Question 1

A capital budgeting project is accepted if the required rate-of-return equals or exceeds the internal rate-of-return.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following capital budgeting methods calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the required rate of return?

Accepted Answer

A) Net present value method 
B) Accrual accounting rate-of-return method 
C) Payback method 
D) Sensitivity method 
A) Net present value method 
B) Accrual accounting rate-of-return method 
C) Payback method 
D) Sensitivity method

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

Darwin Dental Services is considering purchasing a new dental chair for $727 000.It will require additional working capital of $63 000.Its anticipated eight-year life will generate additional client revenue of $303 000 annually with operating costs,excluding depreciation,of $150 000.At the end of eight years,it will have a salvage value of $59 500 and return $15 000 in working capital.Ignore taxes.
Required:
a.If the company has a required rate of return of 14%,what is the net present value of the proposed investment?
b.What is the internal rate of return?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

a.
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Question 5

The stage of the capital-budgeting process in which projects get underway and performance is monitored is the:

Accepted Answer

A) identify problems stage. 
B) collect relevant information stage. 
C) implement the decision,evaluate performance,and learn stage. 
D) evaluate each possible course of action stage. 
A) identify problems stage. 
B) collect relevant information stage. 
C) implement the decision,evaluate performance,and learn stage. 
D) evaluate each possible course of action stage.

Question 6

Capital budgeting focuses on projects over their entire lives to consider all the cash flows or cash savings from investing in a single project.

Accepted Answer

A) True 
 B)False

Question 7

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 24%? Would the company want to purchase the new machine?

Accepted Answer

A) $32 800;no 
B) $(5240);no 
C) $(32 800);yes 
D) $5240;yes 
A) $32 800;no 
B) $(5240);no 
C) $(32 800);yes 
D) $5240;yes

Question 8

An example of a sunk cost in a capital budgeting decision for new equipment is:

Accepted Answer

A) the book value of the old equipment 
B) an increase in working capital required by a particular investment choice 
C) the necessary transportation costs on the new equipment 
D) All of these answers are correct. 
A) the book value of the old equipment 
B) an increase in working capital required by a particular investment choice 
C) the necessary transportation costs on the new equipment 
D) All of these answers are correct.

Question 9

What are the two factors capital budgeting emphasises?

Accepted Answer

A) Qualitative and non-financial 
B) Quantitative and non-financial 
C) Qualitative and financial 
D) Quantitative and financial 
A) Qualitative and non-financial 
B) Quantitative and non-financial 
C) Qualitative and financial 
D) Quantitative and financial

Question 10

Alice Springs Tailors wants to purchase a new cutting machine for its sewing plant.The investment is expected to generate annual cash inflows of $400 000.The required rate of return is 12% and the current machine is expected to last for four years.What is the maximum dollar amount Alice Springs Tailors would be willing to spend for the machine,assuming its life is also four years? Ignore income taxes.

Accepted Answer

A) $820 600 
B) $991 740 
C) $607 000 
D) $1 214 800 
A) $820 600 
B) $991 740 
C) $607 000 
D) $1 214 800

Question 11

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 12

Network Service centre is considering purchasing a new computer network for $82 000.It will require additional working capital of $13 000.Its anticipated eight-year life will generate additional client revenue of $33 000 annually with operating costs,excluding depreciation,of $15 000.At the end of eight years,it will have a salvage value of $9500 and return $5000 in working capital.Ignore taxes.
Required:
a.If the company has a required rate of return of 14%,what is the net present value of the proposed investment?
b.What is the internal rate of return?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

a.
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Question 13

The payback method takes into account cash flows over the whole life of the project.

Accepted Answer

A) True 
 B)False

Question 14

The most significant manager evaluation and goal congruence issues arise because of inconsistencies between the following methods of choosing among alternatives for capital budgeting purposes:

Accepted Answer

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

Question 15

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 $62 755 with a seven-year life.The expected additional cash inflows total $13 750 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 16

Port Phillip Fisheries need a new navigation system for their fishing boat.They have received three proposals,with related facts as follows:
 $$\begin{array} { | l | r | r | r | } 
\hline & { \text { Proposal A } } & \text { Proposal B } &  { \text { Proposal C } } \
\hline \text { Initial investment in equipment } & \$ 90000 & \$ 90000 & \$ 90000 \
\hline \begin{array} { l } 
\text { Annual cash increase in } \
\text { operations: }
\end{array} & & & \
\hline \text { Year 1 } & 80000 & 45000 & 90000 \
\hline \text { Year 2 } & 1000 & 45000 & 0 \
\hline \text { Year 3 } & 45000 & 45000 &0 \
\hline \text { Salvage value } &0 & 0& 0 \
\hline \text { Estimated life } & 3 \mathrm { yrs } &3 \mathrm { yrs }  &1 \mathrm { yr }  \
\hline
\end{array}$$ 
The company uses straight-line depreciation for all capital assets.
Required:
a.Compute 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

a.Payback Method
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Question 17

Bendigo Gold Extrusions Corporation wants to purchase a new machine for its factory operations at a cost of $770 000.The investment is expected to generate $290 000 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? Ignore income taxes.

Accepted Answer

A) $124 770;yes 
B) $844 770;yes 
C) $69 550;no 
D) $126 750;no 
A) $124 770;yes 
B) $844 770;yes 
C) $69 550;no 
D) $126 750;no

Question 18

In calculating the net initial investment cash flows for capital budgeting analysis any increase in working capital required for the project should be included.

Accepted Answer

A) True 
 B)False

Question 19

Nullabor Park Department is considering a new capital investment.The following information is available on the investment.The cost of the machine will be $144 192.The annual cost savings if the new machine is acquired will be $40 000.The machine will have a five-year life,at which time the terminal disposal value is expected to be zero.Nullabor Park is assuming no tax consequences.Nullabor Park has a 10% required rate of return.What is the payback period on this investment?

Accepted Answer

A) 3 years 
B) 3.6 years 
C) 4.2 years 
D) 5 years 
A) 3 years 
B) 3.6 years 
C) 4.2 years 
D) 5 years

Question 20

The net present value method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the hurdle rate.

Accepted Answer

A) True 
 B)False

A capital budgeting project is accepted if the required rate-of-return equals or exceeds the internal rate-of-return.

Which of the following capital budgeting methods calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the required rate of return?

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

The stage of the capital-budgeting process in which projects get underway and performance is monitored is the:

Capital budgeting focuses on projects over their entire lives to consider all the cash flows or cash savings from investing in a single project.

An example of a sunk cost in a capital budgeting decision for new equipment is:

What are the two factors capital budgeting emphasises?

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

The payback method takes into account cash flows over the whole life of the project.

The most significant manager evaluation and goal congruence issues arise because of inconsistencies between the following methods of choosing among alternatives for capital budgeting purposes:

In calculating the net initial investment cash flows for capital budgeting analysis any increase in working capital required for the project should be included.

The net present value method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the hurdle rate.

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 budgeting project is accepted if the required rate-of-return equals or exceeds the internal rate-of-return.

Which of the following capital budgeting methods calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the required rate of return?

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

The stage of the capital-budgeting process in which projects get underway and performance is monitored is the:

Capital budgeting focuses on projects over their entire lives to consider all the cash flows or cash savings from investing in a single project.

An example of a sunk cost in a capital budgeting decision for new equipment is:

What are the two factors capital budgeting emphasises?

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

The payback method takes into account cash flows over the whole life of the project.

The most significant manager evaluation and goal congruence issues arise because of inconsistencies between the following methods of choosing among alternatives for capital budgeting purposes:

In calculating the net initial investment cash flows for capital budgeting analysis any increase in working capital required for the project should be included.

The net present value method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the hurdle rate.

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