Question 1

Briefly describe the processes in the Capital Budgeting Decision Process Model.

Accepted Answer

- Identify capital expenditures relevant

Question 2

The Zero Machine Company is evaluating a capital expenditure proposal that requires an initial
investment of $20,960 and has predicted cash inflows of $5,000 per year for 10 years. It will have no
salvage value.
Required:
a. Using a required rate of return of 16%, determine the net present value of the investment proposal.
b. Determine the proposal's internal rate of return.

Accepted Answer

@#IMG-DLM& b. Present value factor of an annuity o

Question 3

A capital budgeting project will have a positive net present value if its return is less than the hurdle rate.

Accepted Answer

A) True 
 B)False

Question 4

Accrual accounting measures income on a year-to-year basis.

Accepted Answer

A) True 
 B)False

Question 5

What is the net present value (rounded to the nearest thousand) of the investment assuming the required rate of return is 10 percent? Would Hawkeye Cleaners want to purchase the new machine?

Accepted Answer

A)  $112,000; yes 
B)  $52,000; yes 
C)  $(52,000); no 
D)  $(67,000); no 
E)  $127,000; yes 
A)  $112,000; yes 
B)  $52,000; yes 
C)  $(52,000); no 
D)  $(67,000); no 
E)  $127,000; yes

Question 6

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 7

Retail Outlet is looking for a new location near a shopping mall. It is considering purchasing a building rather than leasing, as it has done in the past. Three retail buildings near a new mall are available but each has its own advantages and disadvantages. The owner of the company has completed an analysis of each location which includes considerations for the time value of money. The information is as follows:
   The owner does not understand how the location with the highest percentage return has the lowest net present value.
Required:
Explain to the owner the probable cause(s) of the comparable differences.

Accepted Answer

Location C may have a much lower initial

Question 8

An accounting measure of income divided by an accounting measure of investment is called

Accepted Answer

A)  accrual accounting rate of return. 
B)  bailout payback. 
C)  book-value method. 
D)  rate of return on assets method. 
E)  net previous value. 
A)  accrual accounting rate of return. 
B)  bailout payback. 
C)  book-value method. 
D)  rate of return on assets method. 
E)  net previous value.

Question 9

Jefferson Ltd. is considering the acquisition of new production equipment. If purchased, the new equipment would cost $1,850,000. Installation and testing costs would be $35,000 and $25,000 respectively. Once operational, the equipment will cause and increase in working capital of $120,000. The new equipment is expected to generate increased annual sales of $720,000. Variable costs to operate the machine are estimated at 42% of sales and annual fixed costs would be lowered by $75,000. The equipment has an estimate 6 year life and a salvage value of $90,000. The company requires an 11% return on its investments. Ignore income taxes.
Required:
a. Compute the net present value.
b. Compute the internal rate of return.
c. Determine the payback period of the investment.

Accepted Answer

a.
Initial investment = $1,850,000 + $35

Question 10

In determining whether to keep a machine or replace it, the net book value of the machine is irrelevant.

Accepted Answer

A) True 
 B)False

Question 11

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.
-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 1 year and no sales value. The new equipment has a value of $52,650 with a three-year life. The expected additional cash inflows are $25,000 per year, end of year payments. What is the internal rate of return?

Accepted Answer

A)  24 percent 
B)  20 percent 
C)  16 percent 
D)  12 percent 
E)  8 percent 
A)  24 percent 
B)  20 percent 
C)  16 percent 
D)  12 percent 
E)  8 percent

Question 12

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)  after tax cost of debt. 
E)  coupon interest rate on the firm's debt. 
A)  internal rate of return. 
B)  required rate of return. 
C)  rate of return required by the investment bankers. 
D)  after tax cost of debt. 
E)  coupon interest rate on the firm's debt.

Question 13

A Company wants to buy a moulding machine that can be integrated into its computerized manufacturing process. It has received three bids for the machine and related manufacturer's specifications. The bids range from $3,500,000 to $3,550,000. The estimated annual savings of the machines range from $260,000 to $270,000. The payback periods are almost identical and the net present values are all within $8,000 of each other. The president just doesn't know what to do about which vendor to choose; all the selection criteria are so close together.
Required:
What suggestions do you have for the president?

Accepted Answer

The president needs to consider nonfinan

Question 14

A company is considering two different purchases from a vendor, for a high-speed photocopier. 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 the regular model, 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?

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 15

Terrain Vehicle has received three proposals for its new vehicle painting machine. Information on each proposal is as follows:
   Annual cash saved by operations:
   Salvage value end of year:
   Required: Determine each proposal's payback.

Accepted Answer

Proposal X payback = $180,000/

Question 16

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.
-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 NPV of this investment? (Ignore income taxes.)

Accepted Answer

A)  $87,625 
B)  $46,400 
C)  $52,660 
D)  $234,000 
E)  $247,000 
A)  $87,625 
B)  $46,400 
C)  $52,660 
D)  $234,000 
E)  $247,000

Question 17

A rental company replaces its heavy drilling machine every four years (no salvage value). It is contemplating acquiring a larger machine, at a cost of $70,000, which is guaranteed to last for seven years. The current machine can be traded-in for a $3,000 down payment on the new machine, and the company expects annual savings in operating costs of $15,000. What is the AARR for the new machine?

Accepted Answer

A)  2.86% 
B)  6.85% 
C)  7.14% 
D)  20.55% 
E)  21.43% 
A)  2.86% 
B)  6.85% 
C)  7.14% 
D)  20.55% 
E)  21.43%

Question 18

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 19

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

Question 20

The accrual accounting rate of return for evaluating performance is often a stumbling block when implementing capital-budgeting decisions.

Accepted Answer

A) True 
 B)False

Briefly describe the processes in the Capital Budgeting Decision Process Model.

A capital budgeting project will have a positive net present value if its return is less than the hurdle rate.

Accrual accounting measures income on a year-to-year basis.

What is the net present value (rounded to the nearest thousand) of the investment assuming the required rate of return is 10 percent? Would Hawkeye Cleaners want to purchase the new machine?

Cost analysis has two dimensions, which are

An accounting measure of income divided by an accounting measure of investment is called

In determining whether to keep a machine or replace it, the net book value of the machine is irrelevant.

Net present value is calculated using the

Terrain Vehicle has received three proposals for its new vehicle painting machine. Information on each proposal is as follows: Annual cash saved by operations: Salvage value end of year: Required: Determine each proposal's payback.

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.

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

The accrual accounting rate of return for evaluating performance is often a stumbling block when implementing capital-budgeting decisions.

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

Filters

Exam 21: Capital Budgeting: Methods of Investment Analysis

Briefly describe the processes in the Capital Budgeting Decision Process Model.

A capital budgeting project will have a positive net present value if its return is less than the hurdle rate.

Accrual accounting measures income on a year-to-year basis.

What is the net present value (rounded to the nearest thousand) of the investment assuming the required rate of return is 10 percent? Would Hawkeye Cleaners want to purchase the new machine?

Cost analysis has two dimensions, which are

An accounting measure of income divided by an accounting measure of investment is called

In determining whether to keep a machine or replace it, the net book value of the machine is irrelevant.

Net present value is calculated using the

Terrain Vehicle has received three proposals for its new vehicle painting machine. Information on each proposal is as follows: Annual cash saved by operations: Salvage value end of year: Required: Determine each proposal's payback.

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.

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

The accrual accounting rate of return for evaluating performance is often a stumbling block when implementing capital-budgeting decisions.

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

Filters