C) 17% 
D) 18%

Question 13

Explain why the term tax shield is used in conjunction with depreciation.

Accepted Answer

Depreciation tax deductions result in ta

Question 14

The reason to have a post-investment audits is:

Accepted Answer

A) they discourage mid-level managers from making overly optimistic estimates during the early stages of the capital budgeting process. 
B) they help alert senior management to problems in the implementation of the project. 
C) they are a means by which actual results can be compared to the costs and benefits expected. 
D) All of the above are correct. 
A) they discourage mid-level managers from making overly optimistic estimates during the early stages of the capital budgeting process. 
B) they help alert senior management to problems in the implementation of the project. 
C) they are a means by which actual results can be compared to the costs and benefits expected. 
D) All of the above are correct.

Question 15

In calculating the net initial investment cash flows, any increase in working capital required for the project should be included.

Accepted Answer

A) True 
 B)False

Question 16

What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and accrual accounting for performance evaluation? How can these conflicts be reduced?

Accepted Answer

Using accrual accounting to evaluate the

Question 17

The make predictions stage of the capital budgeting process consists of forecasting all potential net income additions that are attributable to the alternative projects.

Accepted Answer

A) True 
 B)False

Question 18

Soda Manufacturing Company provides vending machines for soft-drink manufacturers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of three years and the new equipment has a value of $52,650 with a three-year life. The expected additional cash inflows are $25,000 per year. What is the internal rate of return?

Accepted Answer

A) 20% 
B) 16% 
C) 10% 
D) 8% 
A) 20% 
B) 16% 
C) 10% 
D) 8%

Question 19

Bock Construction Company is considering four proposals for the construction of new loading facilities that will include the latest in ship loading/unloading equipment. After careful analysis, the company's accountant has developed the following information about the four proposals:
   Required:
How can this information be used in the decision-making process for the new loading facilities? Does it cause any confusion?

Accepted Answer

The managers can use the information to

Question 20

A capital budgeting project is accepted if the required rate of return equals or exceeds the internal rate of return.

Accepted Answer

A) True 
 B)False

What are the four alternative methods for evaluating capital budgeting projects? What is an advantage and disadvantage of each method?

In using the net present value method, only projects with a zero or positive net present value are acceptable because:

The payback method of capital budgeting approach to the investment decision highlights:

Depreciation is usually NOT considered an operating cash flow in capital budgeting because:

Deducting depreciation from operating cash flows would result in counting the initial investment twice in a discounted cash flow analysis.

Using capital budgeting techniques to track and (based on success to date)modify resource levels committed to staged R&D investments is called timed options.

All of the following are methods that aid management in analyzing the expected results of capital budgeting decisions EXCEPT:

Net present value is calculated using the:

All of the following are major categories of cash flows in capital investment decisions EXCEPT:

Investment A requires a net investment of $1,600,000. The required rate of return is 12% for the four-year annuity. What are the annual cash inflows if the net present value equals 0? (rounded)

The stage of the capital budgeting process that distinguishes which types of capital expenditure projects are necessary to accomplish organization objectives is the:

Explain why the term tax shield is used in conjunction with depreciation.

The reason to have a post-investment audits is:

In calculating the net initial investment cash flows, any increase in working capital required for the project should be included.

What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and accrual accounting for performance evaluation? How can these conflicts be reduced?

The make predictions stage of the capital budgeting process consists of forecasting all potential net income additions that are attributable to the alternative projects.

A capital budgeting project is accepted if the required rate of return equals or exceeds the internal rate of return.

The Accountants Role in the Organization

An Introduction to Cost Terms and Purposes

Cost-Volume-Profit Analysis

Job Costing

Activity-Based Costing and Activity-Based Management

Master Budget and Responsibility Accounting

Flexible Budgets, Direct-Cost Variances, and Management Control

Flexible Budgets, Overhead Cost Variances, and Management Control

Inventory Costing and Capacity Analysis

Determining How Costs Behave

Decision Making and Relevant Information

Pricing Decisions and Cost Management

Strategy, Balanced Scorecard, and Strategic Profitability Analysis

Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis

Allocation of Support-Department Costs, Common Costs, and Revenues

Cost Allocation: Joint Products and Byproducts

Process Costing

Spoilage, Rework, and Scrap

Balanced Scorecard: Quality, Time, and the Theory of Constraints

Inventory Management, Just-In-Time, and Simplified Costing Methods

Management Control Systems, Transfer Pricing, and Multinational Considerations

Performance Measurement, Compensation, and Multinational Considerations

Filters

Exam 21: Capital Budgeting and Cost Analysis

What are the four alternative methods for evaluating capital budgeting projects? What is an advantage and disadvantage of each method?

In using the net present value method, only projects with a zero or positive net present value are acceptable because:

The payback method of capital budgeting approach to the investment decision highlights:

Depreciation is usually NOT considered an operating cash flow in capital budgeting because:

Deducting depreciation from operating cash flows would result in counting the initial investment twice in a discounted cash flow analysis.

Using capital budgeting techniques to track and (based on success to date)modify resource levels committed to staged R&D investments is called timed options.

All of the following are methods that aid management in analyzing the expected results of capital budgeting decisions EXCEPT:

Net present value is calculated using the:

All of the following are major categories of cash flows in capital investment decisions EXCEPT:

Investment A requires a net investment of $1,600,000. The required rate of return is 12% for the four-year annuity. What are the annual cash inflows if the net present value equals 0? (rounded)

The stage of the capital budgeting process that distinguishes which types of capital expenditure projects are necessary to accomplish organization objectives is the:

Explain why the term tax shield is used in conjunction with depreciation.

The reason to have a post-investment audits is:

In calculating the net initial investment cash flows, any increase in working capital required for the project should be included.

What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and accrual accounting for performance evaluation? How can these conflicts be reduced?

The make predictions stage of the capital budgeting process consists of forecasting all potential net income additions that are attributable to the alternative projects.

A capital budgeting project is accepted if the required rate of return equals or exceeds the internal rate of return.

The Accountants Role in the Organization

An Introduction to Cost Terms and Purposes

Cost-Volume-Profit Analysis

Job Costing

Activity-Based Costing and Activity-Based Management

Master Budget and Responsibility Accounting

Flexible Budgets, Direct-Cost Variances, and Management Control

Flexible Budgets, Overhead Cost Variances, and Management Control

Inventory Costing and Capacity Analysis

Determining How Costs Behave

Decision Making and Relevant Information

Pricing Decisions and Cost Management

Strategy, Balanced Scorecard, and Strategic Profitability Analysis

Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis

Allocation of Support-Department Costs, Common Costs, and Revenues

Cost Allocation: Joint Products and Byproducts

Process Costing

Spoilage, Rework, and Scrap

Balanced Scorecard: Quality, Time, and the Theory of Constraints

Inventory Management, Just-In-Time, and Simplified Costing Methods

Management Control Systems, Transfer Pricing, and Multinational Considerations

Performance Measurement, Compensation, and Multinational Considerations

Filters