Question 1

A capital budget spans only a one-year period.

Accepted Answer

A) True 
 B)False

Question 2

The stage of the capital budgeting process that considers the expected costs and the expected benefits of alternative capital investments is the:

Accepted Answer

A) evaluate each possible course of action stage. 
B) collect information stage. 
C) identify the problem stage. 
D) make decisions by choosing among alternatives stage. 
A) evaluate each possible course of action stage. 
B) collect information stage. 
C) identify the problem stage. 
D) make decisions by choosing among alternatives stage.

Question 3

The accrual accounting rate-of-return method has a significant weakness for use in making capital budgeting decisions because it does not track cash flows and it ignores the time value of money.

Accepted Answer

A) True 
 B)False

Question 4

Depreciation is usually not considered an operating cash flow in capital budgeting because:

Accepted Answer

A) depreciation usually does not result in an increase in working capital 
B) depreciation is usually a constant amount each year over the life of the capital investment 
C) deducting depreciation from operating cash flows would be counting the lump-sum amount twice 
D) depreciation usually has no effect on the disposal price of the machine 
A) depreciation usually does not result in an increase in working capital 
B) depreciation is usually a constant amount each year over the life of the capital investment 
C) deducting depreciation from operating cash flows would be counting the lump-sum amount twice 
D) depreciation usually has no effect on the disposal price of the machine

Question 5

How is inflation related to capital budgeting? Discuss.
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

When using the net present value method

Question 6

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:
 $$\begin{array} { | l | r | r | r | r | } 
\hline & \text { Proposal 1 } & \text { Proposal 2 } & \text { Proposal 3 } & \text { Proposal 4 } \
\hline \text { Payback period } & 4 \text { years } & 4.5 \text { years } & 6 \text { years } & 7 \text { years } \
\hline \text { Net present value } & \$ 80000 & \$ 178000 & \$ 166000 & \$ 308000 \
\hline \text { Internal rate of return } & 12 \% & 14 \% & 11 \% & 13 \% \
\hline \begin{array} { l } 
\text { Accrual accounting rate of } \
\text { return }
\end{array} & 8 \% & 6 \% & 4 \% & 7 \% \
\hline
\end{array}$$ 
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 7

Townsville Optical needs to overhaul its vision tester or buy a new one.The facts have been gathered,and they are as follows:
 $$\begin{array} { | l | r | r | } 
\hline & \text { Current Machine } & \text { New Machine } \
\hline \text { Purchase Price, New } & \$ 112500 & \$ 248000 \
\hline \text { Current book value } & 33500 & \
\hline \text { Overhaul needed now } & 82500 & \
\hline \text { Annual cash operating costs } & 70000 & 40000 \
\hline \text { Current salvage value } & 50000 & \
\hline \text { Salvage value in five years } & 18000 & 70000 \
\hline
\end{array}$$ 
Required:
Which alternative is the most desirable with a current required rate of return of 15%? Show computations,and assume no taxes.
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

Present value of keeping current system:

Question 8

The method that measures the time it will take to recoup,in the form of future cash inflows,the total dollars invested in a project is called:

Accepted Answer

A) the accrued accounting rate-of-return method. 
B) the book-value method. 
C) internal rate-of-return method. 
D) payback method. 
A) the accrued accounting rate-of-return method. 
B) the book-value method. 
C) internal rate-of-return method. 
D) payback method.

Question 9

Unlike the net present value method and the internal rate-of-return method,the payback method does not distinguish between the origins of the cash flows.

Accepted Answer

A) True 
 B)False

Question 10

Supply the missing data for each of the following proposals:
 $\begin{array}{|l|c|c|c|}
\hline &\text { Proposal A } & \text { Proposal B } & \text { Proposal C } \
\hline \text { Initial investment } & (\mathrm{a}) & \$ 62900 & \$ 226000 \
\hline \text { Annual net cash inflow } & \$ 60000 & \text { (c) } & (\mathrm{e}) \
\hline \text { Life, in years } & 10 & 6 & 10 \
\hline \text { Salvage value } & \$ 0 & \$ 10000 & \$ 0 \
\hline \begin{array}{l}
\text { Discounted payback period in } \
\text { years }
\end{array} & \text { (b) } & \text { (d) } & 5.69 \
\hline \text { Internal rate of return } & 12 \% & 24 \% & (\mathrm{f} )\
\hline
\end{array}$
 
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

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

Question 11

Depreciation tax deductions result in tax savings that partially offset the cost of acquiring the capital asset.

Accepted Answer

A) True 
 B)False

Question 12

Answer the following questions using the information below:
Cronulla Cleaners is considering the purchase of an industrial dry-cleaning machine.The existing machine is operable for three more years and will have a zero disposal price.The machine may be sold for $50 000 now.The new machine will cost $200 000 and an additional cash investment in working capital of $50 000 will be required.The new machine will reduce the average time required to wash clothing and will decrease labour costs.The investment is expected to net $45 000 in additional cash inflows during the year of acquisition and $135 000 each additional year of use.The new machine has a three-year life,and zero disposal value.These cash flows will occur throughout the year but will be recognised at the end of each year.Income taxes are not considered in this problem.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 10%? Would the company want to purchase the new machine?

Accepted Answer

A) $53 800;yes 
B) $45 000;no 
C) $(53 800);no 
D) $(45 000);yes 
A) $53 800;yes 
B) $45 000;no 
C) $(53 800);no 
D) $(45 000);yes

Question 13

The 'determine possible courses of action and consider the consequences of each' stage of the capital budgeting process consists of forecasting all potential net profit additions that are attributable to the alternative projects.

Accepted Answer

A) True 
 B)False

Question 14

Hunter Valley Horticulture Company provides flowers and other nursery products for decorative purposes in medium to large restaurants and businesses.The company has been investigating the purchase of a new specially equipped van for deliveries.The van has a value of $61 875 with a seven-year life.The expected additional cash inflows total $13 750 per year.What is the payback period on this investment?

Accepted Answer

A) 3 years 
B) 4.5 years 
C) 6 years 
D) NA - project not feasible 
A) 3 years 
B) 4.5 years 
C) 6 years 
D) NA - project not feasible

Question 15

The accrual accounting rate-of-return method is similar to the internal rate-of-return method in that both methods calculate a rate-of-return percentage.

Accepted Answer

A) True 
 B)False

Question 16

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 $100 000 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) $(16 960);yes 
B) $(16 960);no 
C) $16 960;yes 
D) $25 350;yes 
A) $(16 960);yes 
B) $(16 960);no 
C) $16 960;yes 
D) $25 350;yes

Question 17

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 investment rates average 9% and you have a 15-year work life?

Accepted Answer

A) $41 286 
B) $34 059 
C) $37 853 
D) $25 554 
A) $41 286 
B) $34 059 
C) $37 853 
D) $25 554

Question 18

What does the net present value method focus on?

Accepted Answer

A) Cash outflows 
B) Accrual-accounting net income 
C) Cash inflows 
D) Both A and C are correct 
A) Cash outflows 
B) Accrual-accounting net income 
C) Cash inflows 
D) Both A and C are correct

Question 19

What do discounted cash flow methods for capital budgeting focus on?

Accepted Answer

A) Cash outflows 
B) Operating profit 
C) Cash inflows 
D) Both A and C are correct. 
A) Cash outflows 
B) Operating profit 
C) Cash inflows 
D) Both A and C are correct.

Question 20

The 'evaluate each possible course of action and select the best one' stage of the capital budgeting process consists of determining which investment yields the greatest benefit and the least cost to the organisation.

Accepted Answer

A) True 
 B)False

A capital budget spans only a one-year period.

The stage of the capital budgeting process that considers the expected costs and the expected benefits of alternative capital investments is the:

The accrual accounting rate-of-return method has a significant weakness for use in making capital budgeting decisions because it does not track cash flows and it ignores the time value of money.

Depreciation is usually not considered an operating cash flow in capital budgeting because:

How is inflation related to capital budgeting? Discuss. _ _

The method that measures the time it will take to recoup,in the form of future cash inflows,the total dollars invested in a project is called:

Unlike the net present value method and the internal rate-of-return method,the payback method does not distinguish between the origins of the cash flows.

Depreciation tax deductions result in tax savings that partially offset the cost of acquiring the capital asset.

The 'determine possible courses of action and consider the consequences of each' stage of the capital budgeting process consists of forecasting all potential net profit additions that are attributable to the alternative projects.

The accrual accounting rate-of-return method is similar to the internal rate-of-return method in that both methods calculate a rate-of-return percentage.

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 investment rates average 9% and you have a 15-year work life?

What does the net present value method focus on?

What do discounted cash flow methods for capital budgeting focus on?

The 'evaluate each possible course of action and select the best one' stage of the capital budgeting process consists of determining which investment yields the greatest benefit and the least cost to the organisation.

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

A capital budget spans only a one-year period.

The stage of the capital budgeting process that considers the expected costs and the expected benefits of alternative capital investments is the:

The accrual accounting rate-of-return method has a significant weakness for use in making capital budgeting decisions because it does not track cash flows and it ignores the time value of money.

Depreciation is usually not considered an operating cash flow in capital budgeting because:

How is inflation related to capital budgeting? Discuss. _____________________________________________________________________________________________ _____________________________________________________________________________________________

The method that measures the time it will take to recoup,in the form of future cash inflows,the total dollars invested in a project is called:

Unlike the net present value method and the internal rate-of-return method,the payback method does not distinguish between the origins of the cash flows.

Depreciation tax deductions result in tax savings that partially offset the cost of acquiring the capital asset.

The 'determine possible courses of action and consider the consequences of each' stage of the capital budgeting process consists of forecasting all potential net profit additions that are attributable to the alternative projects.

The accrual accounting rate-of-return method is similar to the internal rate-of-return method in that both methods calculate a rate-of-return percentage.

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 investment rates average 9% and you have a 15-year work life?

What does the net present value method focus on?

What do discounted cash flow methods for capital budgeting focus on?

The 'evaluate each possible course of action and select the best one' stage of the capital budgeting process consists of determining which investment yields the greatest benefit and the least cost to the organisation.

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

How is inflation related to capital budgeting? Discuss. _ _