Question 1

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 2

Caldwell Corporation is considering an investment proposal that will require an initial outlay of $804,000 and would yield yearly cash inflows of $200,000 for nine years.The company uses a discount rate of 10%.What is the NPV of the investment? Present value of an ordinary annuity of $1:
$$\begin{array} { | l | r | r | r | } 
\hline & { 8 \% } &  { 9 \% } & { 10 \% } \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.312 & 3.24 & 3.17 \
\hline 5 & 3.993 & 3.89 & 3.791 \
\hline 6 & 4.623 & 4.486 & 4.355 \
\hline 7 & 5.206 & 5.033 & 4.868 \
\hline 8 & 5.747 & 5.535 & 5.335 \
\hline 9 & 6.247 & 5.995 & 5.759 \
\hline
\end{array}$$

Accepted Answer

A)  $350,000 
B)  $402,000 
C)  $347,800 
D)  $251,667 
A)  $350,000 
B)  $402,000 
C)  $347,800 
D)  $251,667

Question 3

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

Accepted Answer

1.Develop strategies:
 @#LAT-DLM& 2.Plan
 -Identif

Question 4

Sensitivity analysis is a technique that ________.

Accepted Answer

A)  sets the budgets of alternative investment opportunities 
B)  analyzes the effect of an investment on workers' morale 
C)  evaluates the different available investment options 
D)  shows how results differ when underlying assumptions change 
A)  sets the budgets of alternative investment opportunities 
B)  analyzes the effect of an investment on workers' morale 
C)  evaluates the different available investment options 
D)  shows how results differ when underlying assumptions change

Question 5

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 6

The net present value and internal rate of return methods are appropriate for longer-term investments because they ignore the time value of money.

Accepted Answer

A) True 
 B)False

Question 7

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 8

The discounted cash flow methods of evaluating capital investments are superior because they consider both the time value of money and the profitability of the investment.

Accepted Answer

A) True 
 B)False

Question 9

The following information is provided by Turnbridge Systems:
 $$\begin{array} { l r r r r } 
& \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \
\text { Initial investment } & \$ 438,000 & \$ 218,000 & \$ 560,000 & \$ 516,000 \
\text { PV of cash inflows } & \$ 582,000 & \$ 388,000 & \$ 800,000 & \$ 394,000 \
\text { Payback period (years) } & 3.6 & 3.2 & 4.0 & 2.0 \
\text { NPV of project } & \$ 144,000 & \$ 170,000 & \$ 240,000 & ( \$ 122,000 )
\end{array}$$ Calculate the profitability index for Project C.Show your calculations and round to two decimal places.

Accepted Answer

Profitability Index = Present

Question 10

Investment methods,such as net present value and internal rate of return,________.

Accepted Answer

A)  use simple interest calculations 
B)  use net income amounts rather than cash flows 
C)  focus on the payback period 
D)  consider discounted cash flows 
A)  use simple interest calculations 
B)  use net income amounts rather than cash flows 
C)  focus on the payback period 
D)  consider discounted cash flows

Question 11

Which of the following is the rate of return,based on discounted cash flows,a company can expect to earn by investing in a capital asset?

Accepted Answer

A)  accounting rate of return 
B)  bank interest rate 
C)  internal rate of return 
D)  return on investment 
A)  accounting rate of return 
B)  bank interest rate 
C)  internal rate of return 
D)  return on investment

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Arrendo,Inc.is evaluating two possible investments in depreciable plant assets.The company uses the straight-line method of depreciation.The following information is available: $$\begin{array} { | l | r | r | } 
\hline & \text { Investment A } & \text { Investment B } \
\hline \text { Initial capital investment } & \$ 107,000 & \$ 159,000 \
\hline \text { Estimated useful life } & 10 \text { years } & 10 \text { years } \
\hline \text { Estimated residual value } & 0 & \$ 26,000 \
\hline \text { Estimated annual net cash inflow for 10 years } & \$ 28,000 & \$ 46,000 \
\hline \text { Required rate of return } & 10 \% & 14 \% \
\hline
\end{array}$$ Calculate the payback period for Investment B.(Round your answer to two decimal places.)

Accepted Answer

A)  3.46 years 
B)  1.94 years 
C)  2.89 years 
D)  3.82 years 
A)  3.46 years 
B)  1.94 years 
C)  2.89 years 
D)  3.82 years

Question 14

Nubela Manufacturing is considering two alternative investment proposals with the following data: $$\begin{array} { | l | r | r | } 
\hline & \text { Proposal } X & { \text { Proposal } \mathbf { ~ } } \
\hline \text { Investment } & \$ 10,700,000 & \$ 580,000 \
\hline \text { Useful life } & 5 \text { years } & 5 \text { years } \
\hline \text { Estimated annual net cash inflows for 5 years } & \$ 2,140,000 & \$ 103,000 \
\hline \text { Residual value } & \$ 50,000 & \$ 26,000 \
\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \
\hline \text { Required rate of return } & 12 \% & 13 \% \
\hline
\end{array}$$ Calculate the payback period for Proposal X.

Accepted Answer

A)  5 years 
B)  4 years 
C)  9 years 
D)  8 years 
A)  5 years 
B)  4 years 
C)  9 years 
D)  8 years

Question 15

Gloria Ammon has just won the state lottery and has the following three payout options for after-tax prize money: 1.$64,000 per year at the end of each of the next six years
2)$304,000 (lump sum)now
3)$502,000 (lump sum)six years from now
The annual discount rate is 9%.Compute the present value of the third 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)  $240,000 
B)  $98,133 
C)  $101,717 
D)  $299,192 
A)  $240,000 
B)  $98,133 
C)  $101,717 
D)  $299,192

Question 16

Both the payback and the accounting rate of return methods focus on cash flows that an asset generates.

Accepted Answer

A) True 
 B)False

Question 17

Tiberius Manufacturing is considering two alternative investment proposals with the following data: $$\begin{array} { | l | l | l | } 
\hline & \text { Proposal } X & \text { Proposal Y } \
\hline \text { Investment } & \$ 10,500,000 & \$ 500,000 \
\hline \text { Useful life } & 5 \text { years } & 5 \text { years } \
\hline \text { Estimated annual net cash inflows for 5 years } & \$ 2,100,000 & \$ 105,000 \
\hline \text { Residual value } & \$ 52,000 & \$ 32,000 \
\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \
\hline \text { Required rate of return } & 13 \% & 12 \% \
\hline
\end{array}$$ Calculate the accounting rate of return for Proposal Y.(Round any intermediate calculations and your final answer to two decimal places.)

Accepted Answer

A)  13.87% 
B)  12.63% 
C)  4.29% 
D)  9.52% 
A)  13.87% 
B)  12.63% 
C)  4.29% 
D)  9.52%

Question 18

The following information is provided by Rojas Company: $$\begin{array} { | l | r | r | r | r | } 
\hline &  { \text { Project A } } &  { \text { Project B } } & \text { Project C } & \text { Project D } \
\hline \text { Initial investment } & \$ 424,000 & \$ 212,000 & \$ 552,000 & \$ 504,000 \
\hline \text { PV of cash inflows } & \$ 588,000 & \$ 396,000 & \$ 800,000 & \$ 402,000 \
\hline \text { Payback period (years) } & 3.6 & 3.2 & 4.0 & 2.0 \
\hline \text { NPV of project } & \$ 164,000 & \$ 184,000 & \$ 248,000 & ( \$ 102,000 ) \
\hline
\end{array}$$ 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)  1.87 
A)  1.92 
B)  1.36 
C)  1.25 
D)  1.87

Question 19

Management uses several different methods in evaluating potential capital investments.Identify and briefly discuss the four methods outlined in the text.

Accepted Answer

The four methods are payback,accounting

Question 20

Which of the following most accurately describes an annuity?

Accepted Answer

A)  an investment which produces increasing cash flows over time 
B)  a series of unequal cash payments made at equal time intervals 
C)  a stream of equal cash payments made at equal time intervals 
D)  a term that does not apply to mortgage payable or bond payable 
A)  an investment which produces increasing cash flows over time 
B)  a series of unequal cash payments made at equal time intervals 
C)  a stream of equal cash payments made at equal time intervals 
D)  a term that does not apply to mortgage payable or bond payable

Which of the following describes the time value of money?

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

Sensitivity analysis is a technique that ________.

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.

The net present value and internal rate of return methods are appropriate for longer-term investments because they ignore the time value of money.

An investment should be accepted if ________.

The discounted cash flow methods of evaluating capital investments are superior because they consider both the time value of money and the profitability of the investment.

Investment methods,such as net present value and internal rate of return,________.

Which of the following is the rate of return,based on discounted cash flows,a company can expect to earn by investing in a capital asset?

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

Both the payback and the accounting rate of return methods focus on cash flows that an asset generates.

Management uses several different methods in evaluating potential capital investments.Identify and briefly discuss the four methods outlined in the text.

Which of the following most accurately describes an annuity?

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

Which of the following describes the time value of money?

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

Sensitivity analysis is a technique that ________.

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.

The net present value and internal rate of return methods are appropriate for longer-term investments because they ignore the time value of money.

An investment should be accepted if ________.

The discounted cash flow methods of evaluating capital investments are superior because they consider both the time value of money and the profitability of the investment.

Investment methods,such as net present value and internal rate of return,________.

Which of the following is the rate of return,based on discounted cash flows,a company can expect to earn by investing in a capital asset?

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

Both the payback and the accounting rate of return methods focus on cash flows that an asset generates.

Management uses several different methods in evaluating potential capital investments.Identify and briefly discuss the four methods outlined in the text.

Which of the following most accurately describes an annuity?

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