Question 1

In the net present value method,the only relevant operating cash flows are the ones that differ among alternatives.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is the benefit of depreciation expense on a plant asset when considering investment decisions with taxes?

Accepted Answer

A)  increased future operating income 
B)  future tax deduction 
C)  increased cost of plant asset 
D)  decreased cost of plant asset 
A)  increased future operating income 
B)  future tax deduction 
C)  increased cost of plant asset 
D)  decreased cost of plant asset

Question 3

The payback model measures profitability as well as how quickly investment dollars are recouped.

Accepted Answer

A) True 
 B)False

Question 4

Major weaknesses of the payback method do NOT include which of the following?

Accepted Answer

A)  It does not measure profitability. 
B)  It ignores the time value of money. 
C)  It ignores cash flows beyond the payback period. 
D)  It cannot be used as a rough estimate of the riskiness of a project. 
A)  It does not measure profitability. 
B)  It ignores the time value of money. 
C)  It ignores cash flows beyond the payback period. 
D)  It cannot be used as a rough estimate of the riskiness of a project.

Question 5

The IRR model determines the interest rate at which the NPV of an investment equals zero.

Accepted Answer

A) True 
 B)False

Question 6

Projects that recoup their investment quickly may be less risky than those that require a longer time.

Accepted Answer

A) True 
 B)False

Question 7

The differential approach to investments can be used to compare any number of projects.

Accepted Answer

A) True 
 B)False

Question 8

Managers may use the payback period as a rough estimate of the riskiness of a project.

Accepted Answer

A) True 
 B)False

Question 9

When using an NPV model,we assume predicted cash flows are certain to occur at the times specified.

Accepted Answer

A) True 
 B)False

Question 10

A company is considering the acquisition of new equipment to replace old equipment.When using the net present value method,which of the following items is NOT relevant? Ignore taxes.

Accepted Answer

A)  cash outflow for the purchase of new equipment 
B)  cash installation costs associated with the new equipment 
C)  disposal value of old equipment replaced with new equipment 
D)  fixed overhead costs that are the same under both alternatives 
A)  cash outflow for the purchase of new equipment 
B)  cash installation costs associated with the new equipment 
C)  disposal value of old equipment replaced with new equipment 
D)  fixed overhead costs that are the same under both alternatives

Question 11

A plant asset with a book value of $160,000 is sold for $100,000.The applicable tax rate is 20%.What is the net after-tax cash inflow resulting from the sale?

Accepted Answer

A)  $12,000 cash inflow 
B)  $88,000 cash inflow 
C)  $100,000 cash inflow 
D)  $112,000 cash inflow 
A)  $12,000 cash inflow 
B)  $88,000 cash inflow 
C)  $100,000 cash inflow 
D)  $112,000 cash inflow

Question 12

A recognized loss on the sale of a long-term asset causes a company's tax liability to decrease.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is FALSE?

Accepted Answer

A)  Discounted cash flow models focus on future cash inflows and outflows. 
B)  Discounted cash flow models consider the time value of money. 
C)  Discounted cash flow models focus on net income. 
D)  Discounted cash flow models compare cash outflows today to the present value of future cash flows. 
A)  Discounted cash flow models focus on future cash inflows and outflows. 
B)  Discounted cash flow models consider the time value of money. 
C)  Discounted cash flow models focus on net income. 
D)  Discounted cash flow models compare cash outflows today to the present value of future cash flows.

Question 14

Whitney Company is contemplating three different equipment investments.The relevant data follows:
 $\begin{array}{llll}&\text { Poposal D }&\text { Poposal O }&\text { Poposal G }\
\text { Cost } & \$ 200,000 & \$ 300,000 & \$ 830,000 \
\text { Annual cash savings (end of year) } & \$ 40,000 & \$ 70,000 & \$ 150,000 \
\text { Terminal salvage value } & \$ 10,000 & \$ 5,000 & \$ 20,000 \
\text { Estimated useful life in years } & 10 & 10 & 10 \
\text { Minimum desired rate of return } & 12 \% & 12 \% & 12 \%\
\text { Method of depreciation }&\text { Straight-line }&\text { Straight-line }&\text { Straight-line }\
\end{array}$ 
The present value factor of an ordinary annuity of one for 10 periods at 12% is 5.6502.
The present value factor of one for 10 periods at 12% is 0.322.
Required: 
A) Compute the net present value of each investment. Ignore income taxes.
B) If only one investment can be acquired, which investment should be chosen?

Accepted Answer

A)
Proposal D: NPV = ($40,000 × 5.6502)+

Question 15

Which of the following approaches should be used to compare four investment alternatives?

Accepted Answer

A)  total project approach 
B)  sensitivity analysis 
C)  payback method 
D)  differential approach 
A)  total project approach 
B)  sensitivity analysis 
C)  payback method 
D)  differential approach

Question 16

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

Accepted Answer

A)  6% 
B)  7% 
C)  8% 
D)  10% 
A)  6% 
B)  7% 
C)  8% 
D)  10%

Question 17

The present value of tax savings from depreciation deductions from an accelerated depreciation method will be ________ those from the straight-line method.

Accepted Answer

A)  the same as 
B)  greater than 
C)  less than 
D)  none of the above 
A)  the same as 
B)  greater than 
C)  less than 
D)  none of the above

Question 18

The nominal rate of interest equals the real rate of interest minus the inflation rate.

Accepted Answer

A) True 
 B)False

Question 19

The higher the risk of an investment project,the ________ for the project.

Accepted Answer

A)  lower the minimum desired rate of return 
B)  higher the minimum desired rate of return 
C)  lower the expected rate of return 
D)  higher the expected rate of return 
A)  lower the minimum desired rate of return 
B)  higher the minimum desired rate of return 
C)  lower the expected rate of return 
D)  higher the expected rate of return

Question 20

The marginal tax rate for a company is the ________.

Accepted Answer

A)  average tax rate for the company 
B)  highest possible tax rate that may be imposed on the company by IRS 
C)  lowest tax rate that may be imposed on the company by IRS 
D)  tax rate paid on additional amounts of pretax income 
A)  average tax rate for the company 
B)  highest possible tax rate that may be imposed on the company by IRS 
C)  lowest tax rate that may be imposed on the company by IRS 
D)  tax rate paid on additional amounts of pretax income

In the net present value method,the only relevant operating cash flows are the ones that differ among alternatives.

Which of the following is the benefit of depreciation expense on a plant asset when considering investment decisions with taxes?

The payback model measures profitability as well as how quickly investment dollars are recouped.

Major weaknesses of the payback method do NOT include which of the following?

The IRR model determines the interest rate at which the NPV of an investment equals zero.

Projects that recoup their investment quickly may be less risky than those that require a longer time.

The differential approach to investments can be used to compare any number of projects.

Managers may use the payback period as a rough estimate of the riskiness of a project.

When using an NPV model,we assume predicted cash flows are certain to occur at the times specified.

A company is considering the acquisition of new equipment to replace old equipment.When using the net present value method,which of the following items is NOT relevant? Ignore taxes.

A plant asset with a book value of $160,000 is sold for $100,000.The applicable tax rate is 20%.What is the net after-tax cash inflow resulting from the sale?

A recognized loss on the sale of a long-term asset causes a company's tax liability to decrease.

Which of the following statements is FALSE?

Which of the following approaches should be used to compare four investment alternatives?

The present value of tax savings from depreciation deductions from an accelerated depreciation method will be ________ those from the straight-line method.

The nominal rate of interest equals the real rate of interest minus the inflation rate.

The higher the risk of an investment project,the ________ for the project.

The marginal tax rate for a company is the ________.

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

Exam 11: Capital Budgeting

In the net present value method,the only relevant operating cash flows are the ones that differ among alternatives.

Which of the following is the benefit of depreciation expense on a plant asset when considering investment decisions with taxes?

The payback model measures profitability as well as how quickly investment dollars are recouped.

Major weaknesses of the payback method do NOT include which of the following?

The IRR model determines the interest rate at which the NPV of an investment equals zero.

Projects that recoup their investment quickly may be less risky than those that require a longer time.

The differential approach to investments can be used to compare any number of projects.

Managers may use the payback period as a rough estimate of the riskiness of a project.

When using an NPV model,we assume predicted cash flows are certain to occur at the times specified.

A company is considering the acquisition of new equipment to replace old equipment.When using the net present value method,which of the following items is NOT relevant? Ignore taxes.

A plant asset with a book value of $160,000 is sold for $100,000.The applicable tax rate is 20%.What is the net after-tax cash inflow resulting from the sale?

A recognized loss on the sale of a long-term asset causes a company's tax liability to decrease.

Which of the following statements is FALSE?

Which of the following approaches should be used to compare four investment alternatives?

The present value of tax savings from depreciation deductions from an accelerated depreciation method will be ________ those from the straight-line method.

The nominal rate of interest equals the real rate of interest minus the inflation rate.

The higher the risk of an investment project,the ________ for the project.

The marginal tax rate for a company is the ________.

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