Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Soraya Set Designs Inc.,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 tables is used to calculate today's value of this award?

Accepted Answer

A)  Present Value of $1 
B)  Present Value of an Ordinary Annuity of $1 
C)  Future Value of $1 
D)  Future Value of an Ordinary Annuity of $1 
A)  Present Value of $1 
B)  Present Value of an Ordinary Annuity of $1 
C)  Future Value of $1 
D)  Future Value of an Ordinary Annuity of $1

Question 4

A company is evaluating three possible investments.Each uses the straight-line method of depreciation.The following information is provided by the company: $$\begin{array} { | l | r | r | r | } 
\hline & \text { Project A } & \text { Project B } & \text { Project C } \
\hline \text { Investment } & \$ 240,000 & \$ 54,000 & \$ 240,000 \
\hline \text { Residual value } & 0 & 10,000 & 36,000 \
\hline \text { Net cash inflows: } & & & \
\hline \text { Year 1 } & 52,000 & 40,000 & 96,000 \
\hline \text { Year 2 } & 52,000 & 31,000 & 66,000 \
\hline \text { Year 3 } & 52,000 & 27,000 & 76,000 \
\hline \text { Year 4 } & 52,000 & 24,000 & 36,000 \
\hline \text { Year 5 } & 52,000 & 0 & 0 \
\hline
\end{array}$$ What is the accounting rate of return for Project C? (Round your answer to two decimal places.)

Accepted Answer

A)  12.50% 
B)  12.68% 
C)  44.44% 
D)  15.00% 
A)  12.50% 
B)  12.68% 
C)  44.44% 
D)  15.00%

Question 5

Capital budgeting methods which incorporate the time value of money include the ________.

Accepted Answer

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

Question 6

Which of the following is a capital budgeting method used to screen potential investments?

Accepted Answer

A)  return on assets 
B)  acid test ratio 
C)  accounting rate of return 
D)  debt-to-equity ratio 
A)  return on assets 
B)  acid test ratio 
C)  accounting rate of return 
D)  debt-to-equity ratio

Question 7

Randolph 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 Randolph Corporation is considering an investment opportunity...

Question 8

Which of the following is correct about the payback method?

Accepted Answer

A)  It considers only the cash flows that occur during the payback period. 
B)  It considers an asset's profitability. 
C)  It is normally the only method used when deciding whether to invest in an asset. 
D)  It is difficult to calculate. 
A)  It considers only the cash flows that occur during the payback period. 
B)  It considers an asset's profitability. 
C)  It is normally the only method used when deciding whether to invest in an asset. 
D)  It is difficult to calculate.

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

Prescott Corporation is considering an investment in new equipment costing $918,000.The equipment will be depreciated on a straight-line basis over a ten-year life and is expected to have a residual value of $98,000.The equipment is expected to generate net cash inflows of $152,000 for each of the first five years and $116,000 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)  10.95% 
B)  11.34% 
C)  9.05% 
D)  10.24% 
A)  10.95% 
B)  11.34% 
C)  9.05% 
D)  10.24%

Question 11

Zoey Company is considering purchasing new equipment that costs $726,000.Its management estimates that the equipment will generate cash inflows as follows: $$\begin{array} { | r | r | } 
\hline \text { Year } 1 & \$ 202,000 \
\hline 2 & 202,000 \
\hline 3 & 264,000 \
\hline 4 & 264,000 \
\hline 5 & 160,000 \
\hline
\end{array}$$ 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)  $793,414 
B)  $797,481 
C)  $828,406 
D)  $808,971 
A)  $793,414 
B)  $797,481 
C)  $828,406 
D)  $808,971

Question 12

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 13

Rocco Manufacturing is considering following two investment proposals: $$\begin{array} { | l | l | l | } 
\hline & \text { Proposal } \mathbf { X } &{ \text { Proposal } \mathbf { Y } } \
\hline \text { Investment } & \$ 740,000 & \$ 508,000 \
\hline \text { Useful life } & 5 \text { years } & 4 \text { years } \
\hline \text { Estimated annual net cash inflows received } & & \
\text { at the end of each year } & \$ 154,000 & \$ 92,000 \
\hline \text { Residual value } & \$ 66,000 & \$ 0 \
\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \
\hline \text { Annual discount rate } & 10 \% &9 \% \
\hline
\end{array}$$ 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)  $762,136 
B)  $668,128 
C)  $583,814 
D)  $624,800 
A)  $762,136 
B)  $668,128 
C)  $583,814 
D)  $624,800

Question 14

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 15

Osprey Company is considering purchasing a new summer camp in the mountains of North Carolina for $3,000,000.The new facility will generate annual net cash inflows of $500,000 for ten years.Specialists estimate that the facility will remain useful for ten years and have no residual value.The company uses straight-line depreciation,and its stockholders demand an annual return of 10% on investments of this nature.
Present value of an ordinary annuity of $1:
 $$\begin{array} { | c | c | c | c | c | } 
\hline & 9 \% & 10 \% & 11 \% & 12 \% \
\hline 1 & 0.917 & 0.909 & 0.901 & 0.893 \
\hline 2 & 1.759 & 1.736 & 1.713 & 1.690 \
\hline 3 & 2.531 & 2.487 & 2.444 & 2.402 \
\hline 4 & 3.240 & 3.170 & 3.102 & 3.037 \
\hline 5 & 3.890 & 3.791 & 3.696 & 3.605 \
\hline 6 & 4.486 & 4.355 & 4.231 & 4.111 \
\hline 7 & 5.033 & 4.868 & 4.712 & 4.564 \
\hline 8 & 5.535 & 5.335 & 5.146 & 4.968 \
\hline 9 & 5.995 & 5.759 & 5.537 & 5.328 \
\hline 10 & 6.418 & 6.145 & 5.889 & 5.650 \
\hline
\end{array}$$ Requirements
1.Compute the payback,the ARR,the NPV,the IRR,and the profitability index of this investment.
2.Recommend whether the company should invest in this project.

Accepted Answer

Requirement 1: Payback:
 \[\begin{array}

Question 16

First Choice Carpets is considering purchasing new weaving equipment costing $730,000.The company's management has estimated that the equipment will generate cash inflows as follows: $$\begin{array} { | r | r | } 
\hline \text { Year } 1 & \$ 204,000 \
\hline 2 & 204,000 \
\hline 3 & 266,000 \
\hline 4 & 266,000 \
\hline 5 & 150,000 \
\hline
\end{array}$$ Considering the residual value is zero,calculate the payback period.(Round your answer to two decimal places.)

Accepted Answer

A)  4.61 years 
B)  3.21 years 
C)  3.42 years 
D)  3.70 years 
A)  4.61 years 
B)  3.21 years 
C)  3.42 years 
D)  3.70 years

Question 17

Luong Machines Company is evaluating an investment of $1,100,000 which will yield net cash inflows of $197,062 per year for 7 years with no residual value.What is the internal rate of return? Present value of ordinary annuity of $1:
$$\begin{array} { | c | c | c | c | c | } 
\hline & 5 \% & 6 \% & 7 \% & 8 \% \
\hline 1 & 0.952 & 0.943 & 0.935 & 0.926 \
\hline 2 & 1.859 & 1.833 & 1.808 & 1.783 \
\hline 3 & 2.723 & 2.673 & 2.624 & 2.577 \
\hline 4 & 3.546 & 3.465 & 3.387 & 3.312 \
\hline 5 & 4.329 & 4.212 & 4.100 & 3.993 \
\hline 6 & 5.076 & 4.917 & 4.767 & 4.623 \
\hline 7 & 5.786 & 5.582 & 5.389 & 5.206 \
\hline 8 & 6.463 & 6.21 & 5.971 & 5.747 \
\hline 9 & 7.108 & 6.802 & 6.515 & 6.247 \
\hline 10 & 7.722 & 7.36 & 7.024 & 6.71 \
\hline
\end{array}$$

Accepted Answer

A)  5% 
B)  6% 
C)  7% 
D)  8% 
A)  5% 
B)  6% 
C)  7% 
D)  8%

Question 18

The payback method provides management with valuable information about the time period in which the cash invested will be recouped.

Accepted Answer

A) True 
 B)False

Question 19

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 20

Which of the following is a capital budgeting method?

Accepted Answer

A)  return on assets 
B)  net present value 
C)  inventory turnover 
D)  return on equity 
A)  return on assets 
B)  net present value 
C)  inventory turnover 
D)  return on equity

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

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

Soraya Set Designs Inc.,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 tables is used to calculate today's value of this award?

Capital budgeting methods which incorporate the time value of money include the ________.

Which of the following is a capital budgeting method used to screen potential investments?

Which of the following is correct about the payback method?

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

Net present value represents the difference between the ________.

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

The payback method provides management with valuable information about the time period in which the cash invested will be recouped.

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

Which of the following is a capital budgeting method?

Accounting and the Business Environment

Recording Business Transactions

The Adjusting Process

Completing the Accounting Cycle

Merchandising Operations

Merchandise Inventory

Accounting Information Systems

Internal Control and Cash

Receivables

Plant Assets,natural Resources,and Intangibles

Current Liabilities and Payroll

Partnerships

Corporations

Long-Term Liabilities

Investments

The Statement of Cash Flows

Financial Statement Analysis

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

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

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

Soraya Set Designs Inc.,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 tables is used to calculate today's value of this award?

Capital budgeting methods which incorporate the time value of money include the ________.

Which of the following is a capital budgeting method used to screen potential investments?

Which of the following is correct about the payback method?

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

Net present value represents the difference between the ________.

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

The payback method provides management with valuable information about the time period in which the cash invested will be recouped.

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

Which of the following is a capital budgeting method?

Accounting and the Business Environment

Recording Business Transactions

The Adjusting Process

Completing the Accounting Cycle

Merchandising Operations

Merchandise Inventory

Accounting Information Systems

Internal Control and Cash

Receivables

Plant Assets,natural Resources,and Intangibles

Current Liabilities and Payroll

Partnerships

Corporations

Long-Term Liabilities

Investments

The Statement of Cash Flows

Financial Statement Analysis

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