Question 1

The NPV method is the preferred method over IRR for selecting projects because ________.

Accepted Answer

A)  its use leads to shareholder value maximization 
B)  it accounts for the time value of money 
C)  it assumes that cash flows are reinvested at the internal rate of return 
D)  it gives a project ranking consistent with that of IRR 
A)  its use leads to shareholder value maximization 
B)  it accounts for the time value of money 
C)  it assumes that cash flows are reinvested at the internal rate of return 
D)  it gives a project ranking consistent with that of IRR

Question 2

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 3

In the "make predictions" stage of the capital budgeting process,a company forecasts all potential net income additions those are attributable to the alternative projects.

Accepted Answer

A) True 
 B)False

Question 4

Capital budgeting is a process of ________.

Accepted Answer

A)  tracing overhead costs to products by focusing on the activities that drive costs 
B)  assigning identified costs to specific cost objectives or cost centers 
C)  measuring an organization's operations, products, and services against those of competitors recognized as market leaders 
D)  making long-run planning decisions for investments in projects 
A)  tracing overhead costs to products by focusing on the activities that drive costs 
B)  assigning identified costs to specific cost objectives or cost centers 
C)  measuring an organization's operations, products, and services against those of competitors recognized as market leaders 
D)  making long-run planning decisions for investments in projects

Question 5

A weaknesses of the payback method is that it does not consider a project's cash flows after the payback period.

Accepted Answer

A) True 
 B)False

Question 6

The Required Rate of Return (RRR)is set externally by creditors as the interest rate on long term liabilities.

Accepted Answer

A) True 
 B)False

Question 7

Tax deductions for depreciation result in tax savings that partially offset the cost of acquiring the capital asset.

Accepted Answer

A) True 
 B)False

Question 8

Book & Bible Bookstore desires to buy a new coding machine to help control book inventories.The machine sells for $36,586 and requires working capital of $4,000.Its estimated useful life is five years and will have a salvage value of $4,000.Recovery of working capital will be $4,000 at the end of its useful life.Annual cash savings from the purchase of the machine will be $10,000.
Required:
a.Compute the net present value at a 14% required rate of return.
b.Compute the internal rate of return.
c.Determine the payback period of the investment.

Accepted Answer

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

Question 9

The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $380,000.The investment is expected to generate $125,000 in annual cash flows for a period of four years.The required rate of return is 12%.The old machine can be sold for $20,000.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? Income taxes are not considered.

Accepted Answer

A)  $19,750; yes 
B)  $35,775; no 
C)  $360,000; yes 
D)  $163,005; no 
A)  $19,750; yes 
B)  $35,775; no 
C)  $360,000; yes 
D)  $163,005; no

Question 10

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 11

The final activity in the capital budgeting process is to obtain funding and make the investments identified in the make decisions by choosing among alternatives stage of the process.

Accepted Answer

A) True 
 B)False

Question 12

Match between columns
                        Premises: Issuing corporate stock for the funds to purchase new equipment
Learning how to effectively operate Machine #8 only takes 15 minutes
The need to reduce the costs to process the vegetables used in producing goulash
Monitoring the costs to operate a new machine
Percentage of defective merchandise considered too high
Will introducing the new product substantially upgrade our image as a producer of quality products?
Estimating yearly cash flows and setting investment budgets accordingly using a 12-year planning horizon.
Use of the internal rate of return for each alternative
Tracking realized cash flows and comparing against estimated numbers.

Accepted Answer

The Answer of Identify Projects and Obtain Information and Make is...

Question 13

Cedile Trailer Supply has received three proposals for its new trailer assembly line.Information on each proposal is as follows:
 $$\begin{array} { | l | r | r | r | } 
\hline & \text { Proposal X } & \text { Proposal Y } & \text { Proposal Z } \
\hline \text { Initial investment in equipment } & \$ 180,000 & \$ 140,000 & \$ 145,000 \
\hline \text { Working capital needed } & 0 & 0 & 15,000 \
\hline \text { Annual cash saved by operations: } & & & \
\hline \text { Year 1 } & 60,000 & 60,000 & 60,000 \
\hline \text { Year 2 } & 60,000 & 50,000 & 60,000 \
\hline \text { Year 3 } & 60,000 & 35,000 & 60,000 \
\hline \text { Year 4 } & 60,000 & 10,000 & 60,000 \
\hline \text { Salvage value end of year: } & & & \
\hline \text { Year 1 } & 30,000 & 25,000 & 45,000 \
\hline \text { Year 2 } & 25,000 & 20,000 & 40,000 \
\hline \text { Year 3 } & 20,000 & 15,000 & 35,000 \
\hline \text { Year 4 } & 15,000 & 10,000 & 25,000 \
\hline \text { Working capital returned: } & 0 & 0 & 15,000 \
\hline
\end{array}$$ Required:
Determine each proposal's payback.

Accepted Answer

Proposal X payback = $180,000/$60,000 =

Question 14

Flilane Tire Company needs to overhaul its auto lift system or buy a new one.The facts have been gathered,and they are as follows:
 $$\begin{array} { | l | r | r | } 
\hline & \text { Current Machine } & \text { New Machine } \
\hline \text { Purchase Price, New } & \$ 123,750 & \$ 162,800 \
\hline \text { Current book value } & 36,850 & \
\hline \text { Overhaul needed now } & 30,250 & \
\hline \text { Annual cash operating costs } & 69,300 & 52,800 \
\hline \text { Current salvage value } & 44,000 & \
\hline \text { Salvage value in five years } & 8,800 & 38,500 \
\hline
\end{array}$$ 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 curre

Question 15

The payback method of capital budgeting approach to an investment decision ________.

Accepted Answer

A)  considers cash flows over the life of the investment 
B)  highlights liquidity of the investment 
C)  considers time value of money 
D)  ignores the initial investment 
A)  considers cash flows over the life of the investment 
B)  highlights liquidity of the investment 
C)  considers time value of money 
D)  ignores the initial investment

Question 16

The net present value (NPV)method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows back to the present point in time using the required rate of return.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is the first stage to the capital budgeting process?

Accepted Answer

A)  forecast all potential cash flows attributable to the alternative projects 
B)  determine which investment yields the greatest benefit and the least cost to the organization 
C)  obtain funding and make the investments selected 
D)  identify potential capital investments that agree with the organization's strategy 
A)  forecast all potential cash flows attributable to the alternative projects 
B)  determine which investment yields the greatest benefit and the least cost to the organization 
C)  obtain funding and make the investments selected 
D)  identify potential capital investments that agree with the organization's strategy

Question 18

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

Question 19

What are the strengths and weaknesses of the accrual accounting rate-of-return (AARR)method for evaluating long-term projects?

Accepted Answer

The accrual accounting rate of return (A

Question 20

Which of the following is a stage of the capital budgeting process that determines which investment yields the greatest benefit and the least cost to an organization?

Accepted Answer

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

The NPV method is the preferred method over IRR for selecting projects because ________.

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?

In the "make predictions" stage of the capital budgeting process,a company forecasts all potential net income additions those are attributable to the alternative projects.

Capital budgeting is a process of ________.

A weaknesses of the payback method is that it does not consider a project's cash flows after the payback period.

The Required Rate of Return (RRR)is set externally by creditors as the interest rate on long term liabilities.

Tax deductions for depreciation result in tax savings that partially offset the cost of acquiring the capital asset.

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

The final activity in the capital budgeting process is to obtain funding and make the investments identified in the make decisions by choosing among alternatives stage of the process.

The payback method of capital budgeting approach to an investment decision ________.

The net present value (NPV)method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows back to the present point in time using the required rate of return.

Which of the following is the first stage to the capital budgeting process?

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 ________.

What are the strengths and weaknesses of the accrual accounting rate-of-return (AARR)method for evaluating long-term projects?

Which of the following is a stage of the capital budgeting process that determines which investment yields the greatest benefit and the least cost to an organization?

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

The NPV method is the preferred method over IRR for selecting projects because ________.

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?

In the "make predictions" stage of the capital budgeting process,a company forecasts all potential net income additions those are attributable to the alternative projects.

Capital budgeting is a process of ________.

A weaknesses of the payback method is that it does not consider a project's cash flows after the payback period.

The Required Rate of Return (RRR)is set externally by creditors as the interest rate on long term liabilities.

Tax deductions for depreciation result in tax savings that partially offset the cost of acquiring the capital asset.

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

The final activity in the capital budgeting process is to obtain funding and make the investments identified in the make decisions by choosing among alternatives stage of the process.

The payback method of capital budgeting approach to an investment decision ________.

The net present value (NPV)method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows back to the present point in time using the required rate of return.

Which of the following is the first stage to the capital budgeting process?

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 ________.

What are the strengths and weaknesses of the accrual accounting rate-of-return (AARR)method for evaluating long-term projects?

Which of the following is a stage of the capital budgeting process that determines which investment yields the greatest benefit and the least cost to an organization?

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