Question 1

A major criticism of the payback method is that it focuses only on the time to recover the investment and ignores profitability.

Accepted Answer

A) True 
 B)False

Question 2

When computing the present value,the interest rate will vary depending on the amount of risk.Safer investments,such as FDIC-insured bank deposits,yield lower interest rates.

Accepted Answer

A) True 
 B)False

Question 3

A company is considering an iron ore extraction project that requires an initial investment of $518,000 and will yield annual cash inflows of $158,000 for four years.The company's discount rate is 9%.What is the NPV of the project? Present value of an ordinary annuity of $1:
$$\begin{array} { | c | r | r | r | } 
\hline & { 8 \% } &  { 9 \% } &  { 10 \% } \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.312 & 3.24 & 3.17 \
\hline 5 & 3.993 & 3.89 & 3.791 \
\hline 6 & 4.623 & 4.486 & 4.355 \
\hline 7 & 5.206 & 5.033 & 4.868 \
\hline 8 & 5.747 & 5.535 & 5.335 \
\hline 9 & 6.247 & 5.995 & 5.759 \
\hline 10 & 6.71 & 6.418 & 6.145 \
\hline
\end{array}$$

Accepted Answer

A)  $6,080 
B)  $(103,600) 
C)  $103,600 
D)  $(6,080) 
A)  $6,080 
B)  $(103,600) 
C)  $103,600 
D)  $(6,080)

Question 4

List three cash inflows and three cash outflows for capital investments.
 $$\begin{array} { | c | c | } 
\hline \text { Cash inflows } & \text { Cash outflows } \
\hline & \
\hline & \
\hline & \
\hline
\end{array}$$

Accepted Answer

\[\begin{array} { | l | l | } 
\hline {

Question 5

Door to Door Moving Company is considering purchasing new equipment that costs $730,000.Its management estimates that the equipment will generate cash flows as follows: $$\begin{array} { | r | c | } 
\hline \text { Year 1 } & \$ 206,000 \
\hline 2 & 206,000 \
\hline 3 & 262,000 \
\hline 4 & 262,000 \
\hline 5 & 154,000 \
\hline
\end{array}$$ Present value of $1:
$$\begin{array} { | l | r | r | r | r | r | } 
\hline &  { 6 \% } & { 7 \% } & { 8 \% } &  { 9 \% } & 10 \% \
\hline 1 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \
\hline 2 & 0.890 & 0.873 & 0.857 & 0.842 & 0.826 \
\hline 3 & 0.840 & 0.816 & 0.794 & 0.772 & 0.751 \
\hline 4 & 0.792 & 0.763 & 0.735 & 0.708 & 0.683 \
\hline 5 & 0.747 & 0.713 & 0.681 & 0.605 & 0.621 \
\hline
\end{array}$$ The company's annual required rate of return is 8%.Using the factors in the table,calculate the present value of the cash inflows.(Round all calculations to the nearest whole dollar.)

Accepted Answer

A)  $36,668 
B)  $786,000 
C)  $884,000 
D)  $872,770 
A)  $36,668 
B)  $786,000 
C)  $884,000 
D)  $872,770

Question 6

Yates,Inc.is evaluating two possible investments in depreciable plant assets.The company uses the straight-line method of depreciation.The following information is available:
 $$\begin{array} { l r r } 
& \text { Investment A } & \text { Investment B } \
\text { Initial capital investment } & \$ 275,000 & \$ 225,000 \
\text { Estimated useful life } & 8 \text { years } & 7 \text { years } \
\text { Estimated residual value } & \$ 15,000 & \$ 20,000 \
\text { Estimated annual net cash inflow for 10 years } & \$ 55,000 & \$ 35,000 \
\text { Required rate of return } & 12 \% & 12 \%
\end{array}$$ Compute the payback period for each investment.Show your calculations and round to one decimal place.

Accepted Answer

None

Question 7

Bill Jones has just won the state lottery and has the following three payout options for after-tax prize money: 1.$150,000 per year at the end of each of the next six years
2)$304,000 (lump sum)now
3)$500,000 (lump sum)six years from now
The annual discount rate is 9%.Compute the present value of the first option.(Round your answer to the nearest whole dollar.)
Present value of an ordinary annuity of $1:
$$\begin{array} { | r | r | r | r | } 
\hline & 8 \% & 9 \% & 10 \% \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.312 & 3.240 & 3.170 \
\hline 5 & 3.993 & 3.890 & 3.791 \
\hline 6 & 4.623 & 4.486 & 4.355 \
\hline 7 & 5.206 & 5.033 & 4.868 \
\hline
\end{array}$$ Present value of $1:
$$\begin{array} { | l | r | r | r | } 
\hline & 8 \% & 9 \% & 10 \% \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 0.857 & 0.842 & 0.826 \
\hline 3 & 0.794 & 0.772 & 0.751 \
\hline 4 & 0.735 & 0.708 & 0.683 \
\hline 5 & 0.681 & 0.650 & 0.621 \
\hline 6 & 0.630 & 0.596 & 0.564 \
\hline 7 & 0.583 & 0.547 & 0.513 \
\hline
\end{array}$$

Accepted Answer

A)  $750,000 
B)  $672,900 
C)  $454,000 
D)  $450,050 
A)  $750,000 
B)  $672,900 
C)  $454,000 
D)  $450,050

Question 8

All else being equal,investments with longer payback periods are preferable.

Accepted Answer

A) True 
 B)False

Question 9

Net present value represents the difference between the ________.

Accepted Answer

A)  total net income of the project and the initial investment 
B)  initial investment and the residual value 
C)  future value of the cash flows and the present value of the cash flows 
D)  present value of the investment's net cash inflows and the investment's initial cost 
A)  total net income of the project and the initial investment 
B)  initial investment and the residual value 
C)  future value of the cash flows and the present value of the cash flows 
D)  present value of the investment's net cash inflows and the investment's initial cost

Question 10

A company is evaluating an investment.The company uses the straight-line method of depreciation.Use the following information to compute the accounting rate of return.Show your calculations and round to one decimal place.
 $\begin{array}{ll}
& \text { Project } \
\text { Investment } & \$ 875,000 \
\text { Residual value } & 0 \
\text { Operating income: } &\
\text { Year 1 } & 120,000 \
\text { Year 2 } & 120,000 \
\text { Year 3 } & 120,000 \
\text { Year 4 } & 120,000 \
\text { Year 5 } & 120,000
\end{array}$

Accepted Answer

\[\begin{aligned}
\text { ARR } & = \tex

Question 11

Flint Systems is considering investing in production-management software that costs $640,000,has $67,000 residual value,and leads to cost savings of $1,850,000 per year over its five-year life.Calculate the average amount invested in the asset that should be used for calculating the accounting rate of return.

Accepted Answer

A)  $707,000 
B)  $640,000 
C)  $353,500 
D)  $67,000 
A)  $707,000 
B)  $640,000 
C)  $353,500 
D)  $67,000

Question 12

The following details are provided by a manufacturing company: $$\begin{array} { | l | r | } 
\hline & \text { Product line } \
\hline \text { Investment } & \$ 1,190,000 \
\hline \text { Useful life } & 12 \text { years } \
\hline \text { Estimated annual net cash inflows for first year } & \$ 400,000 \
\hline \text { Estimated annual net cash inflows for second year } & \$ 390,000 \
\hline \text { Estimated annual net cash inflows for next ten years } & \$ 490,000 \
\hline \text { Residual value } & \$ 90,000 \
\hline \text { Depreciation method } & \text { Straight-line } \
\hline \text { Required rate of return } & 12 \% \
\hline
\end{array}$$ Calculate the payback period for the investment.(Round your answer to two decimal places.)

Accepted Answer

A)  2.98 years 
B)  2.82 years 
C)  1.98 years 
D)  2.20 years 
A)  2.98 years 
B)  2.82 years 
C)  1.98 years 
D)  2.20 years

Question 13

Candela Cable Company is considering investing $450,000 in telecommunications equipment that has an estimated life of five years with no residual value.The cash flows are as shown below: $$\begin{array} { | r | r | } 
\hline \text { Year 1 } & \$ 120,000 \
\hline 2 & 235,000 \
\hline 3 & 140,000 \
\hline 4 & 98,000 \
\hline
\end{array}$$ The present value of $1:
$$\begin{array} { | c | c | c | c | c | c | } 
\hline & 10 \% & 11 \% & 12 \% & 13 \% & 14 \% \
\hline 1 & 0.909 & 0.901 & 0.893 & 0.885 & 0.877 \
\hline 2 & 0.826 & 0.812 & 0.797 & 0.783 & 0.769 \
\hline 3 & 0.751 & 0.731 & 0.712 & 0.693 & 0.675 \
\hline 4 & 0.683 & 0.659 & 0.636 & 0.613 & 0.592 \
\hline 5 & 0.621 & 0.593 & 0.567 & 0.543 & 0.519 \
\hline
\end{array}$$ The IRR of the project would be ________.

Accepted Answer

A)  between 12% and 13% 
B)  more than 13% 
C)  less than 10% 
D)  between 9% and 10% 
A)  between 12% and 13% 
B)  more than 13% 
C)  less than 10% 
D)  between 9% and 10%

Question 14

The acquisition or construction of a capital asset is known as a capital investment.

Accepted Answer

A) True 
 B)False

Question 15

When computing the present value,the interest rate will vary depending on the amount of risk.Riskier investments,such as FDIC-insured bank deposits,command higher interest rates.

Accepted Answer

A) True 
 B)False

Question 16

You have just won the lottery and have three payout options:
1.$1,000,000 now
2.$150,000 at the end of each year for the next ten years
3.$2,000,000 at the end of ten years.
What is a common basis for comparison that you can use to decide which option to choose? Explain your answer.

Accepted Answer

A common basis for comparison is needed

Question 17

The following details are provided by Doppler Company: $$\begin{array} { | c | r | } 
\hline \text { Initial investment } & \$ 2,020,000 \
\hline \text { Discount rate } & 12 \% \
\hline \text { Yearly cash flows } & \
\hline 1 & \$ 734,000 \
\hline 2 & \$ 596,000 \
\hline 3 & \$ 596,000 \
\hline 4 & \$ 596,000 \
\hline 5 & \$ 734,000 \
\hline
\end{array}$$ Present Value of $1:
$$\begin{array} { | l | r | r | r | r | } 
\hline &  { \mathbf { 1 0 } \% } &  { \mathbf { 1 1 } \% } & { \mathbf { 1 2 } \% } &  { \mathbf { 1 3 } \% } \
\hline 1 & 0.909 & 0.901 & 0.893 & 0.885 \
\hline 2 & 0.826 & 0.812 & 0.797 & 0.783 \
\hline 3 & 0.751 & 0.731 & 0.712 & 0.693 \
\hline 4 & 0.683 & 0.659 & 0.636 & 0.613 \
\hline 5 & 0.621 & 0.593 & 0.567 & 0.543 \
\hline
\end{array}$$ Calculate the NPV of the project.

Accepted Answer

A)  $959,500 
B)  $330,060 
C)  $1,015,050 
D)  $252,500 
A)  $959,500 
B)  $330,060 
C)  $1,015,050 
D)  $252,500

Question 18

The Accounting Rate of Return method evaluates the lifetime return of an investment,whereas Return on Investment evaluates the annual return of an investment.

Accepted Answer

A) True 
 B)False

Question 19

The only difference between the present value and future value of a lump sum is the amount of interest that is earned in the intervening time span.

Accepted Answer

A) True 
 B)False

Question 20

Elsie Moving Company is considering purchasing new equipment that costs $724,000.Its management estimates that the equipment will generate cash flows as follows: $$\begin{array} { | r | c | } 
\hline \text { Year 1 } & \$ 212,000 \
\hline 2 & 212,000 \
\hline 3 & 260,000 \
\hline 4 & 260,000 \
\hline 5 & 158,000 \
\hline
\end{array}$$ The company's required rate of return is 10%.Using the factors in the table below,calculate the present value of the cash inflows.(Round all calculations to the nearest whole dollar.)
Present value of $1:
$$\begin{array} { | l | r | r | r | r | r | } 
\hline & { 6 \% } & { 7 \% } &{ 8 \% } & { 9 \% } & 10 \% \
\hline 1 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \
\hline 2 & 0.890 & 0.873 & 0.857 & 0.842 & 0.826 \
\hline 3 & 0.840 & 0.816 & 0.794 & 0.772 & 0.751 \
\hline 4 & 0.792 & 0.763 & 0.735 & 0.708 & 0.683 \
\hline 5 & 0.747 & 0.713 & 0.681 & 0.650 & 0.621 \
\hline
\end{array}$$

Accepted Answer

A)  $791,229 
B)  $795,284 
C)  $838,778 
D)  $806,742 
A)  $791,229 
B)  $795,284 
C)  $838,778 
D)  $806,742

A major criticism of the payback method is that it focuses only on the time to recover the investment and ignores profitability.

When computing the present value,the interest rate will vary depending on the amount of risk.Safer investments,such as FDIC-insured bank deposits,yield lower interest rates.

List three cash inflows and three cash outflows for capital investments. Cash inflows Cash outflows

All else being equal,investments with longer payback periods are preferable.

Net present value represents the difference between the ________.

The acquisition or construction of a capital asset is known as a capital investment.

When computing the present value,the interest rate will vary depending on the amount of risk.Riskier investments,such as FDIC-insured bank deposits,command higher interest rates.

You have just won the lottery and have three payout options: 1.$1,000,000 now 2.$150,000 at the end of each year for the next ten years 3.$2,000,000 at the end of ten years. What is a common basis for comparison that you can use to decide which option to choose? Explain your answer.

The Accounting Rate of Return method evaluates the lifetime return of an investment,whereas Return on Investment evaluates the annual return of an investment.

The only difference between the present value and future value of a lump sum is the amount of interest that is earned in the intervening time span.

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

A major criticism of the payback method is that it focuses only on the time to recover the investment and ignores profitability.

When computing the present value,the interest rate will vary depending on the amount of risk.Safer investments,such as FDIC-insured bank deposits,yield lower interest rates.

List three cash inflows and three cash outflows for capital investments. Cash inflows Cash outflows

All else being equal,investments with longer payback periods are preferable.

Net present value represents the difference between the ________.

The acquisition or construction of a capital asset is known as a capital investment.

When computing the present value,the interest rate will vary depending on the amount of risk.Riskier investments,such as FDIC-insured bank deposits,command higher interest rates.

You have just won the lottery and have three payout options: 1.$1,000,000 now 2.$150,000 at the end of each year for the next ten years 3.$2,000,000 at the end of ten years. What is a common basis for comparison that you can use to decide which option to choose? Explain your answer.

The Accounting Rate of Return method evaluates the lifetime return of an investment,whereas Return on Investment evaluates the annual return of an investment.

The only difference between the present value and future value of a lump sum is the amount of interest that is earned in the intervening time span.

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