Question 1

The terminal disposal price of a replacement machine

Accepted Answer

A) generally increases cash inflow in the year of disposal. 
B) is the total of the salvage values of the old machine and the new machine. 
C) is the salvage value of the old machine. 
D) is the NPV value of the new machine salvage value. 
E) is the NPV of the salvage value of the old machine. 
A) generally increases cash inflow in the year of disposal. 
B) is the total of the salvage values of the old machine and the new machine. 
C) is the salvage value of the old machine. 
D) is the NPV value of the new machine salvage value. 
E) is the NPV of the salvage value of the old machine.

Question 2

Johnson's Mini Mart is considering the purchase of a new electronic bar code scanner that will keep detailed records of every sale transaction.The scanner is likely to have little effect on operating revenues and expenses.Its acquisition is primarily for increasing management information about sales.The scanner costs $4,600 and would be included in Class 8 for tax purposes.Johnson's accountant has stated that due to the fast write-off of Class 8 assets (20% CCA rate),its real cost is less than $4,600.
Due to technological obsolescence,it would have zero salvage value.
Required:
a.Since the bar code scanner cannot produce a profit or even show short run savings,should it even be evaluated as a capital budgeting expenditure? Explain.
b.Explain whether or not the real cost is less than $4,600.
c.If the company has a 40 percent tax rate and a 10% discount rate,compute the real cost of the bar code scanner.Assume there would be other assets in the class.

Accepted Answer

a.Yes,it represents an expenditure that

Question 3

A new machine will cost $1,800,000.It is in a CCA class pool that uses a declining balance rate of 30%.The company's tax rate is 38% and it requires a 9% rate of return on investments.Calculate the present value of the the tax shield the first year assuming the savings occur at year end.

Accepted Answer

A) $153,577.98 
B) $188,256.88 
C) $167,400.00 
D) $94,128.44 
E) $102,600.00 
A) $153,577.98 
B) $188,256.88 
C) $167,400.00 
D) $94,128.44 
E) $102,600.00

Question 4

The payback method measures the time required to recoup the total dollars invested in the project through cash inflows.

Accepted Answer

A) True 
 B)False

Question 5

Use the information below to answer the following question(s).
Saturn Ltd.wants to automate one of its production processes.The new equipment will cost $180,000.In addition,Saturn will incur installation and testing costs of $5,000 and $8,500 respectively.The expected life of the equipment is 8 years and the salvage value of the equipment is estimated at $18,000.The annual cash savings are estimated at $32,000.The company uses straight-line depreciation and has a required rate of return of 14%.Ignore income taxes.
-What is the payback period for the investment Saturn Ltd.is considering?

Accepted Answer

A) 5.63 years 
B) 5.78 years 
C) 6.05 years 
D) 5.26 years 
E) The project does not payback. 
A) 5.63 years 
B) 5.78 years 
C) 6.05 years 
D) 5.26 years 
E) The project does not payback.

Question 6

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

Question 7

In capital budgeting the relevant tax rate is the average tax rate for the company.

Accepted Answer

A) True 
 B)False

Question 8

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

Question 9

Return on investment (ROI)is also known as

Accepted Answer

A) internal rate of return. 
B) accrual accounting rate of return. 
C) payback. 
D) net present value. 
E) time-adjusted rate of return. 
A) internal rate of return. 
B) accrual accounting rate of return. 
C) payback. 
D) net present value. 
E) time-adjusted rate of return.

Question 10

Which of the following results of net present value analyses is the LEAST acceptable?

Accepted Answer

A) $(15,000) 
B) $(1,000) 
C) $12,000 
D) $0 
E) $20,000 
A) $(15,000) 
B) $(1,000) 
C) $12,000 
D) $0 
E) $20,000

Question 11

Use the information below to answer the following question(s).
Neptune Ltd.wants to expand its operations by manufacturing a new product line.New equipment will cost $225,000.Incremental sales are estimated at $150,000 per year for 6 years.Variable costs of producing the new product line are 52% of sales and incremental annual fixed costs are $25,000.The equipment can be salvaged after 6 years for 16% of its original cost.The company's required rate of return for new projects is 18%.Ignore income taxes.
-What is the net present value of the Neptune Ltd.investment?

Accepted Answer

A) ($26,291) 
B) ($47,277) 
C) $225,536 
D) ($60,613) 
E) $93,000 
A) ($26,291) 
B) ($47,277) 
C) $225,536 
D) ($60,613) 
E) $93,000

Question 12

Saturn Ltd.wants to automate one of its production processes.The new equipment will cost $180,000.In addition,Saturn will incur installation and testing costs of $5,000 and $8,500 respectively.The expected life of the equipment is 8 years and the salvage value of the equipment is estimated at $18,000.The annual cash savings are estimated at $32,000.The company's required rate of return is 14%.Ignore income taxes.What is the net present value of this investment?

Accepted Answer

A) ($25,246) 
B) $80,500 
C) ($11,746) 
D) ($45,056) 
E) ($38,746) 
A) ($25,246) 
B) $80,500 
C) ($11,746) 
D) ($45,056) 
E) ($38,746)

Question 13

A company is considering purchasing a new machine,at a cost of $50,000.This amount will be written off over 5 years at $10,000 per year.In the first year the company will have to increase its accounts receivable by $4,000,and inventory by $8,000.The disposal value of the machine being replaced is $1,500 and will be used to offset the amount borrowed for the new machine.What is the initial working capital investment required for the purpose of capital budgeting?

Accepted Answer

A) $8,000 
B) $60,500 
C) $10,500 
D) $12,000 
E) $4,000 
A) $8,000 
B) $60,500 
C) $10,500 
D) $12,000 
E) $4,000

Question 14

Cast Iron Stove Company wants to buy a molding machine that can be integrated into its computerized manufacturing process.It has received three bids for the machine and related manufacturer's specifications.The bids range from $3,500,000 to $3,550,000.The estimated annual savings of the machines range from $260,000 to $270,000.The payback periods are almost identical and the net present values are all within $8,000 of each other.The president just doesn't know what to do about which vendor to choose since all of the selection criteria are so close together.
Required:
What suggestions do you have for the president with regard to specific qualitative factors that could be considered?

Accepted Answer

The president needs to consider nonfinan

Question 15

International Financial Reporting Standards (IFRS)require an annual post investment review.

Accepted Answer

A) True 
 B)False

Question 16

Biermann Equipment is a publicly held corporation required to pay income taxes.For the current year it had revenues of $5,000,000 and cash expenses of $3,000,000,and claimed CCA of $200,000.The company has a 30 percent tax rate.What would be the net cash flow for the current year if all revenues and expenses were in cash?

Accepted Answer

A) $1,190,000 
B) $1,260,000 
C) $1,460,000 
D) $1,800,000 
E) $2,000,000 
A) $1,190,000 
B) $1,260,000 
C) $1,460,000 
D) $1,800,000 
E) $2,000,000

Question 17

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 18

Identify capital expenditures relevant to accomplishing strategic goals is the first step in the capital budgeting decision process model.

Accepted Answer

A) True 
 B)False

Question 19

The three factors that generally influence depreciation under IFRS/ASPE are: amount allowable for depreciation,allowable life of asset,and allowable methods of depreciation.In Canada,for tax purposes

Accepted Answer

A) the amount allowable for CCA is the cost of the asset,and,the allowable life of asset and the amount of salvage value are determined by its Class under the Income Tax Act. 
B) the amount allowable for CCA is the cost of the asset;the tax-based depreciation rate is determined by the Class of the asset under the Income Tax Act,and neither the estimated life of asset nor the amount of estimated salvage value are relevant in calculating the CCA claim. 
C) the allowable depreciation for tax purposes (CC
A) is increased for the first year only. 
D) depreciable assets are placed in various classes by the Income Tax Act,based on their estimated salvage value. 
E) in the year of acquisition of new assets into an existing pool the allowable CCA claim is based on 50% of all the assets in the pool. 
A) the amount allowable for CCA is the cost of the asset,and,the allowable life of asset and the amount of salvage value are determined by its Class under the Income Tax Act. 
B) the amount allowable for CCA is the cost of the asset;the tax-based depreciation rate is determined by the Class of the asset under the Income Tax Act,and neither the estimated life of asset nor the amount of estimated salvage value are relevant in calculating the CCA claim. 
C) the allowable depreciation for tax purposes (CC
A) is increased for the first year only. 
D) depreciable assets are placed in various classes by the Income Tax Act,based on their estimated salvage value. 
E) in the year of acquisition of new assets into an existing pool the allowable CCA claim is based on 50% of all the assets in the pool.

Question 20

Use the information below to answer the following question(s).
Hawkeye Cleaners has been 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.If the machine is disposed of now,it may be sold for $30,000.The new machine will cost $200,000,an additional cash investment in working capital of $60,000 will be required and will be returned at the end of the project.The machine is expected to last 3 years and has an estimated disposal value at that time of $20,000.The new machine will reduce the average amount of time required to wash clothing and will decrease labour costs.The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $150,000 each additional year of use.These cash flows will generally occur throughout the year and are recognized at the end of each year.Income taxes are not considered in this problem.
-What is the net present value (rounded to the nearest thousand)of the investment assuming the required rate of return is 24 percent? Would Hawkeye Cleaners want to purchase the new machine?

Accepted Answer

A) $57,000;yes 
B) $(57,000);no 
C) $(3,000);no 
D) $29,000;yes 
E) $(13,000);no 
A) $57,000;yes 
B) $(57,000);no 
C) $(3,000);no 
D) $29,000;yes 
E) $(13,000);no

The terminal disposal price of a replacement machine

A new machine will cost $1,800,000.It is in a CCA class pool that uses a declining balance rate of 30%.The company's tax rate is 38% and it requires a 9% rate of return on investments.Calculate the present value of the the tax shield the first year assuming the savings occur at year end.

The payback method measures the time required to recoup the total dollars invested in the project through cash inflows.

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.

In capital budgeting the relevant tax rate is the average tax rate for the company.

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

Return on investment (ROI)is also known as

Which of the following results of net present value analyses is the LEAST acceptable?

International Financial Reporting Standards (IFRS)require an annual post investment review.

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.

Identify capital expenditures relevant to accomplishing strategic goals is the first step in the capital budgeting decision process model.

The three factors that generally influence depreciation under IFRS/ASPE are: amount allowable for depreciation,allowable life of asset,and allowable methods of depreciation.In Canada,for tax purposes

The Accountants Vital Role in Decision Making

An Introduction to Cost Terms and Purposes

Cost-Volume-Profit Analysis

Job Costing

Activity-Based Costing and Management

Master Budget and Responsibility Accounting

Flexible Budgets,variances,and Management Control: I

Flexible Budgets,variances,and Management Control: II

Income Effects of Denominator Level on Inventory Valuation

Analysis of Cost Behaviour

Decision Making and Relevant Information

Pricing Decisions, product Profitability Decisions, and Cost Management

Strategy,balanced Scorecard,and Profitability Analysis

Period Cost Allocation

Cost Allocation: Joint Products and Byproducts

Revenue and Customer Profitability Analysis

Process Costing

Spoilage, rework, and Scrap

Inventory Cost Management Strategies

Transfer Pricing and Multinational Management Control Systems

Multinational Performance Measurement and Compensation

Filters

Exam 20: Capital Budgeting: Methods of Investment Analysis

The terminal disposal price of a replacement machine

A new machine will cost $1,800,000.It is in a CCA class pool that uses a declining balance rate of 30%.The company's tax rate is 38% and it requires a 9% rate of return on investments.Calculate the present value of the the tax shield the first year assuming the savings occur at year end.

The payback method measures the time required to recoup the total dollars invested in the project through cash inflows.

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.

In capital budgeting the relevant tax rate is the average tax rate for the company.

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

Return on investment (ROI)is also known as

Which of the following results of net present value analyses is the LEAST acceptable?

International Financial Reporting Standards (IFRS)require an annual post investment review.

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.

Identify capital expenditures relevant to accomplishing strategic goals is the first step in the capital budgeting decision process model.

The three factors that generally influence depreciation under IFRS/ASPE are: amount allowable for depreciation,allowable life of asset,and allowable methods of depreciation.In Canada,for tax purposes

The Accountants Vital Role in Decision Making

An Introduction to Cost Terms and Purposes

Cost-Volume-Profit Analysis

Job Costing

Activity-Based Costing and Management

Master Budget and Responsibility Accounting

Flexible Budgets,variances,and Management Control: I

Flexible Budgets,variances,and Management Control: II

Income Effects of Denominator Level on Inventory Valuation

Analysis of Cost Behaviour

Decision Making and Relevant Information

Pricing Decisions, product Profitability Decisions, and Cost Management

Strategy,balanced Scorecard,and Profitability Analysis

Period Cost Allocation

Cost Allocation: Joint Products and Byproducts

Revenue and Customer Profitability Analysis

Process Costing

Spoilage, rework, and Scrap

Inventory Cost Management Strategies

Transfer Pricing and Multinational Management Control Systems

Multinational Performance Measurement and Compensation

Filters