Question 1

Managers prefer projects with higher IRRs to projects with lower IRRs,if all other things are equal.

Accepted Answer

A) True 
 B)False

Question 2

The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the ________.

Accepted Answer

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

Question 3

If internal rate of return is less than required rate of return,the net present value is positive.

Accepted Answer

A) True 
 B)False

Question 4

Discounted cash flow methods for capital budgeting focus on ________.

Accepted Answer

A)  cash inflows and required rate of return 
B)  operating income and required rate of return 
C)  operating income and cost of capital 
D)  working capital and cost of capital 
A)  cash inflows and required rate of return 
B)  operating income and required rate of return 
C)  operating income and cost of capital 
D)  working capital and cost of capital

Question 5

The AARR method is similar to the IRR method as ________.

Accepted Answer

A)  both calculate the return using after-tax cash flows 
B)  both calculate the return using operating-income numbers after considering accruals and taxes 
C)  both calculate the result in terms of percentage 
D)  both consider the time value of money 
A)  both calculate the return using after-tax cash flows 
B)  both calculate the return using operating-income numbers after considering accruals and taxes 
C)  both calculate the result in terms of percentage 
D)  both consider the time value of money

Question 6

Answer the following questions using the information below:
Diemia Hospital has been considering the purchase of a new x-ray machine. The existing machine is operable for five more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $80,000. The new machine will cost $600,000 and an additional cash investment in working capital of $25,000 will be required. The new machine will reduce the average amount of time required to take the x-rays and will allow an additional amount of business to be done at the hospital. The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $200,000 each additional year of use. The new machine has a five-year life, and zero disposal value. 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. 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 18%? Would the hospital want to purchase the new machine?

Accepted Answer

A)  $33,910; yes 
B)  $(46,650); no 
C)  $(46,650); yes 
D)  $50,800; yes 
A)  $33,910; yes 
B)  $(46,650); no 
C)  $(46,650); yes 
D)  $50,800; yes

Question 7

Which of the following is a stage of the capital budgeting process that indicates potential capital investments that agree with an organization's strategy?

Accepted Answer

A)  identify projects stage 
B)  make predictions stage 
C)  obtain information stage 
D)  implement the decision, evaluate performance, and learn stage 
A)  identify projects stage 
B)  make predictions stage 
C)  obtain information stage 
D)  implement the decision, evaluate performance, and learn stage

Question 8

EIF Manufacturing Company needs to overhaul its drill press or buy a new one.The facts have been gathered,and they are as follows:
 $$\begin{array} { | l | r | r | } 
\hline & \text { Current Machine } & \text { New Machine } \
\hline \text { Purchase Price, New } & \$ 88,000 & \$ 110,000 \
\hline \text { Current book value } & 33,000 & \
\hline \text { Overhaul needed now } & 44,000 & \
\hline \text { Annual cash operating costs } & 77,000 & 44,000 \
\hline \text { Current salvage value } & 22,000 & \
\hline \text { Salvage value in five years } & 5,500 & 22,000 \
\hline
\end{array}$$ Required:
Which alternative is the most desirable with a current required rate of return of 20%? Show computations,and assume no taxes.

Accepted Answer

Present value of keeping curre

Question 9

Which of the following is a component of net-initial-investment cash flows?

Accepted Answer

A)  original cost of an old equipment 
B)  cash outflow to purchase a new equipment 
C)  depreciation cost 
D)  after-tax cash flow from operations 
A)  original cost of an old equipment 
B)  cash outflow to purchase a new equipment 
C)  depreciation cost 
D)  after-tax cash flow from operations

Question 10

Assume your goal in life is to retire with two million dollars.How much would you need to save at the end of each year if interest rates average 6% and you have a 25-year work life?

Accepted Answer

A)  $43,118 
B)  $55,596 
C)  $36,453 
D)  $75,503 
A)  $43,118 
B)  $55,596 
C)  $36,453 
D)  $75,503

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Unlike the payback method,which ignores cash flows after the payback period,the AARR method considers income earned throughout a project's expected useful life.

Accepted Answer

A) True 
 B)False

Question 13

The net present value method of capital budgeting is preferred over the internal rate-of-return method because ________.

Accepted Answer

A)  the net present value method is expressed as a percentage of initial investment 
B)  the net present values of individual projects can be added to determine the effects of accepting a combination of projects 
C)  the percentage return computed under the net present value method is very easy to compare 
D)  the calculation under the net present value method is easy as it does not use time value of money 
A)  the net present value method is expressed as a percentage of initial investment 
B)  the net present values of individual projects can be added to determine the effects of accepting a combination of projects 
C)  the percentage return computed under the net present value method is very easy to compare 
D)  the calculation under the net present value method is easy as it does not use time value of money

Question 14

Which of the following is a stage of the capital budgeting process during which a plant manager is queried for assembly time?

Accepted Answer

A)  make decisions by choosing among alternatives stage 
B)  obtain information stage 
C)  make predictions stage 
D)  implement the decision, evaluate performance, and learn stage 
A)  make decisions by choosing among alternatives stage 
B)  obtain information stage 
C)  make predictions stage 
D)  implement the decision, evaluate performance, and learn stage

Question 15

Accrual accounting rate of return is calculated by dividing increase in expected average annual after-tax operating income by the net initial investment.

Accepted Answer

A) True 
 B)False

Question 16

Net present value is calculated using the ________.

Accepted Answer

A)  internal rate of return 
B)  discount rate 
C)  risk-free rate 
D)  predetermined overhead cost rate 
A)  internal rate of return 
B)  discount rate 
C)  risk-free rate 
D)  predetermined overhead cost rate

Question 17

Forise Water Company drills small commercial water wells.The company is in the process of analyzing the purchase of a new drill.Information on the proposal is provided below. Initial investment:
$\begin{array} { l l } \text { Asset } & \$ 600,000 \ \text { Working capital } & \$ 128,000 \end{array}$
Operations (per year for four years):
$\begin{array}{lr}
\text { Cash receipts } & \$ 450,000 \
\text { Cashexpenditures } & \$ 190,000
\end{array}$
Disinvestment:
$\begin{array}{cr}
\text { Salvage value of d rill (existing) } & \$ 50,000 \
\text { Discount rate } & 18 \%
\end{array}$ What is the net present value of the investment? Assume there is no recovery of working capital.

Accepted Answer

A)  $(124,280) 
B)  $21,400 
C)  $82,724 
D)  $149,400 
A)  $(124,280) 
B)  $21,400 
C)  $82,724 
D)  $149,400

Question 18

Accrual accounting rate of return is calculated by dividing ________.

Accepted Answer

A)  net initial investment by an increase in expected average annual after-tax operating income 
B)  an increase in expected average annual after-tax operating income by the net initial investment 
C)  an increase in expected average annual cash flow by the net initial investment 
D)  net initial investment by an increase in expected average annual cash flow 
A)  net initial investment by an increase in expected average annual after-tax operating income 
B)  an increase in expected average annual after-tax operating income by the net initial investment 
C)  an increase in expected average annual cash flow by the net initial investment 
D)  net initial investment by an increase in expected average annual cash flow

Question 19

The accounting system that corresponds to the project dimension in capital budgeting is the ________.

Accepted Answer

A)  net present value method 
B)  internal rate of return 
C)  accrual accounting rate of return 
D)  life-cycle costing 
A)  net present value method 
B)  internal rate of return 
C)  accrual accounting rate of return 
D)  life-cycle costing

Question 20

Which of the following is a stage of the capital-budgeting process that tracks realized cash flows and compares those against estimated numbers?

Accepted Answer

A)  implement the decision, evaluate performance, and learn stage 
B)  make predictions stage 
C)  identify projects stage 
D)  make decisions by choosing among alternatives stage 
A)  implement the decision, evaluate performance, and learn stage 
B)  make predictions stage 
C)  identify projects stage 
D)  make decisions by choosing among alternatives stage

Managers prefer projects with higher IRRs to projects with lower IRRs,if all other things are equal.

The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the ________.

If internal rate of return is less than required rate of return,the net present value is positive.

Discounted cash flow methods for capital budgeting focus on ________.

The AARR method is similar to the IRR method as ________.

Which of the following is a stage of the capital budgeting process that indicates potential capital investments that agree with an organization's strategy?

Which of the following is a component of net-initial-investment cash flows?

Assume your goal in life is to retire with two million dollars.How much would you need to save at the end of each year if interest rates average 6% and you have a 25-year work life?

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

Unlike the payback method,which ignores cash flows after the payback period,the AARR method considers income earned throughout a project's expected useful life.

The net present value method of capital budgeting is preferred over the internal rate-of-return method because ________.

Which of the following is a stage of the capital budgeting process during which a plant manager is queried for assembly time?

Accrual accounting rate of return is calculated by dividing increase in expected average annual after-tax operating income by the net initial investment.

Net present value is calculated using the ________.

Accrual accounting rate of return is calculated by dividing ________.

The accounting system that corresponds to the project dimension in capital budgeting is the ________.

Which of the following is a stage of the capital-budgeting process that tracks realized cash flows and compares those against estimated numbers?

The Manager and Management Accounting

An Introduction to Cost Terms and Purposes

Cost-Volume-Profit Analysis

Job Costing

Activity-Based Costing and Activity-Based Management

Master Budget and Responsibility Accounting

Flexible Budgets, direct-Cost Variances, and Management Control

Flexible Budgets, overhead Cost Variances, and Management Control

Inventory Costing and Capacity Analysis

Determining How Costs Behave

Decision Making and Relevant Information

Strategy, balanced Scorecard, and Strategic Profitability Analysis

Pricing Decisions and Cost Management

Cost Allocation, customer-Profitability Analysis, and Sales-Variance Analysis

Allocation of Support-Department Costs, common Costs, and Revenues

Cost Allocation: Joint Products and Byproducts

Process Costing

Spoilage, rework, and Scrap

Balanced Scorecard: Quality and Time

Inventory Management, just-In-Time, and Simplified Costing Methods

Management Control Systems, transfer Pricing, and Multinational Considerations

Performance Measurement, compensation, and Multinational Considerations

Filters

Exam 21: Capital Budgeting and Cost Analysis

Managers prefer projects with higher IRRs to projects with lower IRRs,if all other things are equal.

The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the ________.

If internal rate of return is less than required rate of return,the net present value is positive.

Discounted cash flow methods for capital budgeting focus on ________.

The AARR method is similar to the IRR method as ________.

Which of the following is a stage of the capital budgeting process that indicates potential capital investments that agree with an organization's strategy?

Which of the following is a component of net-initial-investment cash flows?

Assume your goal in life is to retire with two million dollars.How much would you need to save at the end of each year if interest rates average 6% and you have a 25-year work life?

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

Unlike the payback method,which ignores cash flows after the payback period,the AARR method considers income earned throughout a project's expected useful life.

The net present value method of capital budgeting is preferred over the internal rate-of-return method because ________.

Which of the following is a stage of the capital budgeting process during which a plant manager is queried for assembly time?

Accrual accounting rate of return is calculated by dividing increase in expected average annual after-tax operating income by the net initial investment.

Net present value is calculated using the ________.

Accrual accounting rate of return is calculated by dividing ________.

The accounting system that corresponds to the project dimension in capital budgeting is the ________.

Which of the following is a stage of the capital-budgeting process that tracks realized cash flows and compares those against estimated numbers?

The Manager and Management Accounting

An Introduction to Cost Terms and Purposes

Cost-Volume-Profit Analysis

Job Costing

Activity-Based Costing and Activity-Based Management

Master Budget and Responsibility Accounting

Flexible Budgets, direct-Cost Variances, and Management Control

Flexible Budgets, overhead Cost Variances, and Management Control

Inventory Costing and Capacity Analysis

Determining How Costs Behave

Decision Making and Relevant Information

Strategy, balanced Scorecard, and Strategic Profitability Analysis

Pricing Decisions and Cost Management

Cost Allocation, customer-Profitability Analysis, and Sales-Variance Analysis

Allocation of Support-Department Costs, common Costs, and Revenues

Cost Allocation: Joint Products and Byproducts

Process Costing

Spoilage, rework, and Scrap

Balanced Scorecard: Quality and Time

Inventory Management, just-In-Time, and Simplified Costing Methods

Management Control Systems, transfer Pricing, and Multinational Considerations

Performance Measurement, compensation, and Multinational Considerations

Filters