Question 1

Select the incorrect statement concerning the present value index (PVI).

Accepted Answer

A)  The PVI is computed by dividing the total present value of the cash inflows by the present value of the cash outflows. 
B)  The PVI should be used to evaluate two or more projects whose initial investments differ. 
C)  The lower the PVI, the better. 
D)  A project whose PVI is positive will also have a positive net present value. 
A)  The PVI is computed by dividing the total present value of the cash inflows by the present value of the cash outflows. 
B)  The PVI should be used to evaluate two or more projects whose initial investments differ. 
C)  The lower the PVI, the better. 
D)  A project whose PVI is positive will also have a positive net present value.

Question 2

Generally,a company should use the MACRS method to calculate depreciation on its income tax return,due to the effects of the time value of money.

Accepted Answer

A) True 
 B)False

Question 3

The purposes of the postaudit for capital investments include all of the following except:

Accepted Answer

A)  continuous improvement. 
B)  rewarding managers for increasing idle cash. 
C)  determining whether the project generated the results expected. 
D)  encouraging managers to closely scrutinize capital investment decisions. 
A)  continuous improvement. 
B)  rewarding managers for increasing idle cash. 
C)  determining whether the project generated the results expected. 
D)  encouraging managers to closely scrutinize capital investment decisions.

Question 4

Mendez Company is considering a capital project that costs $16,000.The project will deliver the following cash flows: $$\begin{array} { l l l l l } 
\text { Year } 1 & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } \
\$ 8,000 & \$ 6,000 & \$ 5,000 & \$ 6,000 & \$ 5,000
\end{array}$$ Using the incremental approach,the payback period for the investment is:

Accepted Answer

A)  5 years. 
B)  2 years. 
C)  2.4 years. 
D)  1.66 years. 
A)  5 years. 
B)  2 years. 
C)  2.4 years. 
D)  1.66 years.

Question 5

The unadjusted rate of return is found by dividing the average incremental increase in annual operating income by the cost of the investment.

Accepted Answer

A) True 
 B)False

Question 6

Connor has $300,000 to invest in a 5-year annuity.Assuming the time value of money is 10%,what amount will Connor receive in cash each year? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.Do not round your PV factors.Round your answer to the nearest dollar.)

Accepted Answer

A)  $79,139 
B)  $60,000 
C)  $96,631 
D)  None of these answers are correct. 
A)  $79,139 
B)  $60,000 
C)  $96,631 
D)  None of these answers are correct.

Question 7

Describe how the unadjusted rate of return for a capital investment is calculated.Should it be based on the net cost of the investment or the average investment?

Accepted Answer

Unadjusted rate of return is calculated

Question 8

Select the term from the list provided that best matches each of the following definitions or descriptions.Put the number of the term in the answer column.

Accepted Answer

The answer of Select the term from the list provided...

Question 9

Montana Company is evaluating two different capital investments,Project X and Y.Either X or Y would cost $210,000,and the company cannot afford to do both.The company expects that Project X would provide net cash inflows of $62,000 per year for 5 years.For Project Y,the net cash inflows are expected to be as follows:
 $\begin{array}{|c|c|}
\hline \text { Year } & \text { Cash inflows from Project } Y \
\hline 1 & \$44,000 \
\hline 2 & 48,000 \
\hline 3 & 60,000 \
\hline 4 & 76,000 \
\hline 5 & 80,000 \
\hline \text { Total } &\$ 308,000 \
\hline
\end{array}$
 Montana's cost of capital is 12%.(PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)
Required:
1)Calculate the present value index for Project X and for Project Y.Round your answer to three decimal places.
2)Indicate whether each of the projects is an acceptable investment.
3)Based on present value index,which of the two projects should Montana implement?

Accepted Answer

1)Present value index for X: $62,000 × 3

Question 10

Indicate whether each of the following statements is true or false.
If two capital investments both have positive net present values,both offer an actual rate of return that is higher than the required rate of return.______
Company M has two potential capital investments,each of which has a positive net present value.M can only accept one of the investments.In this situation,it should always accept the project that has the higher net present value.______
Net present value is calculated by dividing the present value of cash inflows by the present value of cash outflows associated with a capital investment.______
The present value index can be used to compare different capital investment projects.______
The higher the present value index,the lower the rate of return per dollar invested in the project.______

Accepted Answer

If two capital investments both have pos

Question 11

The compensation a company receives for investing in capital assets is referred to as a return on investment.

Accepted Answer

A) True 
 B)False

Question 12

Cash outflows can be categorized into all of the following groups except:

Accepted Answer

A)  opportunity costs associated with selecting a specific capital project. 
B)  outflows associated with the initial investment. 
C)  working capital commitments. 
D)  increases in operating expenses. 
A)  opportunity costs associated with selecting a specific capital project. 
B)  outflows associated with the initial investment. 
C)  working capital commitments. 
D)  increases in operating expenses.

Question 13

If the net present value for a capital investment is equal to zero,the internal rate of return for the investment is equal to the required rate of return.

Accepted Answer

A) True 
 B)False

Question 14

What is the reinvestment assumption,and how does the assumption affect capital investment analyses?

Accepted Answer

The reinvestment assumption is that cash

Question 15

Bristles Hair Salon is considering installing spray-tanning booths.The booths cost $220,000 and have an estimated five-year useful life.Ignore income taxes.The following pro forma income statement is provided:
 $\begin{array}{lrr}
  \text { Spray booth revenue } &&\$95,000\
 \text { Less expenses:} &\
 \text { Supplies } &\$15,000\
\text { Insurance }&5,000\
 \text {  Depreciation} &44,000\
 \text { Maintenance } &\underline{6,000}&\underline{70,000}\
 \text { Net income } &&\underline{\$25,000}\
\end{array}$
 Required:
1)Bristles would like to recoup its original investment in less than four years.Compute the payback period for the tanning booth investment.Would you recommend that the booths be purchased? Why or why not?
2)Bristles' minimum acceptable unadjusted rate of return is 11%.Compute the unadjusted rate of return on the original investment.Would you recommend that the booths be purchased? Why or why not?

Accepted Answer

1)Payback = $220,000 ÷ ($25,000 + $44,00

Question 16

Which of the following statements concerning payback analysis is true?

Accepted Answer

A)  An investment with a shorter payback is preferable to an investment with a longer payback. 
B)  The payback method ignores the time value of money concept. 
C)  The payback method and the unadjusted rate of return are different approaches that will not consistently lead to the same conclusion. 
D)  All of these answers are correct. 
A)  An investment with a shorter payback is preferable to an investment with a longer payback. 
B)  The payback method ignores the time value of money concept. 
C)  The payback method and the unadjusted rate of return are different approaches that will not consistently lead to the same conclusion. 
D)  All of these answers are correct.

Question 17

What amount of cash would result at the end of one year,if $15,000 is invested today and the rate of return is 8%? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)

Accepted Answer

A)  $16,200 
B)  $13,889 
C)  $15,000 
D)  $1,200 
A)  $16,200 
B)  $13,889 
C)  $15,000 
D)  $1,200

Question 18

Butch's Barbecue thinks that offering delivery will increase their sales.Butch's is considering whether to purchase a used delivery truck costing $12,000.Additional net income from the delivery service will be $1,400 per year.The truck will last approximately 5 years.What is the unadjusted rate of return based on the average investment?

Accepted Answer

A)  About 58.3% 
B)  About 11.7% 
C)  About 23.3% 
D)  About 857.1% 
A)  About 58.3% 
B)  About 11.7% 
C)  About 23.3% 
D)  About 857.1%

Question 19

Newton Company is considering the purchase of an asset that will provide a depreciation tax shield of $10,000 per year for 10 years.Assuming the company is subject to a 40% tax rate during the period and a zero salvage value,what is the depreciable cost of the new asset?

Accepted Answer

A)  $100,000 
B)  $250,000 
C)  $400,000 
D)  Can't be determined from the information provided 
A)  $100,000 
B)  $250,000 
C)  $400,000 
D)  Can't be determined from the information provided

Question 20

When the effect of income taxes is considered in a capital budgeting analysis,the amount of depreciation expense must be added back to after-tax income to calculate the annual cash inflow.

Accepted Answer

A) True 
 B)False

Select the incorrect statement concerning the present value index (PVI).

Generally,a company should use the MACRS method to calculate depreciation on its income tax return,due to the effects of the time value of money.

The purposes of the postaudit for capital investments include all of the following except:

Mendez Company is considering a capital project that costs $16,000.The project will deliver the following cash flows: Year 1 Year 2 Year 3 Year 4 Year 5 \ 8,000 \ 6,000 \ 5,000 \ 6,000 \ 5,000 Using the incremental approach,the payback period for the investment is:

The unadjusted rate of return is found by dividing the average incremental increase in annual operating income by the cost of the investment.

Connor has $300,000 to invest in a 5-year annuity.Assuming the time value of money is 10%,what amount will Connor receive in cash each year? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.Do not round your PV factors.Round your answer to the nearest dollar.)

Describe how the unadjusted rate of return for a capital investment is calculated.Should it be based on the net cost of the investment or the average investment?

Select the term from the list provided that best matches each of the following definitions or descriptions.Put the number of the term in the answer column.

The compensation a company receives for investing in capital assets is referred to as a return on investment.

Cash outflows can be categorized into all of the following groups except:

If the net present value for a capital investment is equal to zero,the internal rate of return for the investment is equal to the required rate of return.

What is the reinvestment assumption,and how does the assumption affect capital investment analyses?

Which of the following statements concerning payback analysis is true?

What amount of cash would result at the end of one year,if $15,000 is invested today and the rate of return is 8%? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)

Newton Company is considering the purchase of an asset that will provide a depreciation tax shield of $10,000 per year for 10 years.Assuming the company is subject to a 40% tax rate during the period and a zero salvage value,what is the depreciable cost of the new asset?

When the effect of income taxes is considered in a capital budgeting analysis,the amount of depreciation expense must be added back to after-tax income to calculate the annual cash inflow.

Management Accounting and Corporate Governance

Cost Behavior, operating Leverage, and Profitability Analysis

Analysis of Cost, volume, and Pricing to Increase Profitability

Cost Accumulation,tracing,and Allocation

Cost Management in an Automated Business Environment: ABC, ABM, and TQM

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Responsibility Accounting

Product Costing in Service and Manufacturing Entities

Job-Order, process, and Hybrid Costing Systems

Financial Statement Analysis

Statement of Cash Flows

Filters

Exam 10: Planning for Capital Investments

Select the incorrect statement concerning the present value index (PVI).

Generally,a company should use the MACRS method to calculate depreciation on its income tax return,due to the effects of the time value of money.

The purposes of the postaudit for capital investments include all of the following except:

Mendez Company is considering a capital project that costs $16,000.The project will deliver the following cash flows: Year 1 Year 2 Year 3 Year 4 Year 5 \ 8,000 \ 6,000 \ 5,000 \ 6,000 \ 5,000 Using the incremental approach,the payback period for the investment is:

The unadjusted rate of return is found by dividing the average incremental increase in annual operating income by the cost of the investment.

Connor has $300,000 to invest in a 5-year annuity.Assuming the time value of money is 10%,what amount will Connor receive in cash each year? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.Do not round your PV factors.Round your answer to the nearest dollar.)

Describe how the unadjusted rate of return for a capital investment is calculated.Should it be based on the net cost of the investment or the average investment?

Select the term from the list provided that best matches each of the following definitions or descriptions.Put the number of the term in the answer column.

The compensation a company receives for investing in capital assets is referred to as a return on investment.

Cash outflows can be categorized into all of the following groups except:

If the net present value for a capital investment is equal to zero,the internal rate of return for the investment is equal to the required rate of return.

What is the reinvestment assumption,and how does the assumption affect capital investment analyses?

Which of the following statements concerning payback analysis is true?

What amount of cash would result at the end of one year,if $15,000 is invested today and the rate of return is 8%? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)

Newton Company is considering the purchase of an asset that will provide a depreciation tax shield of $10,000 per year for 10 years.Assuming the company is subject to a 40% tax rate during the period and a zero salvage value,what is the depreciable cost of the new asset?

When the effect of income taxes is considered in a capital budgeting analysis,the amount of depreciation expense must be added back to after-tax income to calculate the annual cash inflow.

Management Accounting and Corporate Governance

Cost Behavior, operating Leverage, and Profitability Analysis

Analysis of Cost, volume, and Pricing to Increase Profitability

Cost Accumulation,tracing,and Allocation

Cost Management in an Automated Business Environment: ABC, ABM, and TQM

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Responsibility Accounting

Product Costing in Service and Manufacturing Entities

Job-Order, process, and Hybrid Costing Systems

Financial Statement Analysis

Statement of Cash Flows

Filters