Question 1

Post-investment audits

Accepted Answer

A)  should be done as soon as possible after the investment is made. 
B)  provide management with feedback about the performance of a project. 
C)  include obtaining appropriation requests so that the funding will be authorized to purchase the equipment. 
D)  are usually not feasible in a large project because the cost accounting system does not collect actual costs at the same level of detail as the initial plans had. 
E)  should not be undertaken because they are too costly. 
A)  should be done as soon as possible after the investment is made. 
B)  provide management with feedback about the performance of a project. 
C)  include obtaining appropriation requests so that the funding will be authorized to purchase the equipment. 
D)  are usually not feasible in a large project because the cost accounting system does not collect actual costs at the same level of detail as the initial plans had. 
E)  should not be undertaken because they are too costly.

Question 2

If the internal rate of return is less than the hurdle rate, the net present value of the project will be negative.

Accepted Answer

A) True 
 B)False

Question 3

The net initial investment for a new mainframe computer is $2,000,000. Annual cash flows are expected to increase by $800,000 per year. The equipment has a 10-year useful life. What is the payback period?

Accepted Answer

A)  4.00 years 
B)  2.50 years 
C)  2.00 years 
D)  1.75 years 
E)  0.75 years 
A)  4.00 years 
B)  2.50 years 
C)  2.00 years 
D)  1.75 years 
E)  0.75 years

Question 4

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 Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $950,000. The investment is expected to generate $350,000 in annual cash flows for a period of four years. The required rate of return is 14%. The old machine can be sold for $50,000. The machine is expected to have zero value at the end of the four-year period. What is the net present value of the investment? Would the company want to purchase the new machine? Income taxes are not considered.

Accepted Answer

A)  $119,550; yes 
B)  $69,550; no 
C)  $1,019,550; yes 
D)  $326,750; no 
E)  $500,000; yes 
A)  $119,550; yes 
B)  $69,550; no 
C)  $1,019,550; yes 
D)  $326,750; no 
E)  $500,000; yes

Question 5

Fisher Ltd. is considering the purchase of new equipment. Details of the investment follow:
   Depreciation method: straight line
Required:
a. Calculate payback.
b. Calculate accrual accounting rate of return based on the initial investment.
c. Calculate the net present value.

Accepted Answer

a.
Annual cash flows = $520,000 - $295,0

Question 6

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 7

Many new capital projects are investments in new technologies. Both benefits and costs of these new technologies are hard to estimate.
Required:
Discuss some of the difficulties in quantifying the expected benefits and costs of new technologies.

Accepted Answer

This is intended to be an open ended que

Question 8

Relevant cash flows are expected future cash flows that differ among the alternative uses of investment funds.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is not one of the methods that aid management in analyzing the expected results of capital budgeting decisions?

Accepted Answer

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

Question 10

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 11

Defensive strategies can be difficult to quantify because opportunity costs are difficult to predict.

Accepted Answer

A) True 
 B)False

Question 12

The payback method discounts cash flows prior to the payback date.

Accepted Answer

A) True 
 B)False

Question 13

In determining whether to keep a machine or replace it, the original cost of the machine is always a relevant factor.

Accepted Answer

A) True 
 B)False

Question 14

A "what-if" technique that examines how a result will change if the original predicted data are not achieved, or if an underlying assumption changes, is called

Accepted Answer

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

Question 15

Cost systems with an exclusive period-by-period focus are more likely to identify project costs over multiple periods.

Accepted Answer

A) True 
 B)False

Question 16

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:
   Internal rate
   Accrual accounting
   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 17

Pender Ltd. is analyzing two proposals for cleaning contracts for the next 3 year period. The company has 200,000 square metres of floor space which is currently 75% occupied. It expects that occupancy will increase to 82% in year 2 and 90% in year 3.
The proposal from Company A is as follows:
Six janitors will be used at a budgeted annual salary of $26,000/each. These salaries are expected to remain static over the 3 year period. One supervisor will be used at an annual salary of $38,000. Salary increases for the supervisor will be $1,500 per year. Indirect labour costs are at 12.5% of salaries. Indirect material costs will be at a rate of $0.20 per square metre occupied. Fixed costs of $7,200 per year will also be charged to Pender by the contractor.
The proposal from Company B is as follows:
A rate of $1.40 per square metre occupied will be charged. In addition a part time supervisor will be required at an annual cost of $24,000 plus benefits at 15%. Fixed costs of $4,600 per year will be charged to Pender by Company B. No increases are forecast through the three year period.
Additional information:
Company A is the existing contractor. If the agency does not choose Company A, it must pay Company A a flat $8,000 on termination of its services. This payment would be made immediately.
Assume cash flows occur at the end of the year unless otherwise stated. The discount rate to be used is 6% and is not expected to change in the next 3 years.

Accepted Answer

The cash flows and present value analysi

Question 18

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's required rate of return is 14%. Ignore income taxes. What is the payback period for this investment?

Accepted Answer

A)  5.63 years 
B)  5.78 years 
C)  6.05 years 
D)  5.26 years 
E)  The project does not payback. 
A)  5.63 years 
B)  5.78 years 
C)  6.05 years 
D)  5.26 years 
E)  The project does not payback.

Question 19

In capital budgeting decisions, revenues and costs are analyzed over the short-run.

Accepted Answer

A) True 
 B)False

Question 20

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

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

Post-investment audits

If the internal rate of return is less than the hurdle rate, the net present value of the project will be negative.

The net initial investment for a new mainframe computer is $2,000,000. Annual cash flows are expected to increase by $800,000 per year. The equipment has a 10-year useful life. What is the payback period?

Fisher Ltd. is considering the purchase of new equipment. Details of the investment follow: Depreciation method: straight line Required: a. Calculate payback. b. Calculate accrual accounting rate of return based on the initial investment. c. Calculate the net present value.

The initial investment in working capital is usually recovered

Many new capital projects are investments in new technologies. Both benefits and costs of these new technologies are hard to estimate. Required: Discuss some of the difficulties in quantifying the expected benefits and costs of new technologies.

Relevant cash flows are expected future cash flows that differ among the alternative uses of investment funds.

Which of the following is not one of the methods that aid management in analyzing the expected results of capital budgeting decisions?

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

Defensive strategies can be difficult to quantify because opportunity costs are difficult to predict.

The payback method discounts cash flows prior to the payback date.

In determining whether to keep a machine or replace it, the original cost of the machine is always a relevant factor.

A "what-if" technique that examines how a result will change if the original predicted data are not achieved, or if an underlying assumption changes, is called

Cost systems with an exclusive period-by-period focus are more likely to identify project costs over multiple periods.

In capital budgeting decisions, revenues and costs are analyzed over the short-run.

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

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

Post-investment audits

If the internal rate of return is less than the hurdle rate, the net present value of the project will be negative.

The net initial investment for a new mainframe computer is $2,000,000. Annual cash flows are expected to increase by $800,000 per year. The equipment has a 10-year useful life. What is the payback period?

Fisher Ltd. is considering the purchase of new equipment. Details of the investment follow: Depreciation method: straight line Required: a. Calculate payback. b. Calculate accrual accounting rate of return based on the initial investment. c. Calculate the net present value.

The initial investment in working capital is usually recovered

Many new capital projects are investments in new technologies. Both benefits and costs of these new technologies are hard to estimate. Required: Discuss some of the difficulties in quantifying the expected benefits and costs of new technologies.

Relevant cash flows are expected future cash flows that differ among the alternative uses of investment funds.

Which of the following is not one of the methods that aid management in analyzing the expected results of capital budgeting decisions?

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

Defensive strategies can be difficult to quantify because opportunity costs are difficult to predict.

The payback method discounts cash flows prior to the payback date.

In determining whether to keep a machine or replace it, the original cost of the machine is always a relevant factor.

A "what-if" technique that examines how a result will change if the original predicted data are not achieved, or if an underlying assumption changes, is called

Cost systems with an exclusive period-by-period focus are more likely to identify project costs over multiple periods.

In capital budgeting decisions, revenues and costs are analyzed over the short-run.

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

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