Question 1

The discount rate used in a net present value analysis is the ________.

Accepted Answer

A)  rate of inflation 
B)  rate of interest earned on a savings account 
C)  required rate of return or the hurdle rate 
D)  rate of interest charged for debt financing of an investment 
A)  rate of inflation 
B)  rate of interest earned on a savings account 
C)  required rate of return or the hurdle rate 
D)  rate of interest charged for debt financing of an investment

Question 2

Net cash inflows from a capital investment arise from an increase in revenues,a decrease in expenses,or both.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is a capital budgeting method that ignores the time value of money?

Accepted Answer

A)  payback 
B)  internal rate of return 
C)  return on assets 
D)  net present value 
A)  payback 
B)  internal rate of return 
C)  return on assets 
D)  net present value

Question 4

The following information is provided by Glinda Systems: $$\begin{array} { | l | r | r | r | r | } 
\hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \
\hline \text { Initial investment } & \$ 428,000 & \$ 212,000 & \$ 566,000 & \$ 512,000 \
\hline \text { PV of cash inflows } & \$ 590,000 & \$ 380,000 & \$ 814,000 & \$ 398,000 \
\hline \text { Payback period (years) } & 3.6 & 3.2 & 4.0 & 2.0 \
\hline \text { NPV of project } & \$ 162,000 & \$ 168,000 & \$ 248,000 & \$ 114,000 \
\hline
\end{array}$$ What is the profitability index for Project B? (Round your answer to two decimal places.)

Accepted Answer

A)  1.92 
B)  1.36 
C)  1.25 
D)  1.79 
A)  1.92 
B)  1.36 
C)  1.25 
D)  1.79

Question 5

An investment should be accepted if ________.

Accepted Answer

A)  it has positive total cash inflows 
B)  it has a payback period in less than 10 years 
C)  the investment's rate of return is lower than the company's current year required rate of return 
D)  the net present value is positive 
A)  it has positive total cash inflows 
B)  it has a payback period in less than 10 years 
C)  the investment's rate of return is lower than the company's current year required rate of return 
D)  the net present value is positive

Question 6

The following information is provided by Pemberton Systems: $$\begin{array} { | l | r | r | r | r | } 
\hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \
\hline \text { Initial investment } & \$ 422,000 & \$ 212,000 & \$ 562,000 & \$ 516,000 \
\hline \text { PV of cash inflows } & \$ 588,000 & \$ 380,000 & \$ 810,000 & \$ 390,000 \
\hline \text { Payback period (years) } & 3.6 & 3.2 & 4.0 & 2.0 \
\hline \text { NPV of project } & \$ 166,000 & \$ 168,000 & \$ 248,000 & \$ 126,000 \
\hline
\end{array}$$ Which project has the highest profitability index?

Accepted Answer

A)  Project A 
B)  Project B 
C)  Project C 
D)  Project D 
A)  Project A 
B)  Project B 
C)  Project C 
D)  Project D

Question 7

McAfee Automobiles Manufacturing is considering two alternative investment proposals with the following data: $$\begin{array} { | l | r | r | } 
\hline & \text { Proposal } X & \text { Proposal Y } \
\hline \text { Investment } & \$ 11,800,000 & \$ 470,000 \
\hline \text { Useful life } & 5 \text { years } & 5 \text { years } \
\hline \text { Estimated annual net cash inflows for 5 years } & \$ 2,360,000 & \$ 103,000 \
\hline \text { Residual value } & \$ 58,000 & \$ 34,000 \
\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \
\hline \text { Required rate of return } & 12 \% & 10 \% \
\hline
\end{array}$$ Calculate the accounting rate of return for Proposal Y.(Round any intermediate calculations and your final answer to two decimal places.)

Accepted Answer

A)  16.10% 
B)  10.63% 
C)  6.27% 
D)  10.80% 
A)  16.10% 
B)  10.63% 
C)  6.27% 
D)  10.80%

Question 8

Which of the following situations suggests the acceptance of an investment proposal?

Accepted Answer

A)  The present value of the net cash inflows exceeds the initial investment. 
B)  The IRR is lower than the hurdle rate. 
C)  The cash inflows are less than the initial investment. 
D)  The investment will have a residual value. 
A)  The present value of the net cash inflows exceeds the initial investment. 
B)  The IRR is lower than the hurdle rate. 
C)  The cash inflows are less than the initial investment. 
D)  The investment will have a residual value.

Question 9

Which of the following best describes the internal rate of return?

Accepted Answer

A)  interest rate that makes the net present value of the investment equal to zero 
B)  discount rate that is used to evaluate funds borrowed from a lender for profitability 
C)  the ratio of average annual income to average amount invested 
D)  the rate at which the profitability of an investment increases 
A)  interest rate that makes the net present value of the investment equal to zero 
B)  discount rate that is used to evaluate funds borrowed from a lender for profitability 
C)  the ratio of average annual income to average amount invested 
D)  the rate at which the profitability of an investment increases

Question 10

Which of the following best describes the profitability index?

Accepted Answer

A)  an index of projects based on their net income 
B)  the ratio of present value of net cash inflows to initial investment 
C)  the ratio of total cash inflows to initial investment 
D)  an array of possible investment outcomes at different discount rates 
A)  an index of projects based on their net income 
B)  the ratio of present value of net cash inflows to initial investment 
C)  the ratio of total cash inflows to initial investment 
D)  an array of possible investment outcomes at different discount rates

Question 11

Clapton Corporation is considering an investment in new equipment costing $934,000.The equipment will be depreciated on a straight-line basis over a ten-year life and is expected to have a residual value of $90,000.The equipment is expected to generate net cash flows of $156,000 for each of the first five years and $138,000 for each of the last five years.What is the accounting rate of return associated with the equipment investment? (Round your answer to two decimal places.)

Accepted Answer

A)  12.86% 
B)  13.30% 
C)  8.25% 
D)  12.23% 
A)  12.86% 
B)  13.30% 
C)  8.25% 
D)  12.23%

Question 12

The net present value method of evaluating capital investments suggests that an investment with net cash inflows which exceed the initial cost of the investment is desirable.

Accepted Answer

A) True 
 B)False

Question 13

Caliber Lawnmowers is considering the purchase of a new machine costing $804,000.The company's management is estimating that the new machine will generate additional cash flows of $180,000 a year for ten years and have a residual value of $62,000 at the end of ten years.What is the machine's payback period? (Round your answer to two decimal places.)

Accepted Answer

A)  4.47 years 
B)  7.29 years 
C)  3.33 years 
D)  4.32 years 
A)  4.47 years 
B)  7.29 years 
C)  3.33 years 
D)  4.32 years

Question 14

A company is evaluating three possible investments.Each uses the straight-line method of depreciation.Following information is provided by the company: $$\begin{array} { | l | r | r | r | } 
\hline & \text { Project A } & \text { Project B } & \text { Project C } \
\hline \text { Investment } & \$ 228,000 & \$ 52,000 & \$ 228,000 \
\hline \text { Residual value } & 0 & 10,000 & 34,000 \
\hline \text { Net cash flows: } & & & \
\hline \text { Year 1 } & 56,000 & 24,000 & 86,000 \
\hline \text { Year 2 } & 56,000 & 15,000 & 56,000 \
\hline \text { Year 3 } & 56,000 & 11,000 & 66,000 \
\hline \text { Year 4 } & 56,000 & 8,000 & 26,000 \
\hline \text { Year 5 } & 56,000 & 0 & 0 \
\hline
\end{array}$$ What is the accounting rate of return for Project B? (Round your answer to two decimal places.)

Accepted Answer

A)  20.84% 
B)  9.82% 
C)  12.90% 
D)  12.22% 
A)  20.84% 
B)  9.82% 
C)  12.90% 
D)  12.22%

Question 15

Which of the following describes the time value of money?

Accepted Answer

A)  The time value of money has no effect on the timing of capital investments. 
B)  Money loses its purchasing power over time through inflation. 
C)  The fact that invested cash may not earn interest over time is called the time value of money. 
D)  A dollar received today is worth more than a dollar to be received in the future. 
A)  The time value of money has no effect on the timing of capital investments. 
B)  Money loses its purchasing power over time through inflation. 
C)  The fact that invested cash may not earn interest over time is called the time value of money. 
D)  A dollar received today is worth more than a dollar to be received in the future.

Question 16

The following information is provided by Westwind Systems:
   Calculate the profitability index for Project C.Show your calculations and round to two decimal places.

Accepted Answer

Profitability Index = Present

Question 17

Newman Automobiles Manufacturing is considering two alternative investment proposals with the following data: $$\begin{array} { | l | r | r | } 
\hline & \text { Proposal } \mathbf { X } & \text { Proposal Y } \
\hline \text { Investment } & \$ 11,100,000 & \$ 570,000 \
\hline \text { Useful life } & 5 \text { years } & 5 \text { years } \
\hline \text { Estimated annual net cash inflows for 5 years } & \$ 2,220,000 & \$ 95,000 \
\hline \text { Residual value } & \$ 54,000 & \$ 27,000 \
\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \
\hline \text { Required rate of return } & 12 \% & 10 \% \
\hline
\end{array}$$ Calculate the payback period for Proposal X.

Accepted Answer

A)  5 years 
B)  4 years 
C)  9 years 
D)  10 years 
A)  5 years 
B)  4 years 
C)  9 years 
D)  10 years

Question 18

Gordon Manufacturing is considering following two investment proposals: $$\begin{array} { | l | r | r | } 
\hline & \text { Proposal X } & \text { Proposal } \mathbf { Y } \
\hline \text { Investment } & \$ 736,000 & \$ 504,000 \
\hline \text { Useful life } & 5 \text { years } & 4 \text { years } \
\hline \text { Estimated annual net cash inflows received } & & \
\text { at the end of each year } & \$ 152,000 & \$ 108,000 \
\hline \text { Residual value } & \$ 64,000 & \$ 0 \
\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \
\hline \text { Annual discount rate } & 10 \% & 9 \% \
\hline
\end{array}$$ Compute the present value of the future cash inflows from Proposal X.
Present value of an ordinary annuity of $1:
$$\begin{array} { | l | r | r | r | } 
\hline &{ 8 \% } & { 9 \% } & 10 \% \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.312 & 3.240 & 3.170 \
\hline 5 & 3.993 & 3.890 & 3.791 \
\hline 6 & 4.623 & 4.486 & 4.355 \
\hline
\end{array}$$ Present value of $1:
$$\begin{array} { | l | r | r | r | } 
\hline &{ 8 \% } &  { 9 \% } & 10 \% \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 0.857 & 0.842 & 0.826 \
\hline 3 & 0.794 & 0.772 & 0.751 \
\hline 4 & 0.735 & 0.708 & 0.683 \
\hline 5 & 0.681 & 0.650 & 0.621 \
\hline 6 & 0.630 & 0.596 & 0.564 \
\hline
\end{array}$$

Accepted Answer

A)  $752,238 
B)  $664,516 
C)  $576,232 
D)  $615,976 
A)  $752,238 
B)  $664,516 
C)  $576,232 
D)  $615,976

Question 19

When comparing several investments with the same initial cost,the decision should be made on the basis of the ________.

Accepted Answer

A)  highest total cash inflows 
B)  longest payback period 
C)  highest NPV 
D)  highest ARR 
A)  highest total cash inflows 
B)  longest payback period 
C)  highest NPV 
D)  highest ARR

Question 20

The accounting rate of return method focuses on operating income instead of net cash inflow generated by an asset.

Accepted Answer

A) True 
 B)False

The discount rate used in a net present value analysis is the ________.

Net cash inflows from a capital investment arise from an increase in revenues,a decrease in expenses,or both.

Which of the following is a capital budgeting method that ignores the time value of money?

An investment should be accepted if ________.

Which of the following situations suggests the acceptance of an investment proposal?

Which of the following best describes the internal rate of return?

Which of the following best describes the profitability index?

The net present value method of evaluating capital investments suggests that an investment with net cash inflows which exceed the initial cost of the investment is desirable.

Which of the following describes the time value of money?

The following information is provided by Westwind Systems: Calculate the profitability index for Project C.Show your calculations and round to two decimal places.

When comparing several investments with the same initial cost,the decision should be made on the basis of the ________.

The accounting rate of return method focuses on operating income instead of net cash inflow generated by an asset.

Introduction to Managerial Accounting

Job Order Costing

Process Costing

Cost-Volume-Profit Analysis

Master Budgets

Flexible Budgets and Standard Cost Systems

Cost Allocation and Responsibility Accounting

Short-Term Business Decisions

Filters

Exam 26: Capital Investment Decisions

The discount rate used in a net present value analysis is the ________.

Net cash inflows from a capital investment arise from an increase in revenues,a decrease in expenses,or both.

Which of the following is a capital budgeting method that ignores the time value of money?

An investment should be accepted if ________.

Which of the following situations suggests the acceptance of an investment proposal?

Which of the following best describes the internal rate of return?

Which of the following best describes the profitability index?

The net present value method of evaluating capital investments suggests that an investment with net cash inflows which exceed the initial cost of the investment is desirable.

Which of the following describes the time value of money?

The following information is provided by Westwind Systems: Calculate the profitability index for Project C.Show your calculations and round to two decimal places.

When comparing several investments with the same initial cost,the decision should be made on the basis of the ________.

The accounting rate of return method focuses on operating income instead of net cash inflow generated by an asset.

Introduction to Managerial Accounting

Job Order Costing

Process Costing

Cost-Volume-Profit Analysis

Master Budgets

Flexible Budgets and Standard Cost Systems

Cost Allocation and Responsibility Accounting

Short-Term Business Decisions

Filters