Question 1

The accrual accounting rate of return is the method of capital budgeting that is based most closely on the information in the financial statements.

Accepted Answer

A) True 
 B)False  True

Question 2

The ___________________capital budgeting method calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows.

Accepted Answer

A) internal rate of return 
B) payback method 
C) accrual accounting rate-of-return method 
D) net present value method 
A) internal rate of return 
B) payback method 
C) accrual accounting rate-of-return method 
D) net present value method A

Question 3

The four categories of cash flow for an investment project are: (1)net initial investment; (2)net income; (3)after tax cash flow from operations;and (4)after tax cash flow from terminal disposal of an asset.

Accepted Answer

A) True 
 B)False  False

Question 4

The net present value method can indicate erroneous decisions as it implicitly assumes that project cash flows can be reinvested at the project's rate-of-return.

Accepted Answer

A) True 
 B)False

Question 5

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

Question 6

What does the payback method of capital budgeting approach highlight?

Accepted Answer

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

Question 7

Which of the following statements concerning depreciation and capital budgeting is true?

Accepted Answer

A) Depreciation can reduce cash outflows through savings in income tax. 
B) The tax effects of depreciation are mostly irrelevant as capital budgeting analysis is generally done with before tax information. 
C) Some depreciation charges can affect cash flows both directly and through effects on income tax. 
D) Because depreciation is a non-cash item,it can never affect cash flows. 
A) Depreciation can reduce cash outflows through savings in income tax. 
B) The tax effects of depreciation are mostly irrelevant as capital budgeting analysis is generally done with before tax information. 
C) Some depreciation charges can affect cash flows both directly and through effects on income tax. 
D) Because depreciation is a non-cash item,it can never affect cash flows.

Question 8

During which stage of the capital budgeting process does marketing query the potential revenue numbers?

Accepted Answer

A) Implement the decision stage 
B) Make decisions by choosing among alternatives stage 
C) Identify the problem stage 
D) Collect information stage 
A) Implement the decision stage 
B) Make decisions by choosing among alternatives stage 
C) Identify the problem stage 
D) Collect information stage

Question 9

Answer the following questions using the information below:
Footscray Hospital is considering purchasing a new x-ray machine.The existing machine is operable for five more years and will have a zero disposal price.The machine may be sold for $45 000 now.The new machine will cost $325 000 and an additional cash investment in working capital of $10 000 will be required.The new machine will reduce the average time required to take x-rays and will allow additional business to be done at the hospital.The investment is expected to net $30 000 in additional cash inflows during the year of acquisition and $120 000 each additional year of use.The new machine has a five-year life,and zero disposal value.These cash flows will occur throughout the year but are recognised at the end of each year.Ignore income taxes.The working capital investment will not be recovered at the end of the asset's life.
-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) the company will be able to pay the necessary payments on any loans secured to finance the project. 
C) a positive net present value on a particular project guarantees company profitability. 
D) Both A and B are correct. 
A) the return from these projects equals or exceeds the cost of capital. 
B) the company will be able to pay the necessary payments on any loans secured to finance the project. 
C) a positive net present value on a particular project guarantees company profitability. 
D) Both A and B are correct.

Question 10

______________________ involves significant financial investments in projects to develop new products,expand production capacity or remodel current production facilities.

Accepted Answer

A) Capital budgeting 
B) Working capital 
C) Project-cost budgeting 
D) Master budgeting 
A) Capital budgeting 
B) Working capital 
C) Project-cost budgeting 
D) Master budgeting

Question 11

Post-investment audits are held because:

Accepted Answer

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

Question 12

What stage of the capital budgeting process involves choosing the projects for implementation?

Accepted Answer

A) Make decisions by choosing among alternatives stage 
B) Management-control stage 
C) Evaluate each possible course of action stage 
D) Identify the problem stage 
A) Make decisions by choosing among alternatives stage 
B) Management-control stage 
C) Evaluate each possible course of action stage 
D) Identify the problem stage

Question 13

The following are included in the formal financial analysis of a capital budgeting program except for:

Accepted Answer

A) safety of employees. 
B) quality of the output. 
C) cash flow. 
D) both A and B. 
A) safety of employees. 
B) quality of the output. 
C) cash flow. 
D) both A and B.

Question 14

The Rockhampton Chronicle needs to overhaul its printing press or buy a new one.The facts have been gathered,and they are as follows:
 $$\begin{array} { | l | r | r | } 
\hline & \text { Current Machine } & \text { New Machine } \
\hline \text { Purchase Price, New } & \$ 240000 & \$ 450000 \
\hline \text { Current book value } & 90000 & \
\hline \text { Overhaul needed now } & 120000 & \
\hline \text { Annual cash operating costs } & 210000 & 120000 \
\hline \text { Current salvage value } & 60000 & \
\hline \text { Salvage value in five years } & 15000 & 60000 \
\hline
\end{array}$$ 
Required:
Which alternative is the most desirable with a current required rate of return of 20%? Show computations,and assume no taxes.
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

Present value of keeping current system:

Question 15

A decrease in the tax rate will decrease the net present value (NPV)for a given capital budgeting project.

Accepted Answer

A) True 
 B)False

Question 16

Assume your goal in life is to retire with one million dollars.How much would you need to save at the end of each year if interest rates average 6% and you have a 20-year work life?

Accepted Answer

A) $120 102 
B) $27 184 
C) $376 476 
D) $14 565 
A) $120 102 
B) $27 184 
C) $376 476 
D) $14 565

Question 17

Discounted cash flow methods measure all the expected future cash inflows and outflows of a project as if they occurred at equal intervals over the life of the project.

Accepted Answer

A) True 
 B)False

Question 18

Investment A requires a net investment of $800 000 today.If you require an annuity for the next four years and the required rate of return is 12%,what are the annual cash flows if the net present value (rounded)equals 0?

Accepted Answer

A) $189 483 
B) $263 418 
C) $295 733 
D) $274 848 
A) $189 483 
B) $263 418 
C) $295 733 
D) $274 848

Question 19

Discounted cash flow methods focus on operating profit.

Accepted Answer

A) True 
 B)False

Question 20

Nullabor Park Department is considering buying a new grass mowing machine.The cost of the machine will be $150 000 and will provide annual cost savings of $40 000.The machine will have a five-year life,at which time the terminal disposal value is expected to be $20 000.Nullabor Park Department is assuming no tax consequences.If Nullabor Park Department has a required rate of return of 10%,which of the following is closest to the present value of the project?

Accepted Answer

A) $1632 
B) $150 000 
C) $14 060 
D) $12 418 
A) $1632 
B) $150 000 
C) $14 060 
D) $12 418

The accrual accounting rate of return is the method of capital budgeting that is based most closely on the information in the financial statements.

The ___________________capital budgeting method calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows.

The four categories of cash flow for an investment project are: (1)net initial investment; (2)net income; (3)after tax cash flow from operations;and (4)after tax cash flow from terminal disposal of an asset.

The net present value method can indicate erroneous decisions as it implicitly assumes that project cash flows can be reinvested at the project's rate-of-return.

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:

What does the payback method of capital budgeting approach highlight?

Which of the following statements concerning depreciation and capital budgeting is true?

During which stage of the capital budgeting process does marketing query the potential revenue numbers?

______________________ involves significant financial investments in projects to develop new products,expand production capacity or remodel current production facilities.

Post-investment audits are held because:

What stage of the capital budgeting process involves choosing the projects for implementation?

The following are included in the formal financial analysis of a capital budgeting program except for:

A decrease in the tax rate will decrease the net present value (NPV)for a given capital budgeting project.

Assume your goal in life is to retire with one million dollars.How much would you need to save at the end of each year if interest rates average 6% and you have a 20-year work life?

Discounted cash flow methods measure all the expected future cash inflows and outflows of a project as if they occurred at equal intervals over the life of the project.

Investment A requires a net investment of $800 000 today.If you require an annuity for the next four years and the required rate of return is 12%,what are the annual cash flows if the net present value (rounded)equals 0?

Discounted cash flow methods focus on operating profit.

Management Accounting in Context

Different Costs for Different Purposes

Determining How Costs Behave

Costvolumeprofit Analysis

Estimating the Cost of Producing Services

Estimating the Costs of Products and Inventory

Target Costing, Managing Activities and Managing Capacity

Activity-Based Management and Activity-Based Costing

Pricing and Customer Profitability

Decision Making and Relevant Information

Budgeting, Management Control and Responsibility Accounting

Flexible Budgets, Direct Cost Variances and Management Control

Flexible Budgets, Overhead Cost Variances and Management Control

Allocation of Support-Department Costs, Common Costs and Revenues

Strategy Formation, Strategic Control and the Balanced Scorecard

Quality, Time and the Balanced Scorecard

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

Management Control Systems, Transfer Pricing and Multinational Considerations

Performance Measurement, Compensation and Multinational Considerations

Measuring and Reporting Sustainability

Filters

Exam 18: Capital Budgeting and Cost Analysis

The accrual accounting rate of return is the method of capital budgeting that is based most closely on the information in the financial statements.

The ___________________capital budgeting method calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows.

The four categories of cash flow for an investment project are: (1)net initial investment; (2)net income; (3)after tax cash flow from operations;and (4)after tax cash flow from terminal disposal of an asset.

The net present value method can indicate erroneous decisions as it implicitly assumes that project cash flows can be reinvested at the project's rate-of-return.

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:

What does the payback method of capital budgeting approach highlight?

Which of the following statements concerning depreciation and capital budgeting is true?

During which stage of the capital budgeting process does marketing query the potential revenue numbers?

______________________ involves significant financial investments in projects to develop new products,expand production capacity or remodel current production facilities.

Post-investment audits are held because:

What stage of the capital budgeting process involves choosing the projects for implementation?

The following are included in the formal financial analysis of a capital budgeting program except for:

A decrease in the tax rate will decrease the net present value (NPV)for a given capital budgeting project.

Assume your goal in life is to retire with one million dollars.How much would you need to save at the end of each year if interest rates average 6% and you have a 20-year work life?

Discounted cash flow methods measure all the expected future cash inflows and outflows of a project as if they occurred at equal intervals over the life of the project.

Investment A requires a net investment of $800 000 today.If you require an annuity for the next four years and the required rate of return is 12%,what are the annual cash flows if the net present value (rounded)equals 0?

Discounted cash flow methods focus on operating profit.

Management Accounting in Context

Different Costs for Different Purposes

Determining How Costs Behave

Costvolumeprofit Analysis

Estimating the Cost of Producing Services

Estimating the Costs of Products and Inventory

Target Costing, Managing Activities and Managing Capacity

Activity-Based Management and Activity-Based Costing

Pricing and Customer Profitability

Decision Making and Relevant Information

Budgeting, Management Control and Responsibility Accounting

Flexible Budgets, Direct Cost Variances and Management Control

Flexible Budgets, Overhead Cost Variances and Management Control

Allocation of Support-Department Costs, Common Costs and Revenues

Strategy Formation, Strategic Control and the Balanced Scorecard

Quality, Time and the Balanced Scorecard

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

Management Control Systems, Transfer Pricing and Multinational Considerations

Performance Measurement, Compensation and Multinational Considerations

Measuring and Reporting Sustainability

Filters