Question 1

The most widely used capital budgeting models are ________.

Accepted Answer

A)  payback method 
B)  accounting rate of return 
C)  return on investment 
D)  discounted cash flow methods 
A)  payback method 
B)  accounting rate of return 
C)  return on investment 
D)  discounted cash flow methods

Question 2

In net present value analysis,the minimum desired rate of return for an investment project depends on the ________ of a proposed project.

Accepted Answer

A)  expected return 
B)  desired return 
C)  risk 
D)  payback period 
A)  expected return 
B)  desired return 
C)  risk 
D)  payback period

Question 3

A company is considering two investment projects.If they use the total project approach and the differential approach,both approaches produce ________.

Accepted Answer

A)  different answers 
B)  similar answers 
C)  the same answer 
D)  not enough information is given to make an assessment 
A)  different answers 
B)  similar answers 
C)  the same answer 
D)  not enough information is given to make an assessment

Question 4

Apple Company pays 15% on the first $50,000 of pretax income and 30% on any additional pretax income.Apple Company currently earns $52,000.An investment under consideration is expected to add $20,000 in pretax income.What is the tax rate on the additional income from the investment?

Accepted Answer

A)  15% 
B)  22.5% 
C)  30% 
D)  43% 
A)  15% 
B)  22.5% 
C)  30% 
D)  43%

Question 5

Which of the following items does NOT affect the present value of the tax deduction for depreciation expense used in the net present value calculation of an investment?

Accepted Answer

A)  recovery period 
B)  tax rates 
C)  discount rate 
D)  gain on disposal of investment 
A)  recovery period 
B)  tax rates 
C)  discount rate 
D)  gain on disposal of investment

Question 6

A plant asset with a book value of $200,000 is sold for $150,000.The applicable tax rate is 40%.What is the tax effect of the loss on sale?

Accepted Answer

A)  $20,000 cash outflow 
B)  $20,000 cash inflow 
C)  $30,000 cash inflow 
D)  $170,000 cash inflow 
A)  $20,000 cash outflow 
B)  $20,000 cash inflow 
C)  $30,000 cash inflow 
D)  $170,000 cash inflow

Question 7

The annual after-tax cash operating inflows of a newly purchased machine are expected to be $60,000.The expected useful life of the machine is 5 years.The after-tax minimum desired rate of return,including an inflation factor,is 25%.The inflation rate is 10% per year.What is the annual after-tax cash operating inflow for year 2 for the machine?

Accepted Answer

A)  $54,000 
B)  $60,000 
C)  $66,000 
D)  $72,600 
A)  $54,000 
B)  $60,000 
C)  $66,000 
D)  $72,600

Question 8

New Hampshire Company is considering two investments.The relevant data follows:
$\begin{array}{lll}&\text { Project A }&\text { Project B }\
\text { Cost } & \$ 200,000 & \$ 300,000 \
\text { Annual cash savings(end of year) } & \$ 50,692 & \$ 60,995 \
\text { Terminal salvage value } & \$ 50,000 & \$ 70,000 \
\text { Estimated useful life in years } & 5 & 5 \
\text { Minimum desired rate of return } & 10 \% & 10 \%\
\text { Method of depreciation }&\text { Straight-line }&\text { Straight-line }\
\end{array}$
$\begin{array}{lll}&\text { Present Value } & \text { Present Value } \
&\text { Of } \$ 1 & \text { of Ordinary } \
&\text { for } 5 \text { periods } & \text { Annuity of } \$1 \
&& \text { for } 5 \text { periods }\
5 \% & 0.7835 & 4.3295 \
6 \% & 0.7473 & 4.2124 \
7 \% & 0.713 & 4.1002 \
8 \% & 0.6806 & 3.9927 \
10 \% & 0.6209 & 3.7908 \
12 \% & 0.5674 & 3.6048 \
14 \% & 0.5194 & 3.4331
\end{array}$
Ignore taxes.Using the net present value method,which project should be accepted?

Accepted Answer

A)  Project A only 
B)  Project B only 
C)  both Project A and Project B 
D)  neither Project A nor Project B 
A)  Project A only 
B)  Project B only 
C)  both Project A and Project B 
D)  neither Project A nor Project B

Question 9

The accounting rate of return model ignores the time value of money.

Accepted Answer

A) True 
 B)False

Question 10

California Company is considering two investments.The relevant data follows:
$\begin{array}{lll}&\text { Project A }&\text { Project B }\
\text { Cost } & \$ 205,010 & \$ 259,770 \
\text { Annual cash savings(end of year) } & \$ 50,000 & \$ 60,000 \
\text { Terminal salvage value } & \$ 0 & \$ 0 \
\text { Estimated useful life in years } & 5 & 5 \
\text { Minimum desired rate of return } & 10 \% & 10 \%\
\text { Method of depreciation }&\text { Straight-line }&\text { Straight-line }
\end{array}$
$\begin{array}{lll}&\text { Present Value } & \text { Present Value } \
&\text { Of } \$ 1 & \text { of Ordinary } \
&\text { for } 5 \text { periods } & \text { Annuity of } \$ 1 \
&& \text { for } 5 \text { periods }\
5 \% & 0.7835 & 4.3295 \
6 \% & 0.7473 & 4.2124 \
7 \% & 0.713 & 4.1002 \
8 \% & 0.6806 & 3.9927 \
10 \% & 0.6209 & 3.7908 \
12 \% & 0.5674 & 3.6048 \
14 \% & 0.5194 & 3.4331
\end{array}$
Ignoring taxes,the internal rate of return for Project B is approximately ________.

Accepted Answer

A)  5% 
B)  6% 
C)  7% 
D)  8% 
A)  5% 
B)  6% 
C)  7% 
D)  8%

Question 11

Hewlett Company is considering the following investment:
$\begin{array}{ll}
\text { Estimated capital investment } & \$ 220,000 \
\text { Estimated useful life } & 3 \text { years } \
\text { Estimated disposal value in } 3 \text { years } & \$ 10,000 \
\text { Estimated annual savings in cash operating costs(end of year) } & \$ 120,000 \
\text { Minimum desired rate of return } & 12 \% \
\text { Present value of ordinary annuity of one, } 3 \text { periods at } 12 \% & 2.4018 \
\text { Present value of one, } 3 \text { periods at } 12 \% & 0.7118
\end{array}$
Assume straight-line depreciation is used.Ignore income taxes.The net present value of the investment is ________.

Accepted Answer

A)  $68,216 
B)  $75,334 
C)  $78,216 
D)  $150,229 
A)  $68,216 
B)  $75,334 
C)  $78,216 
D)  $150,229

Question 12

The ________ approach computes the differences in cash flows between two alternatives and then finds the present value of these differences.

Accepted Answer

A)  differential 
B)  payback 
C)  total project 
D)  sensitivity 
A)  differential 
B)  payback 
C)  total project 
D)  sensitivity

Question 13

Assume the net present value method is used to evaluate investment opportunities.A manager is faced with several investments,but only has funding for one investment.Which investment should be chosen?

Accepted Answer

A)  the investment with the lowest net present value 
B)  the investment with a net present value equal to zero 
C)  the investment with a negative net present value 
D)  the investment with the largest net present value 
A)  the investment with the lowest net present value 
B)  the investment with a net present value equal to zero 
C)  the investment with a negative net present value 
D)  the investment with the largest net present value

Question 14

If a company accepts a project with a negative NPV,the project will increase the value of the firm.

Accepted Answer

A) True 
 B)False

Question 15

Using the net present value method,managers sum the present values of all expected future cash flows from the project and ________.

Accepted Answer

A)  add the initial investment 
B)  subtract the initial investment 
C)  ignore the initial investment 
D)  add the depreciation expense 
A)  add the initial investment 
B)  subtract the initial investment 
C)  ignore the initial investment 
D)  add the depreciation expense

Question 16

The present value of tax savings from depreciation is greater for straight-line depreciation than an accelerated depreciation method.

Accepted Answer

A) True 
 B)False

Question 17

Haworth Company is considering the purchase of a labor saving piece of equipment with the following information:
$\begin{array}{ll}
\text { Purchase cost of equipment } & \$ 432,000 \
\text { Annual cost savings, excluding depreciation (end of year) } & \$ 90,000 \
\text { Terminal salvage value } & 0 \
\text { Useful life of equipment } & 12 \text { years } \
\text { Required rate of return } & 10 \% \
\text { Taxrate } & 30 \% \
\text { Depreciation method for taxpurposes } & \text { Straight-line }
\end{array}$
Present value of ordinary annuity of one
$\begin{array} { l  }
 \text {at $ 10 \% $ for 12 period }&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)  $(2,737) 
B)  $(174,442) 
C)  $70,851 
D)  $168,968 
A)  $(2,737) 
B)  $(174,442) 
C)  $70,851 
D)  $168,968

Question 18

Discounted-cash-flow models are not based on the theory of compound interest.

Accepted Answer

A) True 
 B)False

Question 19

Sharpie Company will purchase a van for $75,000.The van's depreciable life is 5 years.The van has no terminal salvage value.Assume a tax rate of 30% and a required after-tax rate of return of 12%.The company uses the straight-line method of depreciation for tax purposes.What is the annual after-tax cash flow from depreciation expense?

Accepted Answer

A)  $4,500 cash outflow 
B)  $4,500 cash inflow 
C)  $10,500 cash outflow 
D)  $10,500 cash inflow 
A)  $4,500 cash outflow 
B)  $4,500 cash inflow 
C)  $10,500 cash outflow 
D)  $10,500 cash inflow

Question 20

Discounted-cash-flow models focus on a project's cash inflows and cash outflows without regard to the time value of money.

Accepted Answer

A) True 
 B)False

The most widely used capital budgeting models are ________.

In net present value analysis,the minimum desired rate of return for an investment project depends on the ________ of a proposed project.

A company is considering two investment projects.If they use the total project approach and the differential approach,both approaches produce ________.

Apple Company pays 15% on the first $50,000 of pretax income and 30% on any additional pretax income.Apple Company currently earns $52,000.An investment under consideration is expected to add $20,000 in pretax income.What is the tax rate on the additional income from the investment?

Which of the following items does NOT affect the present value of the tax deduction for depreciation expense used in the net present value calculation of an investment?

A plant asset with a book value of $200,000 is sold for $150,000.The applicable tax rate is 40%.What is the tax effect of the loss on sale?

The accounting rate of return model ignores the time value of money.

The ________ approach computes the differences in cash flows between two alternatives and then finds the present value of these differences.

Assume the net present value method is used to evaluate investment opportunities.A manager is faced with several investments,but only has funding for one investment.Which investment should be chosen?

If a company accepts a project with a negative NPV,the project will increase the value of the firm.

Using the net present value method,managers sum the present values of all expected future cash flows from the project and ________.

The present value of tax savings from depreciation is greater for straight-line depreciation than an accelerated depreciation method.

Discounted-cash-flow models are not based on the theory of compound interest.

Discounted-cash-flow models focus on a project's cash inflows and cash outflows without regard to the time value of money.

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

The most widely used capital budgeting models are ________.

In net present value analysis,the minimum desired rate of return for an investment project depends on the ________ of a proposed project.

A company is considering two investment projects.If they use the total project approach and the differential approach,both approaches produce ________.

Apple Company pays 15% on the first $50,000 of pretax income and 30% on any additional pretax income.Apple Company currently earns $52,000.An investment under consideration is expected to add $20,000 in pretax income.What is the tax rate on the additional income from the investment?

Which of the following items does NOT affect the present value of the tax deduction for depreciation expense used in the net present value calculation of an investment?

A plant asset with a book value of $200,000 is sold for $150,000.The applicable tax rate is 40%.What is the tax effect of the loss on sale?

The accounting rate of return model ignores the time value of money.

The ________ approach computes the differences in cash flows between two alternatives and then finds the present value of these differences.

Assume the net present value method is used to evaluate investment opportunities.A manager is faced with several investments,but only has funding for one investment.Which investment should be chosen?

If a company accepts a project with a negative NPV,the project will increase the value of the firm.

Using the net present value method,managers sum the present values of all expected future cash flows from the project and ________.

The present value of tax savings from depreciation is greater for straight-line depreciation than an accelerated depreciation method.

Discounted-cash-flow models are not based on the theory of compound interest.

Discounted-cash-flow models focus on a project's cash inflows and cash outflows without regard to the time value of money.

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