Question 1

"Faster response to market changes" is a benefit of computer-integrated technology.

Accepted Answer

A) True 
 B)False  True

Question 2

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.
-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 NPV 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) E

Question 3

Explain capital budgeting, and then briefly discuss each of the six processes of the capital budgeting decision process model?

Accepted Answer

Capital budgeting is long-run planning for investment projects that usually have a life that is greater than one year.
- Identify capital expenditures relevant to accomplishing strategic goals.
- Establish assumptions common for each potential capital investment.
- Analyze the present value of future cash inflow and outflow and relevant qualitative factors.
- Decide on the projects, timing of implementation, and performance criteria.
- Obtain appropriate sources of financing for investments.
- Initiate investments and monitor results throughout the investment life.

Question 4

Lion Enterprises Inc. is evaluating 3 investment alternatives. Each alternative requires a cash outflow of $102,000. The cash inflows are summarized below (ignore taxes):
   The company has a required rate of return of 9%.
Required:
Evaluate and rank each alternative using net present value (NPV).

Accepted Answer

Project A:
NPV = $2,411.57
CF0 - $102,00

Question 5

Discounted cash flow measures the cash inflows and outflows of a project as if they occurred at a single point in time in order to facilitate a proper comparison.

Accepted Answer

A) True 
 B)False

Question 6

Hiroshima Inc. is evaluating 3 investment alternatives. Each alternative requires a cash outflow of $176,000 and is to be depreciated on a straight line basis ($6,000 salvage value). Ignore income taxes. Cash flows for the various investments are summarized below:
   The company has a required rate of return of 11.2%
Required:
a. Evaluate and rank each alternative based on NPV
   c. Evaluate and rank each alternative based on Accrual Accounting Return using average annualcash flows.
d. Evaluate each project based on payback period.
e. Which project do you recommend and why? Address the issue of risk in your response.

Accepted Answer

@#IMG-DLM& Depreciation is the same for all projec

Question 7

A project has a net initial investment of $500,000 and the cash flows cover five years. The project involves replacing an old machine with a new machine at the same time. Which of the following is true based on the above assumptions, in NPV analysis?

Accepted Answer

A)  The book value of the old machine is relevant. 
B)  Recurring operating cash flows cannot be positive and negative. 
C)  Incremental working capital investment is irrelevant. 
D)  Any cash received from the disposal of the old machine would be a relevant cash flow for end of year 1. 
E)  Errors in forecasting the terminal disposal price of the new machine are seldom critical on long-duration projects. 
A)  The book value of the old machine is relevant. 
B)  Recurring operating cash flows cannot be positive and negative. 
C)  Incremental working capital investment is irrelevant. 
D)  Any cash received from the disposal of the old machine would be a relevant cash flow for end of year 1. 
E)  Errors in forecasting the terminal disposal price of the new machine are seldom critical on long-duration projects.

Question 8

The time value of money refers to the concept that

Accepted Answer

A)  saving money has value for the business. 
B)  both time and money are valuable resources to any organization. 
C)  money invested today will grow. 
D)  the value of a monetary unit today is worth less than the same unit in the future. 
E)  the value of a monetary unit today is worth more than the same unit in the future. 
A)  saving money has value for the business. 
B)  both time and money are valuable resources to any organization. 
C)  money invested today will grow. 
D)  the value of a monetary unit today is worth less than the same unit in the future. 
E)  the value of a monetary unit today is worth more than the same unit in the future.

Question 9

What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and accrual accounting for performance

Accepted Answer

Using accrual accounting to evaluate the

Question 10

The first step in the capital budgeting decision process model is to

Accepted Answer

A)  establish assumptions common for each potential capital investment. 
B)  obtain appropriate sources of financing for investments. 
C)  identify capital expenditures relevant to accomplishing strategic goals. 
D)  manage the control of non-quantitative factors. 
E)  analyze the present value of future cash inflow and outflow and relevant qualitative factors. 
A)  establish assumptions common for each potential capital investment. 
B)  obtain appropriate sources of financing for investments. 
C)  identify capital expenditures relevant to accomplishing strategic goals. 
D)  manage the control of non-quantitative factors. 
E)  analyze the present value of future cash inflow and outflow and relevant qualitative factors.

Question 11

Initial machine investment costs include cash outflows for installation and transportation.

Accepted Answer

A) True 
 B)False

Question 12

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 13

The rate of return is the ratio of net future cash flows to the investment outflow.

Accepted Answer

A) True 
 B)False

Question 14

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 15

Which of the following is not a major category of cash flows in capital budgeting?

Accepted Answer

A)  initial investment in machines 
B)  recurring operating cash flows 
C)  cash flows from dispositions of assets 
D)  management and labour allocation deductions 
E)  initial working capital investment 
A)  initial investment in machines 
B)  recurring operating cash flows 
C)  cash flows from dispositions of assets 
D)  management and labour allocation deductions 
E)  initial working capital investment

Question 16

The accrual accounting rate-of-return method has a significant weakness for use in making capital budgeting decisions because it does not track cash flows and it ignores the time value of money.

Accepted Answer

A) True 
 B)False

Question 17

The consequences of capital expenditures are

Accepted Answer

A)  quantitative and financial. 
B)  quantitative and qualitative. 
C)  qualitative and nonfinancial. 
D)  appropriate and inappropriate. 
E)  nonfinancial and irrelevant. 
A)  quantitative and financial. 
B)  quantitative and qualitative. 
C)  qualitative and nonfinancial. 
D)  appropriate and inappropriate. 
E)  nonfinancial and irrelevant.

Question 18

Life cycle costing is the accounting system that corresponds to

Accepted Answer

A)  the non-financial dimension of costs analysis. 
B)  the project dimension of costs analysis. 
C)  the cost dimension of costs analysis. 
D)  the financial dimension of costs analysis. 
E)  the time dimension of costs analysis. 
A)  the non-financial dimension of costs analysis. 
B)  the project dimension of costs analysis. 
C)  the cost dimension of costs analysis. 
D)  the financial dimension of costs analysis. 
E)  the time dimension of costs analysis.

Question 19

Computer integrated technology may increase workers' knowledge of automation and facilitate future installations.

Accepted Answer

A) True 
 B)False

Question 20

What is the net present value (rounded to the nearest thousand) of the investment assuming the required rate of return is 24 percent? Would Hawkeye Cleaners want to purchase the new machine?

Accepted Answer

A)  $57,000; yes 
B)  $(57,000); no 
C)  $(3,000); no 
D)  $29,000; yes 
E)  $(13,000); no 
A)  $57,000; yes 
B)  $(57,000); no 
C)  $(3,000); no 
D)  $29,000; yes 
E)  $(13,000); no

Exam 21: Capital Budgeting: Methods of Investment Analysis

"Faster response to market changes" is a benefit of computer-integrated technology.

Explain capital budgeting, and then briefly discuss each of the six processes of the capital budgeting decision process model?

Lion Enterprises Inc. is evaluating 3 investment alternatives. Each alternative requires a cash outflow of $102,000. The cash inflows are summarized below (ignore taxes): The company has a required rate of return of 9%. Required: Evaluate and rank each alternative using net present value (NPV).

Discounted cash flow measures the cash inflows and outflows of a project as if they occurred at a single point in time in order to facilitate a proper comparison.

A project has a net initial investment of $500,000 and the cash flows cover five years. The project involves replacing an old machine with a new machine at the same time. Which of the following is true based on the above assumptions, in NPV analysis?

The time value of money refers to the concept that

What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and accrual accounting for performance

The first step in the capital budgeting decision process model is to

Initial machine investment costs include cash outflows for installation and transportation.

Which of the following statements about the net present value method is true?

The rate of return is the ratio of net future cash flows to the investment outflow.

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

Which of the following is not a major category of cash flows in capital budgeting?

The accrual accounting rate-of-return method has a significant weakness for use in making capital budgeting decisions because it does not track cash flows and it ignores the time value of money.

The consequences of capital expenditures are

Life cycle costing is the accounting system that corresponds to

Computer integrated technology may increase workers' knowledge of automation and facilitate future installations.

What is the net present value (rounded to the nearest thousand) of the investment assuming the required rate of return is 24 percent? Would Hawkeye Cleaners want to purchase the new machine?

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

Quantitative Analyses of Cost Functions

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

Cost Management: Quality, Time, and the Theory of Constraints

Inventory Cost Management Strategies

Capital Budgeting: a Closer Look

Transfer Pricing and Multinational Management Control Systems

Multinational Performance Measurement and Compensation

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