A company is evaluating three possible investments.Each uses the straight-line method of depreciation.The following information is provided by the company: \[\begin{array} { | l | r | r | r | } \hline & \text { Project A } & \text { Project B } & \text { Project C } \\ \hline \text { Investment } & \$ 210,000 & \$ 54,000 & \$ 210,000 \\ \hline \text { Residual value } & 0 & 30,000 & 28,000 \\ \hline \text { Net cash flows: } & & & \\ \hline \text { Year 1 } & 70,000 & 34,000 & 82,000 \\ \hline \text { Year 2 } & 70,000 & 25,000 & 52,000 \\ \hline \text { Year 3 } & 70,000 & 21,000 & 62,000 \\ \hline \text { Year 4 } & 70,000 & 18,000 & 22,000 \\ \hline \text { Year 5 } & 70,000 & 0 & 0 \\ \hline \end{array}\] What is the accounting rate of return for Project C? (Round your answer to two decimal places.)

A) 14.29% B) 7.56% C) 33.33% D) 10.48% A) 14.29% B) 7.56% C) 33.33% D) 10.48%

Lloyd's Moving Company is considering purchasing new equipment that costs $728,000.Its management estimates that the equipment will generate cash flows as follows: \[\begin{array} { | r | c | } \hline \text { Year 1 } & \$ 206,000 \\ \hline 2 & 206,000 \\ \hline 3 & 254,000 \\ \hline 4 & 254,000 \\ \hline 5 & 156,000 \\ \hline \end{array}\] Present value of $1: \[\begin{array} { | l | r | r | r | r | r | } \hline & { 6 \% } &{ 7 \% } & { 8 \% } & { 9 \% } & 10 \% \\ \hline 1 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \\ \hline 2 & 0.890 & 0.873 & 0.857 & 0.842 & 0.826 \\ \hline 3 & 0.840 & 0.816 & 0.794 & 0.772 & 0.751 \\ \hline 4 & 0.792 & 0.763 & 0.735 & 0.708 & 0.683 \\ \hline 5 & 0.747 & 0.713 & 0.681 & 0.650 & 0.621 \\ \hline \end{array}\] The company's annual required rate of return is 9%.Using the factors in the table,calculate the present value of the cash flows.(Round all calculations to the nearest whole dollar.)

A) $870,000 B) $839,674 C) $853,320 D) $872,000 A) $870,000 B) $839,674 C) $853,320 D) $872,000

Exam 26: Capital Investment Decisions

A company is evaluating three possible investments.Each uses the straight-line method of depreciation.The following information is provided by the company: Project A Project B Project C Investment \ 210,000 \ 54,000 \ 210,000 Residual value 0 30,000 28,000 Net cash flows: Year 1 70,000 34,000 82,000 Year 2 70,000 25,000 52,000 Year 3 70,000 21,000 62,000 Year 4 70,000 18,000 22,000 Year 5 70,000 0 0 What is the accounting rate of return for Project C? (Round your answer to two decimal places.)

(Multiple Choice)

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Question 41

Discounted cash flow methods,such as net present value and internal rate of return,________.

(Multiple Choice)

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Question 42

Capital rationing is a process adopted when a company has limited resources,and it must find ways to reduce operating expenses in all of its divisions and units.

(True/False)

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Question 43

Many service,merchandising,and manufacturing firms use discounted cash flow methods to make capital investment decisions.

(True/False)

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Question 44

When a company is evaluating an investment proposal with high risk,a low discount rate should be used.

(True/False)

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Question 45

Which of the following best describes a capital budgeting post-audit?

(Multiple Choice)

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Question 46

Landmark Prints is considering an investment in new equipment costing $520,000.The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $128,000 the first year,$160,000 the second year,and $154,000 every year thereafter until the fifth year.What is the payback period for this investment? The residual value is zero.(Round your answer to two decimal places.)

(Multiple Choice)

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Question 47

When the internal rate of return is the same as the required rate of return,the net present value of an investment will be positive.

(True/False)

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Question 48

Management's minimum desired rate of return on a capital investment is known as the return on investment.

(True/False)

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Question 49

The net present value of future cash inflows received in earlier years is higher than future cash inflows received in later years.

(True/False)

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Question 50

Lora Corporation will receive $10,000 a year at the end of each of the next five years.Using a discount rate of 14%,the present value of the receipts can be stated as ________.

(Multiple Choice)

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Question 51

Zane Set Designs Company has received an award which entitles it to receive annual payments of $10,000 at the end of each year for the next ten years.Which of the following is used to calculate today's value of this award?

(Multiple Choice)

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Question 52

The internal rate of return (IRR)is the rate of return,based on discounted cash flows,of a capital investment.

(True/False)

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Question 53

Compound interest assumes that all interest earned will remain invested and earn additional interest at the same interest rate.

(True/False)

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Question 54

Discounted cash flow methods incorporate compound interest by assuming that companies will reinvest future cash flows when they are received.

(True/False)

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Question 55

List the steps of the capital budgeting process and identify actions that relate to each step.

(Essay)

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Question 56

Lloyd's Moving Company is considering purchasing new equipment that costs $728,000.Its management estimates that the equipment will generate cash flows as follows: Year 1 \ 206,000 2 206,000 3 254,000 4 254,000 5 156,000 Present value of $1: 6\% 7\% 8\% 9\% 10\% 1 0.943 0.935 0.926 0.917 0.909 2 0.890 0.873 0.857 0.842 0.826 3 0.840 0.816 0.794 0.772 0.751 4 0.792 0.763 0.735 0.708 0.683 5 0.747 0.713 0.681 0.650 0.621 The company's annual required rate of return is 9%.Using the factors in the table,calculate the present value of the cash flows.(Round all calculations to the nearest whole dollar.)

(Multiple Choice)

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Question 57

A company is considering an iron ore extraction project that requires an initial investment of $1,300,000 and will yield annual cash flows of $789,314 for two years.The company's discount rate is 9%.Calculate IRR. Present value of ordinary annuity of $1: 10\% 12\% 14\% 15\% 16\% 18\% 20\% 1 0.909 0.893 0.877 0.870 0.862 0.847 0.833 2 1.736 1.690 1.647 1.626 1.605 1.566 1.528 3 2.487 2.402 2.322 2.283 2.246 2.174 2.106 4 3.170 3.037 2.914 2.855 2.798 2.690 2.589

(Multiple Choice)

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Question 58

Provide responses to the following questions regarding the discount rate. Question? Your response What does the discount rate represent? What are other names for the discount rate? Is the following statement true? Discuss the reason for your response. "The higher the risk, the lower the discount rate."

(Essay)

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Question 59

The accounting rate of return method considers the time value of money.

(True/False)

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Question 60

Discounted cash flow methods,such as net present value and internal rate of return,________.

Capital rationing is a process adopted when a company has limited resources,and it must find ways to reduce operating expenses in all of its divisions and units.

Many service,merchandising,and manufacturing firms use discounted cash flow methods to make capital investment decisions.

When a company is evaluating an investment proposal with high risk,a low discount rate should be used.

Which of the following best describes a capital budgeting post-audit?

When the internal rate of return is the same as the required rate of return,the net present value of an investment will be positive.

Management's minimum desired rate of return on a capital investment is known as the return on investment.

The net present value of future cash inflows received in earlier years is higher than future cash inflows received in later years.

Lora Corporation will receive $10,000 a year at the end of each of the next five years.Using a discount rate of 14%,the present value of the receipts can be stated as ________.

Zane Set Designs Company has received an award which entitles it to receive annual payments of $10,000 at the end of each year for the next ten years.Which of the following is used to calculate today's value of this award?

The internal rate of return (IRR)is the rate of return,based on discounted cash flows,of a capital investment.

Compound interest assumes that all interest earned will remain invested and earn additional interest at the same interest rate.

Discounted cash flow methods incorporate compound interest by assuming that companies will reinvest future cash flows when they are received.

List the steps of the capital budgeting process and identify actions that relate to each step.

The accounting rate of return method considers the time value of money.

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

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