Question 1

When adjusting for inflation in a capital budgeting problem,which of the following items should be adjusted for inflation?

Accepted Answer

A)  required rate of return only 
B)  operating cash flows only 
C)  required rate of return and operating cash flows 
D)  depreciation expense 
A)  required rate of return only 
B)  operating cash flows only 
C)  required rate of return and operating cash flows 
D)  depreciation expense

Question 2

The net present value of a project is zero.The minimum desired rate of return used to obtain the net present value of zero is 8%.Which of the following statements is TRUE?

Accepted Answer

A)  The project is desirable if the minimum desired rate of return is 10%. 
B)  The project is desirable if the minimum desired rate of return is 6%. 
C)  The project is desirable if the minimum desired rate of return is 6% or 10%. 
D)  The project is undesirable if the minimum desired rate of return is 6%. 
A)  The project is desirable if the minimum desired rate of return is 10%. 
B)  The project is desirable if the minimum desired rate of return is 6%. 
C)  The project is desirable if the minimum desired rate of return is 6% or 10%. 
D)  The project is undesirable if the minimum desired rate of return is 6%.

Question 3

Christina Company will purchase a van for $40,000.It will have a depreciable life of 5 years and a terminal salvage value of $10,000.Assume a tax rate of 20% and a required after-tax rate of return of 12%.The company uses straight-line depreciation for tax purposes.The annual cash operating savings at the end of each year,exclusive of depreciation,are $10,000 for five years.The present value of one for five periods at 12% is 0.5674.The present value of an ordinary annuity of one for five periods at 12% is 3.6048.What is the net present value of the van?

Accepted Answer

A)  $(5,394) 
B)  $(1,162) 
C)  $11,909 
D)  $17,583 
A)  $(5,394) 
B)  $(1,162) 
C)  $11,909 
D)  $17,583

Question 4

Lorenzo Company is considering the purchase of equipment with an eight year life that requires a $1,600,000 investment.At the end of eight years,the equipment will have no salvage value.For eight years,the equipment will provide net income at the end of each year as follows:
 $\begin{array}{ll}
\text { Sales } & \$ 3,000,000 \
\text { Less: Variable Expenses } & 1,800,000 \
\text { Contribution margin } & 1,200,000
\end{array}$ 
Less: Fixed Expenses:
 $\begin{array}{ll}
\text { Advertising } & 700,000 \
\text { Depreciation on equipment } & {200,000} \
\text { Net income } &{\$ 300,000}
\end{array}$ 
Other information follows:
 $\begin{array} { l  }
 \text {Required rate of return }&18\% \
 \text {Tax rate }&30\% \
 \text {Depreciation method for tax purposes }&\text { Straight-line } \
\end{array}$
 
Present value of ordinary annuity of one
 $\begin{array} { l  }
 \text {at $ 18 \% $ for 8 periods }&4.0776 \
 \text {Present value of one at $ 18 \% $ for 8 periods }&0.266 \
\end{array}$
 
Required:
1.Compute the after tax annual cash flows generated by the equipment.
2.Compute the equipment's net present value.
3.If the salvage value of the equipment is $10,000,compute the equipment's net present value.

Accepted Answer

1.After-tax operating savings: ($300,000

Question 5

The minimum desired rate of return on an investment is sometimes referred to as ________.

Accepted Answer

A)  the discount rate 
B)  the hurdle rate 
C)  the required rate of return 
D)  all of the above 
A)  the discount rate 
B)  the hurdle rate 
C)  the required rate of return 
D)  all of the above

Question 6

Cowboy Company wishes to sell a machine with a book value of $40,000.The income tax rate is 30%.The machine is sold for $60,000.
Required:
A) What is the net after-tax cash flow from the sale of the machine? Is it an inflow or outflow?
B) If the machine is sold for $30,000, what is the net after-tax cash flow from the sale of the machine?

Accepted Answer

A)Net cash flow: $60,000 - $6,

Question 7

Stonefield Company pays taxes of 25% on their first $30,000 of pretax income and 30% on any taxable income in excess of $30,000.The current pretax income is $45,000.What is the marginal tax rate for Stonefield Company?

Accepted Answer

A)  25% 
B)  30% 
C)  40% 
D)  65% 
A)  25% 
B)  30% 
C)  40% 
D)  65%

Question 8

Capital-budgeting decisions have significant financial effects beyond the current year.

Accepted Answer

A) True 
 B)False

Question 9

Two common methods for comparing alternative investments are the total project approach and the conversion approach.

Accepted Answer

A) True 
 B)False

Question 10

The cash inflow from the sale of a long-term plant asset at a loss is equal to the ________.

Accepted Answer

A)  amount of the loss plus the loss times the tax rate 
B)  amount of the loss 
C)  selling price of asset plus the loss times the tax rate 
D)  selling price of asset minus the loss times the tax rate 
A)  amount of the loss plus the loss times the tax rate 
B)  amount of the loss 
C)  selling price of asset plus the loss times the tax rate 
D)  selling price of asset minus the loss times the tax rate

Question 11

When using the net present value method,if the net present value of a project is negative,then the ________.

Accepted Answer

A)  the project should be rejected 
B)  the project should be accepted 
C)  the project should be recalculated for missing cash inflows 
D)  none of the above 
A)  the project should be rejected 
B)  the project should be accepted 
C)  the project should be recalculated for missing cash inflows 
D)  none of the above

Question 12

Vanduser Company is considering the purchase of a labor saving piece of equipment with the following information:
$\begin{array}{ll}
\text { Purchase cost of equipment } & \$ 432,000 \
\text { Annual cost savings, excluding depreciation(end of year) } & \$ 80,000 \
\text { Terminal salvage value } & \$ 10,000 \
\text { Useful life of equipment } & 12 \text { years } \
\text { Required rate of return } & 10 \% \
\text { Taxrate } & 30 \% \
\text { Depreciation method for taxpurposes } & \text { Straight-line }
\end{array}$
Present value of ordinary annuity of one
$\begin{array} { l  }
 \text {at 10\% for 12 periods }&6.8137 \ \text {Present value of one at 10\% for 12 periods }&0.3186\
\end{array}$

What is the net present value of the equipment?

Accepted Answer

A)  $(50,433) 
B)  $23,155 
C)  $24,638 
D)  $124,458 
A)  $(50,433) 
B)  $23,155 
C)  $24,638 
D)  $124,458

Question 13

When making capital budgeting decisions,the manager should utilize the marginal tax rate for the company instead of the average tax rate.

Accepted Answer

A) True 
 B)False

Question 14

If the internal rate of return on a project is ________ the required rate of return,then the project should be accepted.

Accepted Answer

A)  higher than 
B)  lower than 
C)  the same as 
D)  none of the above 
A)  higher than 
B)  lower than 
C)  the same as 
D)  none of the above

Question 15

Using the total project approach to investment decisions,the following information is available:
Net present value of Alternative A is $12,000
Net present value of Alternative B is $14,000
If the differential approach is used to evaluate Alternatives A and B,what is the numerical result obtained?

Accepted Answer

A)  $0 
B)  $2,000 advantage to Alternative B 
C)  $12,000 
D)  $14,000 
A)  $0 
B)  $2,000 advantage to Alternative B 
C)  $12,000 
D)  $14,000

Question 16

A capital investment has a net present value of $1,000.00 at a required rate of return of 10%.At a 12% required rate of return,the net present value of the investment is $100.00.At a 14% required rate of return,the net present value of the investment is $0.The capital investment should be rejected if ________.

Accepted Answer

A)  the required rate of return exceeds 14% 
B)  the required rate of return exceeds 12% 
C)  the required rate of return is less than 14% 
D)  the required rate of return is less than 12% 
A)  the required rate of return exceeds 14% 
B)  the required rate of return exceeds 12% 
C)  the required rate of return is less than 14% 
D)  the required rate of return is less than 12%

Question 17

An investment of $42,000 is expected to generate the following annual cash flows:
$\begin{array}{ll}
\text { Year 1 } & \$ 10,000 \
\text { Year 2 } & \$ 15,000 \
\text { Year 3 } & \$ 15,000 \
\text { Year 4 } & \$ 12,000
\end{array}$
Assume straight-line depreciation is used.Ignore income taxes.What is the payback period?

Accepted Answer

A)  3 years 
B)  3.17 years 
C)  3.83 years 
D)  4 years 
A)  3 years 
B)  3.17 years 
C)  3.83 years 
D)  4 years

Question 18

Maroon Company is considering the purchase of equipment for $600,000.The equipment will have a ten year life with no terminal salvage value.Straight-line depreciation will be used for tax purposes.It is expected that the equipment will generate annual sales of $400,000 for ten years and annual production costs,exclusive of depreciation,of $300,000 for ten years.The tax rate is 20%.The required rate of return is 12%.The present value of one for ten periods at 12% is 0.322.The present value of an ordinary annuity of one for ten periods at 12% is 5.6502.What is the net present value of the equipment?

Accepted Answer

A)  $(80,182) 
B)  $32,822 
C)  $123,226 
D)  $191,028 
A)  $(80,182) 
B)  $32,822 
C)  $123,226 
D)  $191,028

Question 19

Which of the following statements is FALSE?

Accepted Answer

A)  The higher the minimum desired rate of return, the lower the present value of each future cash flow. 
B)  Higher required rates of return lead to lower net present values for capital investments. 
C)  Higher required rates of return lead to higher net present values for capital investments. 
D)  The net present value for a project can be negative or positive depending on the minimum desired rate of return used. 
A)  The higher the minimum desired rate of return, the lower the present value of each future cash flow. 
B)  Higher required rates of return lead to lower net present values for capital investments. 
C)  Higher required rates of return lead to higher net present values for capital investments. 
D)  The net present value for a project can be negative or positive depending on the minimum desired rate of return used.

Question 20

Paper Company has a tax rate of 40% and a required rate of return of 10%.Depreciation expense relating to operating equipment is $80,000 per year.The asset has a five year life.The present value of one for five years at 10% is 0.6209.The present value of an ordinary annuity of one for five years at 10% is 3.7908.What is the present value of the after-tax cash flows from the annual depreciation expense over the life of the equipment?

Accepted Answer

A)  $0 
B)  $19,869 
C)  $80,000 
D)  $121,306 
A)  $0 
B)  $19,869 
C)  $80,000 
D)  $121,306

When adjusting for inflation in a capital budgeting problem,which of the following items should be adjusted for inflation?

The net present value of a project is zero.The minimum desired rate of return used to obtain the net present value of zero is 8%.Which of the following statements is TRUE?

The minimum desired rate of return on an investment is sometimes referred to as ________.

Stonefield Company pays taxes of 25% on their first $30,000 of pretax income and 30% on any taxable income in excess of $30,000.The current pretax income is $45,000.What is the marginal tax rate for Stonefield Company?

Capital-budgeting decisions have significant financial effects beyond the current year.

Two common methods for comparing alternative investments are the total project approach and the conversion approach.

The cash inflow from the sale of a long-term plant asset at a loss is equal to the ________.

When using the net present value method,if the net present value of a project is negative,then the ________.

When making capital budgeting decisions,the manager should utilize the marginal tax rate for the company instead of the average tax rate.

If the internal rate of return on a project is ________ the required rate of return,then the project should be accepted.

Using the total project approach to investment decisions,the following information is available: Net present value of Alternative A is $12,000 Net present value of Alternative B is $14,000 If the differential approach is used to evaluate Alternatives A and B,what is the numerical result obtained?

An investment of $42,000 is expected to generate the following annual cash flows: Year 1 \ 10,000 Year 2 \ 15,000 Year 3 \ 15,000 Year 4 \ 12,000 Assume straight-line depreciation is used.Ignore income taxes.What is the payback period?

Which of the following statements is FALSE?

Managerial Accounting,the Business Organization,and Professional Ethics

Introduction to Cost Behavior and Cost Volume Profit Relationships

Measurement of Cost Behavior

Cost Management Systems and Activity-Based Costing

Relevant Information for Decision Making With a Focus on Pricing Decisions

Relevant Information for Decision Making With a Focus on Operational Decisions

Introduction to Budgets and Preparing the Master Budget

Flexible Budgets and Variance Analysis

Management Control Systems and Responsibility Accounting

Management Control in Decentralized Organizations

Cost Allocation

Accounting for Overhead Costs

Job-Order Costing and Process-Costing Systems

Basic Accounting: Concepts, techniques, and Conventions

Understanding Corporate Annual Reports: Basic Financial Statements

Understanding and Analyzing Consolidated Financial Statements

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Exam 11: Capital Budgeting

When adjusting for inflation in a capital budgeting problem,which of the following items should be adjusted for inflation?

The net present value of a project is zero.The minimum desired rate of return used to obtain the net present value of zero is 8%.Which of the following statements is TRUE?

The minimum desired rate of return on an investment is sometimes referred to as ________.

Stonefield Company pays taxes of 25% on their first $30,000 of pretax income and 30% on any taxable income in excess of $30,000.The current pretax income is $45,000.What is the marginal tax rate for Stonefield Company?

Capital-budgeting decisions have significant financial effects beyond the current year.

Two common methods for comparing alternative investments are the total project approach and the conversion approach.

The cash inflow from the sale of a long-term plant asset at a loss is equal to the ________.

When using the net present value method,if the net present value of a project is negative,then the ________.

When making capital budgeting decisions,the manager should utilize the marginal tax rate for the company instead of the average tax rate.

If the internal rate of return on a project is ________ the required rate of return,then the project should be accepted.

Using the total project approach to investment decisions,the following information is available: Net present value of Alternative A is $12,000 Net present value of Alternative B is $14,000 If the differential approach is used to evaluate Alternatives A and B,what is the numerical result obtained?

An investment of $42,000 is expected to generate the following annual cash flows: Year 1 \ 10,000 Year 2 \ 15,000 Year 3 \ 15,000 Year 4 \ 12,000 Assume straight-line depreciation is used.Ignore income taxes.What is the payback period?

Which of the following statements is FALSE?

Managerial Accounting,the Business Organization,and Professional Ethics

Introduction to Cost Behavior and Cost Volume Profit Relationships

Measurement of Cost Behavior

Cost Management Systems and Activity-Based Costing

Relevant Information for Decision Making With a Focus on Pricing Decisions

Relevant Information for Decision Making With a Focus on Operational Decisions

Introduction to Budgets and Preparing the Master Budget

Flexible Budgets and Variance Analysis

Management Control Systems and Responsibility Accounting

Management Control in Decentralized Organizations

Cost Allocation

Accounting for Overhead Costs

Job-Order Costing and Process-Costing Systems

Basic Accounting: Concepts, techniques, and Conventions

Understanding Corporate Annual Reports: Basic Financial Statements

Understanding and Analyzing Consolidated Financial Statements

Filters