Question 1

The purchase of a corporation's customer base is an investment in an intangible asset.

Accepted Answer

A) True 
 B)False

Question 2

Gold Coast Glass Company provides glassware for major department store retailers.The company has been investigating a new piece of machinery for its production department.The old equipment has a remaining life of five years and the new equipment has a value of $117 320 with a five-year life.The expected additional cash inflows total $35 000 per year.What is the internal rate of return?

Accepted Answer

A) 10% 
B) 12% 
C) 15% 
D) 20% 
A) 10% 
B) 12% 
C) 15% 
D) 20%

Question 3

The Alpha Beta Corporation sells a capital asset with an original cost of $85 000 and accumulated depreciation of $54 500 for $25 000.Alpha Beta's tax rate is 40%.Calculate the after-tax cash inflow from the disposal of the capital asset.

Accepted Answer

A) ($2200) 
B) $31 500 
C) $27 200 
D) $2200 
A) ($2200) 
B) $31 500 
C) $27 200 
D) $2200

Question 4

Westaus Instant Scaffolding desires to buy a new crane and accessories to help install and remove scaffoldings at building sites.The machine sells for $150 000 and requires working capital of $20 000.Its estimated useful life is six years and it will have a salvage value of $35 120.Recovery of working capital will be $20 000 at the end of its useful life.Annual cash savings from the purchase of the machine will be $40 000.
Required:
a.Calculate the net present value at a 14% required rate of return.
b.Calculate the internal rate of return.
c.Determine the discounted payback period of the investment.
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

a.
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Question 5

The use of an accelerated method of depreciation for tax purposes would usually increase the present value of the investment.

Accepted Answer

A) True 
 B)False

Question 6

A manager who uses discounted cash flow methods to make capital budgeting decisions does not face goal-congruence issues if the accrual accounting rate of return is used for performance evaluation.

Accepted Answer

A) True 
 B)False

Question 7

Gold Coast Glass Company provides glassware machines for major department store retailers.The company has been investigating a new piece of machinery for its production department.The old equipment has a remaining life of five years and the new equipment has a value of $115 500 with a five-year life.The expected additional cash inflows are $35 000 per year.What is the payback period on this investment?

Accepted Answer

A) 2.5 years 
B) 3 years 
C) 3.3 years 
D) 5 years 
A) 2.5 years 
B) 3 years 
C) 3.3 years 
D) 5 years

Question 8

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.
-The 'required rate-of-return' can also be expressed as:

Accepted Answer

A) cost of capital. 
B) discount rate. 
C) hurdle rate. 
D) All of these answers are correct. 
A) cost of capital. 
B) discount rate. 
C) hurdle rate. 
D) All of these answers are correct.

Question 9

During which stage of the capital budgeting process does a firm obtain funding for the project?

Accepted Answer

A) Make decisions by choosing among alternatives stage 
B) Implement the decision,evaluate performance and learn stage 
C) Evaluate each possible course of action stage 
D) Collect relevant information stage 
A) Make decisions by choosing among alternatives stage 
B) Implement the decision,evaluate performance and learn stage 
C) Evaluate each possible course of action stage 
D) Collect relevant information stage

Question 10

There is an inconsistency in using the net present value method as best for capital budgeting decisions and then using a different method to evaluate performance.

Accepted Answer

A) True 
 B)False

Question 11

The payback method allows for managers to highlight liquidity.

Accepted Answer

A) True 
 B)False

Question 12

Lake Torrens Boating Company is interested in replacing a moulding machine with a new improved model.The old machine has a salvage value of $20 000 now and a predicted salvage value of $4000 in six years,if rebuilt.If the old machine is kept,it must be rebuilt in one year at a predicted cost of $40 000.
The new machine costs $160 000 and has a predicted salvage value of $24 000 at the end of six years.If purchased,the new machine will allow cash savings of $40 000 for each of the first three years,and $20 000 for each year of its remaining six-year life.
Required:
What is the net present value of purchasing the new machine if the company has a required rate of return of 14%?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

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Question 13

In using the net present value (NPV)method for capital budgeting after-tax cash flows should be used instead of pre-tax cash flows when taxes are a consideration.

Accepted Answer

A) True 
 B)False

Question 14

The tendency to be influenced by sunk costs and to continue to pour money into unviable projects is a common psychological phenomenon,which is called escalation of commitment.

Accepted Answer

A) True 
 B)False

Question 15

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 16

During which stage of the capital budgeting process is the type of capital expenditure project identified as being necessary to accomplish organisation objectives?

Accepted Answer

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

Question 17

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.
-If the net cash inflows were $20 000 in the first year and $110 000 in the following years,should the X-ray machine be purchased? What is the net present value of the investment,assuming the required rate of return is 14%? Would the hospital want to purchase the new machine?

Accepted Answer

A) $25 350;yes 
B) $8590;yes 
C) $8590;no 
D) $(8590);yes 
A) $25 350;yes 
B) $8590;yes 
C) $8590;no 
D) $(8590);yes

Question 18

What is the definition of an annuity?

Accepted Answer

A) A series of equal cash flows at regular intervals 
B) Similar to the definition of a life insurance policy 
C) An investment product whose funds are invested in the stock market 
D) Both A and B are correct. 
A) A series of equal cash flows at regular intervals 
B) Similar to the definition of a life insurance policy 
C) An investment product whose funds are invested in the stock market 
D) Both A and B are correct.

Question 19

Cash received from the disposal of old equipment is not relevant to a decision to buy replacement equipment.

Accepted Answer

A) True 
 B)False

Question 20

Retail Outlet is looking for a new location near a shopping centre.It is considering purchasing a building rather than leasing,as it has done in the past.Three retail buildings near a new shopping centre are available but each has its own advantages and disadvantages.The owner of the company has completed an analysis of each location that includes considerations for the time value of money.The information is as follows:
 $$\begin{array} { | l | r | r | r | } 
\hline & \text { Location A } & \text { Location B } & { \text { Location C } } \
\hline \text { Internal rate of return } & 13 \% & 17 \% & 20 \% \
\hline \text { Net present value } & \$ 25000 & \$ 40000 & \$ 20000 \
\hline
\end{array}$$ 
The owner does not understand how the location with the highest percentage return has the lowest net present value.
Required:
Explain to the owner what is (are)the probable cause(s)of the comparable differences.
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

The highest probability is that location

The purchase of a corporation's customer base is an investment in an intangible asset.

The Alpha Beta Corporation sells a capital asset with an original cost of $85 000 and accumulated depreciation of $54 500 for $25 000.Alpha Beta's tax rate is 40%.Calculate the after-tax cash inflow from the disposal of the capital asset.

The use of an accelerated method of depreciation for tax purposes would usually increase the present value of the investment.

A manager who uses discounted cash flow methods to make capital budgeting decisions does not face goal-congruence issues if the accrual accounting rate of return is used for performance evaluation.

During which stage of the capital budgeting process does a firm obtain funding for the project?

There is an inconsistency in using the net present value method as best for capital budgeting decisions and then using a different method to evaluate performance.

The payback method allows for managers to highlight liquidity.

In using the net present value (NPV)method for capital budgeting after-tax cash flows should be used instead of pre-tax cash flows when taxes are a consideration.

The tendency to be influenced by sunk costs and to continue to pour money into unviable projects is a common psychological phenomenon,which is called escalation of commitment.

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.

During which stage of the capital budgeting process is the type of capital expenditure project identified as being necessary to accomplish organisation objectives?

What is the definition of an annuity?

Cash received from the disposal of old equipment is not relevant to a decision to buy replacement equipment.

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 purchase of a corporation's customer base is an investment in an intangible asset.

The Alpha Beta Corporation sells a capital asset with an original cost of $85 000 and accumulated depreciation of $54 500 for $25 000.Alpha Beta's tax rate is 40%.Calculate the after-tax cash inflow from the disposal of the capital asset.

The use of an accelerated method of depreciation for tax purposes would usually increase the present value of the investment.

A manager who uses discounted cash flow methods to make capital budgeting decisions does not face goal-congruence issues if the accrual accounting rate of return is used for performance evaluation.

During which stage of the capital budgeting process does a firm obtain funding for the project?

There is an inconsistency in using the net present value method as best for capital budgeting decisions and then using a different method to evaluate performance.

The payback method allows for managers to highlight liquidity.

In using the net present value (NPV)method for capital budgeting after-tax cash flows should be used instead of pre-tax cash flows when taxes are a consideration.

The tendency to be influenced by sunk costs and to continue to pour money into unviable projects is a common psychological phenomenon,which is called escalation of commitment.

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.

During which stage of the capital budgeting process is the type of capital expenditure project identified as being necessary to accomplish organisation objectives?

What is the definition of an annuity?

Cash received from the disposal of old equipment is not relevant to a decision to buy replacement equipment.

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