Question 1

Which of the following two methods are typically used for initial screening of investments,rather than for detailed,in-depth analysis?

Accepted Answer

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

Question 2

The payback method considers cash flows that occur both during and after the payback period.

Accepted Answer

A) True 
 B)False

Question 3

All of the following are considered cash inflows EXCEPT the ________.

Accepted Answer

A)  future cash revenue generated by the investment 
B)  future savings in ongoing cash operating costs 
C)  future residual value of the capital investment 
D)  future additional operating costs of the investment 
A)  future cash revenue generated by the investment 
B)  future savings in ongoing cash operating costs 
C)  future residual value of the capital investment 
D)  future additional operating costs of the investment

Question 4

The payback method uses discounted cash flows to make investment decisions.

Accepted Answer

A) True 
 B)False

Question 5

A post-audit in capital budgeting is a comparison of the actual results of capital investments with the projected results.

Accepted Answer

A) True 
 B)False

Question 6

The accounting rate of return method focuses on operating income instead of net cash inflow generated by an asset.

Accepted Answer

A) True 
 B)False

Question 7

The accounting rate of return is calculated by dividing the average annual operating income by the average amount invested.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Cash inflows from a capital investment arise from an increase in revenues,a decrease in expenses,or both.

Accepted Answer

A) True 
 B)False

Question 10

Which capital budgeting method uses accrual accounting,rather than net cash inflows,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 11

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

Accepted Answer

A) True 
 B)False

Question 12

Solutions Tool Co.is considering investing in specialized equipment costing $975,000.The equipment has a useful life of five years and a residual value of $75,000.Depreciation is calculated using the straight-line method.The expected net cash inflows from the investment are given below:
 $$\begin{array} { r r } 
\text { Year 1 } & \$ 275,000 \
\text { Year 2 } & 220,000 \
\text { Year 3 } & 200,000 \
\text { Year 4 } & 200,000 \
\text { Year 5 } & \underline { 180,000 } \
& \$ 1,075,000
\end{array}$$ Compute the accounting rate of return on the investment.Show your calculations and round to two decimal places.

Accepted Answer

Calculation of accounting rate of return

Question 13

Which of the following best describes the profitability index?

Accepted Answer

A)  an index of projects based on their net income 
B)  the ratio of present value of net cash inflows to initial investment 
C)  the ratio of total cash inflows to initial investment 
D)  an array of possible investment outcomes at different discount rates 
A)  an index of projects based on their net income 
B)  the ratio of present value of net cash inflows to initial investment 
C)  the ratio of total cash inflows to initial investment 
D)  an array of possible investment outcomes at different discount rates

Question 14

Zebulon,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 15

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

Accepted Answer

A) True 
 B)False

Question 16

The accounting rate of return shows the effect of the investment on the company's accrual-based income.

Accepted Answer

A) True 
 B)False

Question 17

An operational asset used for a long period of time is known as a capital asset.

Accepted Answer

A) True 
 B)False

Question 18

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 19

Beam Cable Company is considering investing $450,000 in telecommunications equipment that has an estimated life of four years with no residual value.The cash inflows 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 20

Moonbeam Company is considering purchasing a new machine for $80,000.The new facility will generate annual net cash inflows of $20,000 for six years.At the end of the six years the machine will have no residual value.The company uses straight-line depreciation,and its stockholders demand an annual return of 12% on investments of this nature.
Present value of an ordinary annuity of $1:
 $$\begin{array} { | c | c | c | c | c | } 
\hline & 12 \% & 13 \% & 14 \% & 15 \% \
\hline 1 & 0.893 & 0.885 & 0.877 & 0.87 \
\hline 2 & 1.69 & 1.668 & 1.647 & 1.626 \
\hline 3 & 2.402 & 2.361 & 2.322 & 2.283 \
\hline 4 & 3.037 & 2.974 & 2.914 & 2.855 \
\hline 5 & 3.605 & 3.517 & 3.433 & 3.352 \
\hline 6 & 4.111 & 3.998 & 3.889 & 3.784 \
\hline 7 & 4.564 & 4.423 & 4.288 & 4.160 \
\hline
\end{array}$$ 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}

Exam 26: Capital Investment Decisions

Which of the following two methods are typically used for initial screening of investments,rather than for detailed,in-depth analysis?

The payback method considers cash flows that occur both during and after the payback period.

All of the following are considered cash inflows EXCEPT the ________.

The payback method uses discounted cash flows to make investment decisions.

A post-audit in capital budgeting is a comparison of the actual results of capital investments with the projected results.

The accounting rate of return method focuses on operating income instead of net cash inflow generated by an asset.

The accounting rate of return is calculated by dividing the average annual operating income by the average amount invested.

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

Cash inflows from a capital investment arise from an increase in revenues,a decrease in expenses,or both.

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

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

Which of the following best describes the profitability index?

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

The accounting rate of return shows the effect of the investment on the company's accrual-based income.

An operational asset used for a long period of time is known as a capital asset.

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.

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

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