Question 1

Capital budgeting is the ________.

Accepted Answer

A)  process of planning for investments in long-term assets 
B)  preparation of the budget for operating expenses 
C)  process of evaluating the profitability of a business 
D)  process of making pricing decisions for products 
A)  process of planning for investments in long-term assets 
B)  preparation of the budget for operating expenses 
C)  process of evaluating the profitability of a business 
D)  process of making pricing decisions for products

Question 2

An annuity is a series of unequal payments over equal intervals.

Accepted Answer

A) True 
 B)False

Question 3

The process for calculating present values is often called discounting future cash flows because future amounts are discounted to their present value.

Accepted Answer

A) True 
 B)False

Question 4

If an investment's internal rate of return is higher than the required rate of return,the company should reject the investment.

Accepted Answer

A) True 
 B)False

Question 5

Paramount Carpets is considering purchasing new equipment costing $736,000.The company's management has estimated that the equipment will generate cash flows as follows: $$\begin{array} { | r | r | } 
\hline \text { Year } 1 & \$ 218,000 \
\hline 2 & 218,000 \
\hline 3 & 260,000 \
\hline 4 & 260,000 \
\hline 5 & 168,000 \
\hline
\end{array}$$ Considering the residual value is zero,calculate the payback period.(Round your answer to two decimal places.)

Accepted Answer

A)  4.39 years 
B)  3.15 years 
C)  3.62 years 
D)  3.81 years 
A)  4.39 years 
B)  3.15 years 
C)  3.62 years 
D)  3.81 years

Question 6

Gamma Corporation is considering an investment of $516,000 in a land development project.The investment will yield cash inflows of $200,000 per year for five years.The company uses a discount rate of 9%.What is the net present value of the investment? Present value of an ordinary annuity of $1:
$$\begin{array} { | l | r | r | r | } 
\hline &{ 8 \% } &{ 9 \% } & { 10 \% } \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.312 & 3.24 & 3.17 \
\hline 5 & 3.993 & 3.89 & 3.791 \
\hline
\end{array}$$

Accepted Answer

A)  $237,360 
B)  $262,000 
C)  $340,560 
D)  $200,000 
A)  $237,360 
B)  $262,000 
C)  $340,560 
D)  $200,000

Question 7

All else being equal,the shorter the investment period,the higher the total amount of interest earned.

Accepted Answer

A) True 
 B)False

Question 8

Cash inflows include future cash revenue generated from an investment and any future residual value of the asset but exclude any future savings in ongoing cash operating costs resulting from the investment.

Accepted Answer

A) True 
 B)False

Question 9

Steve Coleman has just won the state lottery and has the following three payout options for after-tax prize money: 1.$166,000 per year at the end of each of the next six years
2)$304,000 (lump sum)now
3)$504,000 (lump sum)six years from now
The annual discount rate is 9%.Compute the present value of the second option.(Round to nearest whole dollar.)
Present value of $1:
$$\begin{array} { | l | r | r | r | } 
\hline & 8 \% & 9 \% & 10 \% \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 0.857 & 0.842 & 0.826 \
\hline 3 & 0.794 & 0.772 & 0.751 \
\hline 4 & 0.735 & 0.708 & 0.683 \
\hline 5 & 0.681 & 0.650 & 0.621 \
\hline 6 & 0.630 & 0.596 & 0.564 \
\hline 7 & 0.583 & 0.547 & 0.513 \
\hline
\end{array}$$

Accepted Answer

A)  $670,000 
B)  $100,800 
C)  $403,200 
D)  $304,000 
A)  $670,000 
B)  $100,800 
C)  $403,200 
D)  $304,000

Question 10

Reading Corporation is considering an investment opportunity with the following expected net cash inflows: Year 1,$250,000; Year 2,$350,000; Year 3,$395,000.At the end of Year 3,the residual value of the investment would be $50,000.The company uses a discount rate of 12%,and the initial investment is $400,000.Calculate the NPV of the investment.
Present value of $1:
 $$\begin{array} { | c | c | c | c | c | } 
\hline & 11 \% & 12 \% & 13 \% & 14 \% \
\hline 1 & 0.901 & 0.893 & 0.885 & 0.877 \
\hline 2 & 0.812 & 0.797 & 0.783 & 0.769 \
\hline 3 & 0.731 & 0.712 & 0.693 & 0.675 \
\hline 4 & 0.659 & 0.636 & 0.613 & 0.592 \
\hline 5 & 0.593 & 0.567 & 0.543 & 0.519 \
\hline
\end{array}$$

Accepted Answer

The answer of Reading Corporation is considering an investment opportunity...

Question 11

Peri Corporation is considering an investment opportunity with the following expected net cash inflows: Year 1,$260,000; Year 2,$340,000; Year 3,$390,000.The company uses a discount rate of 11%,and the initial cost of the investment is $770,000. Present Value of $1:
$$\begin{array} { | c | c | c | c | c | c | c | } 
\hline & 10 \% & 11 \% & 12 \% & 13 \% & 14 \% & 15 \% \
\hline 1 & 0.909 & 0.901 & 0.893 & 0.885 & 0.877 & 0.870 \
\hline 2 & 0.826 & 0.812 & 0.797 & 0.783 & 0.769 & 0.756 \
\hline 3 & 0.751 & 0.731 & 0.712 & 0.693 & 0.675 & 0.658 \
\hline 4 & 0.683 & 0.659 & 0.636 & 0.613 & 0.592 & 0.572 \
\hline 5 & 0.621 & 0.593 & 0.567 & 0.543 & 0.519 & 0.497 \
\hline
\end{array}$$ The IRR of the project will be ________.

Accepted Answer

A)  less than 11% 
B)  between 11% and 12% 
C)  between 12% and 13% 
D)  more than 11% 
A)  less than 11% 
B)  between 11% and 12% 
C)  between 12% and 13% 
D)  more than 11%

Question 12

Under what circumstances is the investment with the shortest payback the best choice? How should managers use the payback method?

Accepted Answer

The investment with the shortest payback

Question 13

Which capital budgeting method uses accrual accounting,rather than net cash flows,as a basis for calculations?

Accepted Answer

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

Question 14

At the internal rate of return,the present value of net cash inflows will equal the ________.

Accepted Answer

A)  initial cost of the investment 
B)  residual value 
C)  average operating income 
D)  profit from the project 
A)  initial cost of the investment 
B)  residual value 
C)  average operating income 
D)  profit from the project

Question 15

The accounting rate of return also is known as the average rate of return or annual rate of return.

Accepted Answer

A) True 
 B)False

Question 16

The following formula is used to compute the present value of a lump sum:
Future value = Present value × PV factor for i = X%,n = X periods

Accepted Answer

A) True 
 B)False

Question 17

Ipswich Corporation is considering an investment opportunity with the expected net cash inflows of $300,000 for four years.The residual value of the investment,at the end of four years,would be $70,000.The company uses a discount rate of 14%,and the initial investment is $290,000.Calculate the NPV of the investment.
Present value of an ordinary annuity of $1:
 $$\begin{array} { | c | c | c | c | c | } 
\hline & 12 \% & 13 \% & 14 \% & 15 \% \
\hline 1 & 0.893 & 0.885 & 0.877 & 0.87 \
\hline 2 & 1.69 & 1.668 & 1.647 & 1.626 \
\hline 3 & 2.402 & 2.361 & 2.322 & 2.283 \
\hline 4 & 3.037 & 2.974 & 2.914 & 2.855 \
\hline 5 & 3.605 & 3.517 & 3.433 & 3.352 \
\hline
\end{array}$$ Present value of $1:
 $$\begin{array} { | c | c | c | c | c | } 
\hline & 12 \% & 13 \% & 14 \% & 15 \% \
\hline 1 & 0.893 & 0.885 & 0.877 & 0.87 \
\hline 2 & 0.797 & 0.783 & 0.769 & 0.756 \
\hline 3 & 0.712 & 0.693 & 0.675 & 0.658 \
\hline 4 & 0.636 & 0.613 & 0.592 & 0.572 \
\hline 5 & 0.567 & 0.543 & 0.519 & 0.497 \
\hline
\end{array}$$

Accepted Answer

The answer of Ipswich Corporation is considering an investment opportunity...

Question 18

Logan,Inc.is evaluating two possible investments in depreciable plant assets.The company uses the straight-line method of depreciation.The following information is available: $$\begin{array} { | l | r | r | } 
\hline & \text { Investment A } & \text { Investment B } \
\hline \text { Initial capital investment } & \$ 102,000 & \$ 150,000 \
\hline \text { Estimated useful life } & 10 \text { years } & 10 \text { years } \
\hline \text { Estimated residual value } & 0 & \$ 23,000 \
\hline \text { Estimated annual net cash inflow for 10 years } & \$ 20,000 & \$ 46,000 \
\hline \text { Required rate of return } & 10 \% & 14 \% \
\hline
\end{array}$$ Calculate the payback period for Investment A.(Round your answer to two decimal places.)

Accepted Answer

A)  3.04 years 
B)  3.95 years 
C)  1.00 year 
D)  5.10 years 
A)  3.04 years 
B)  3.95 years 
C)  1.00 year 
D)  5.10 years

Question 19

The following information is provided by Doppler Systems: $$\begin{array} { | l | r | r | r | r | } 
\hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \
\hline \text { Initial investment } & \$ 440,000 & \$ 202,000 & \$ 550,000 & \$ 506,000 \
\hline \text { PV of cash inflows } & \$ 570,000 & \$ 394,000 & \$ 816,000 & \$ 406,000 \
\hline \text { Payback period (years) } & 3.6 & 3.2 & 4.0 & 2.0 \
\hline \text { NPV of project } & \$ 130,000 & \$ 192,000 & \$ 266,000 & \$ 100,000 \
\hline
\end{array}$$ Calculate the profitability index for Project A.(Round your answer to two decimal places.)

Accepted Answer

A)  0.85 
B)  1.09 
C)  1.30 
D)  1.67 
A)  0.85 
B)  1.09 
C)  1.30 
D)  1.67

Question 20

The payback method is a screening device and is rarely used as the sole method for deciding whether to invest in an asset.

Accepted Answer

A) True 
 B)False

Capital budgeting is the ________.

An annuity is a series of unequal payments over equal intervals.

The process for calculating present values is often called discounting future cash flows because future amounts are discounted to their present value.

If an investment's internal rate of return is higher than the required rate of return,the company should reject the investment.

All else being equal,the shorter the investment period,the higher the total amount of interest earned.

Cash inflows include future cash revenue generated from an investment and any future residual value of the asset but exclude any future savings in ongoing cash operating costs resulting from the investment.

Under what circumstances is the investment with the shortest payback the best choice? How should managers use the payback method?

Which capital budgeting method uses accrual accounting,rather than net cash flows,as a basis for calculations?

At the internal rate of return,the present value of net cash inflows will equal the ________.

The accounting rate of return also is known as the average rate of return or annual rate of return.

The following formula is used to compute the present value of a lump sum: Future value = Present value × PV factor for i = X%,n = X periods

The payback method is a screening device and is rarely used as the sole method for deciding whether to invest in 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

Capital budgeting is the ________.

An annuity is a series of unequal payments over equal intervals.

The process for calculating present values is often called discounting future cash flows because future amounts are discounted to their present value.

If an investment's internal rate of return is higher than the required rate of return,the company should reject the investment.

All else being equal,the shorter the investment period,the higher the total amount of interest earned.

Cash inflows include future cash revenue generated from an investment and any future residual value of the asset but exclude any future savings in ongoing cash operating costs resulting from the investment.

Under what circumstances is the investment with the shortest payback the best choice? How should managers use the payback method?

Which capital budgeting method uses accrual accounting,rather than net cash flows,as a basis for calculations?

At the internal rate of return,the present value of net cash inflows will equal the ________.

The accounting rate of return also is known as the average rate of return or annual rate of return.

The following formula is used to compute the present value of a lump sum: Future value = Present value × PV factor for i = X%,n = X periods

The payback method is a screening device and is rarely used as the sole method for deciding whether to invest in 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