Question 1

The net present value method can be used in situations where the required rate-of-return varies over the life of the project.

Accepted Answer

A) True 
 B)False

Question 2

All of the following are major categories of cash flows in capital investment decisions EXCEPT:

Accepted Answer

A) the initial working capital investment 
B) the initial investment in machines and working capital 
C) depreciation expense reported on the income statement 
D) recurring operating cash flows 
A) the initial working capital investment 
B) the initial investment in machines and working capital 
C) depreciation expense reported on the income statement 
D) recurring operating cash flows

Question 3

Botany Bay Fisheries needs a new refrigeration system on their trawler.They have received three
proposals,with related facts as follows:
 $\begin{array}{|l|r|r|r|}
\hline & \text { Proposal A } & \text { Proposal B } & \text { Proposal C } \
\hline \text { Initial investment in equipment } & \$ 180000 & \$ 180000 & \$ 180000 \
\hline \text { Annual cash increase in } & & & \
\text { operations: } & & & \
\hline \text { Year 1 } & 160000 & 90000 & 180000 \
\hline \text { Year 2 } & 20000 & 90000 & 0 \
\hline \text { Year 3 } & 90000 & 90000 & 0 \
\hline \text { Salvage value } & 0 & 0 &0  \
\hline \text { Estimated life } & 3 \mathrm{yrs} & 3 \mathrm{yrs} & 1 \mathrm{yr}\
\hline
\end{array}$ 
The company uses straight-line depreciation for all capital assets.
Required:
a.Calculate the payback period,net present value,and accrual accounting rate of return with initial investment,for each proposal.Use a required rate of return of 14%.
b.Rank each proposal 1,2,and 3 using each method separately.Which proposal is best? Why?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

Payback Method
 \[\begin{array} { | l |

Question 4

Match each one of the examples below with one of the stages of the capital budgeting decision model.
Stages:
1.Identify Projects
2.Obtain Information
3.Make Predictions
4.Make Decisions by Choosing Among Alternatives
5.Implement the Decision,Evaluate Performance and Learn
   
a.Issuing shares for the funds to purchase new equipment
b.Learning that to effectively operate Machine #8 only takes 15 minutes
c.The need to reduce the costs to process the vegetables used in producing goulash
d.Monitoring the costs to operate a new machine
e.Percentage of defective merchandise is considered too high
f.Will introducing the new product substantially upgrade our image as a producer of quality products?
g.Research indicates there are five machines on the market capable of producing our product at a competitive cost
h.Use of the internal rate of return for each alternative

Accepted Answer

a.Implement the Decision,Evaluate Perfor

Question 5

The Shepparton Corporation sells a capital asset with an original cost of $230 000 and accumulated depreciation of $205 000 for a salvage price of $36 000.Shepparton's tax rate is 30%.Calculate the after-tax cash inflow from the disposal of the capital asset.

Accepted Answer

A) $36 000 
B) $2070 
C) $11 000 
D) $32 700 
A) $36 000 
B) $2070 
C) $11 000 
D) $32 700

Question 6

The 'identify the problem' stage of capital budgeting gathers information from all parts of the value chain to evaluate alternative projects.

Accepted Answer

A) True 
 B)False

Question 7

Capital investment decisions that are strategic in nature:

Accepted Answer

A) are often referred to as 'real options' 
B) are easily handled by the capital budgeting process when the accrual accounting rate-of-return method is used as the tool to analyse the alternatives 
C) require managers to consider a broad range of factors that may be difficult to estimate 
D) All of the above are correct. 
A) are often referred to as 'real options' 
B) are easily handled by the capital budgeting process when the accrual accounting rate-of-return method is used as the tool to analyse the alternatives 
C) require managers to consider a broad range of factors that may be difficult to estimate 
D) All of the above are correct.

Question 8

What rate of return is used in calculating net present value of a project?

Accepted Answer

A) Internal rate of return 
B) Rate of return required by the investment bankers 
C) Required rate of return 
D) None of these answers are correct. 
A) Internal rate of return 
B) Rate of return required by the investment bankers 
C) Required rate of return 
D) None of these answers are correct.

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.
-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) $25 715;no 
B) $(62 235);no 
C) $42 910;yes 
D) $83 415;yes 
A) $25 715;no 
B) $(62 235);no 
C) $42 910;yes 
D) $83 415;yes

Question 10

Supply the missing data for each of the following proposals:
 $$\begin{array} { | l | r | r | r | } 
\hline & \text { Proposal A } & \text { Proposal B } & \text { Proposal C } \
\hline \text { Initial investment } & ( \mathrm { a } ) & \$ 75000 & \$ 255000 \
\hline \text { Annual net cash inflow } & \$ 90000 & ( \mathrm { c } ) & ( \mathrm { e } ) \
\hline \text { Life, in years } & 10 & 6 & 10 \
\hline \text { Salvage value } & \$ 0 & \$ 10000 & \$ 0 \
\hline \text { Discounted payback period in years } & ( \mathrm { b } & ( \mathrm { d } ) & 5.65 \
\hline \text { Internal rate of return } & 12 \% & 24 \% & \text { (f) } \
\hline
\end{array}$$ 
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

a.
 \[\begin{array} { | l | r | } 
\hlin

Question 11

What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and accrual accounting for performance evaluation? How can these conflicts be reduced?

Accepted Answer

Using accrual accounting to evaluate the

Question 12

Mildura 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 three years and the new equipment has a value of $73 250 with a three-year life.The expected additional cash inflows are $34 782 per year.What is the internal rate of return?

Accepted Answer

A) 20% 
B) 16% 
C) 10% 
D) 8% 
A) 20% 
B) 16% 
C) 10% 
D) 8%

Question 13

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.
-Which of the following results of the net present value method in capital budgeting is the LEAST acceptable?

Accepted Answer

A) $0 
B) $(18 000) 
C) $(7000) 
D) $(10 000) 
A) $0 
B) $(18 000) 
C) $(7000) 
D) $(10 000)

Question 14

The ____________________________method for capital budgeting divides an accounting measure of income by an accounting measure of investment.

Accepted Answer

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

Question 15

Sam's Structures desires to buy a new crane and accessories to help move and install modular buildings.The machine sells for $75 000 and requires working capital of $10 000.Its estimated useful life is six years and it will have a salvage value of $17 560.Recovery of working capital will be $10 000 at the end of its useful life.Annual cash savings from the purchase of the machine will be $20 000.
Required:
a.Compute the net present value at a 12% required rate of return.
b.Compute the internal rate-of-return.
c.Determine the discounted payback period of the investment.
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

a.
 \[\begin{array} { | l | r | r | r |

Question 16

Deducting depreciation from operating cash flows would result in counting the initial investment twice in a discounted cash flow analysis.

Accepted Answer

A) True 
 B)False

Question 17

Terrain Vehicle has received three proposals for its new vehicle-painting machine.Information on each proposal is as follows:
 $$\begin{array} { | l | r | r | r | } 
\hline & \text { Proposal } \mathbf { X } & \text { Proposal Y } & \text { Proposal Z } \
\hline \text { Initial investment in equipment } & \$ 180000 & \$ 120000 & \$ 19000 \
\hline \text { Working capital needed } & 0 & 0 & 10000 \
\hline \text { Annual cash saved by operations: } & & & \
\hline \text { Year 1 } & 75000 & 50000 & 80000 \
\hline \text { Year 2 } & 75000 & 48000 & 80000 \
\hline \text { Year 3 } & 75000 & 44000 & 80000 \
\hline \text { Year 4 } & 75000 & 8000 & 80000 \
\hline \text { Salvage value end of year: } & & & \
\hline \text { Year 1 } & 100000 & 80000 & 60000 \
\hline \text { Year 2 } & 80000 & 60000 & 50000 \
\hline \text { Year 3 } & 40000 & 40000 & 30000 \
\hline \text { Year 4 } & 10000 & 20000 & 15000 \
\hline \text { Working capital returned } & 0 & 0 & 10000 \
\hline
\end{array}$$ 
Required:
Determine each proposal's payback.
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

Proposal X payback = $180 000/$75 000 =

Question 18

Echidna Corporation has an annual cash inflow from operations from its investment in a capital asset of $50 000 each year for five years.The corporation's income tax rate is 40%.Calculate the five years' total after-tax cash inflow from operations.

Accepted Answer

A) $175 000 
B) $50 000 
C) $150 000 
D) $250 000 
A) $175 000 
B) $50 000 
C) $150 000 
D) $250 000

Question 19

What does it mean when the net present value for a project is zero or positive?

Accepted Answer

A) Project should be accepted 
B) Expected rate of return is below the required rate of return 
C) Project should not be accepted 
D) Both A and C are correct. 
A) Project should be accepted 
B) Expected rate of return is below the required rate of return 
C) Project should not be accepted 
D) Both A and C are correct.

Question 20

Bendigo Gold Extrusions Corporation recently purchased a new machine for its factory operations at a cost of $521 250.The investment is expected to generate $141 452 in annual cash flows for a period of six years.The required rate of return is 14%.The old machine has a remaining life of six years.The new machine is expected to have zero value at the end of the six-year period.The disposal value of the old machine at the time of replacement is zero.What is the internal rate of return?

Accepted Answer

A) 15% 
B) 16% 
C) 17% 
D) 18% 
A) 15% 
B) 16% 
C) 17% 
D) 18%

The net present value method can be used in situations where the required rate-of-return varies over the life of the project.

All of the following are major categories of cash flows in capital investment decisions EXCEPT:

The Shepparton Corporation sells a capital asset with an original cost of $230 000 and accumulated depreciation of $205 000 for a salvage price of $36 000.Shepparton's tax rate is 30%.Calculate the after-tax cash inflow from the disposal of the capital asset.

The 'identify the problem' stage of capital budgeting gathers information from all parts of the value chain to evaluate alternative projects.

Capital investment decisions that are strategic in nature:

What rate of return is used in calculating net present value of a project?

What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and accrual accounting for performance evaluation? How can these conflicts be reduced?

The ____________________________method for capital budgeting divides an accounting measure of income by an accounting measure of investment.

Deducting depreciation from operating cash flows would result in counting the initial investment twice in a discounted cash flow analysis.

Echidna Corporation has an annual cash inflow from operations from its investment in a capital asset of $50 000 each year for five years.The corporation's income tax rate is 40%.Calculate the five years' total after-tax cash inflow from operations.

What does it mean when the net present value for a project is zero or positive?

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 net present value method can be used in situations where the required rate-of-return varies over the life of the project.

All of the following are major categories of cash flows in capital investment decisions EXCEPT:

The Shepparton Corporation sells a capital asset with an original cost of $230 000 and accumulated depreciation of $205 000 for a salvage price of $36 000.Shepparton's tax rate is 30%.Calculate the after-tax cash inflow from the disposal of the capital asset.

The 'identify the problem' stage of capital budgeting gathers information from all parts of the value chain to evaluate alternative projects.

Capital investment decisions that are strategic in nature:

What rate of return is used in calculating net present value of a project?

What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and accrual accounting for performance evaluation? How can these conflicts be reduced?

The ____________________________method for capital budgeting divides an accounting measure of income by an accounting measure of investment.

Deducting depreciation from operating cash flows would result in counting the initial investment twice in a discounted cash flow analysis.

Echidna Corporation has an annual cash inflow from operations from its investment in a capital asset of $50 000 each year for five years.The corporation's income tax rate is 40%.Calculate the five years' total after-tax cash inflow from operations.

What does it mean when the net present value for a project is zero or positive?

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