Question 1

Which of the following is not a factor in explaining why the present value of a future dollar is less than one dollar?

Accepted Answer

A)  Inflation 
B)  Interest 
C)  Risk of failure to receive expected cash inflows 
D)  Historic cost 
A)  Inflation 
B)  Interest 
C)  Risk of failure to receive expected cash inflows 
D)  Historic cost

Question 2

The review of a capital budgeting decision to determine whether a project was accepted that should have been rejected is referred to as:

Accepted Answer

A)  an audit. 
B)  a preaudit. 
C)  a postaudit. 
D)  a capital review. 
A)  an audit. 
B)  a preaudit. 
C)  a postaudit. 
D)  a capital review.

Question 3

The rate of return that equates the present value of cash inflows and outflows is the:

Accepted Answer

A)  minimum rate of return. 
B)  internal rate of return. 
C)  desired rate of return. 
D)  hurdle rate. 
A)  minimum rate of return. 
B)  internal rate of return. 
C)  desired rate of return. 
D)  hurdle rate.

Question 4

The amount of the depreciation tax shield can be calculated by multiplying the amount of depreciation expense by the tax rate.

Accepted Answer

A) True 
 B)False

Question 5

Matt needs to compute the present value of $5,000 to be received four years from now.He should multiply $5,000 by the appropriate present value interest factor obtained from the present value of $1 table.

Accepted Answer

A) True 
 B)False

Question 6

Theresa is considering starting a small business.She plans to purchase equipment costing $145,000.Rent on the building used by the business will be $26,000 per year while other operating costs will total $30,000 per year.A market research specialist estimates that Theresa's annual sales from the business will amount to $80,000.Theresa plans to operate the business for 6 years.Disregarding the effects of taxes,what will be the amount of annual net cash flow generated by the business?

Accepted Answer

A)  $24,000 
B)  $56,000 
C)  $80,000 
D)  None of these answers is correct. 
A)  $24,000 
B)  $56,000 
C)  $80,000 
D)  None of these answers is correct.

Question 7

Because of the expense of applying multiple techniques,managers should use a single capital budgeting technique to analyze potential capital investments.

Accepted Answer

A) True 
 B)False

Question 8

Why is the time value of money often taken into account in analyzing a capital investment?

Accepted Answer

Capital investments involve expected cas

Question 9

Morrisey Company has two investment opportunities.Both investments cost $5,500 and will provide the same total future cash inflows.The cash receipt schedule for each investment is given below: $$\begin{array} { | l | c | c | } 
\hline & \text { Investment I } & \text { Investment II } \
\hline \text { Period 1 } & \$ 1,000 & \$ 1,000 \
\hline \text { Period 2 } & 1,000 & 2,000 \
\hline \text { Period 3 } & 2,000 & 3,000 \
\hline \text { Period 4 } & \underline { 4,000 } & \underline { 2,000 } \
\hline \text { Total } & \underline { \$ 8,000 } & \underline { \$ 8,000 } \
\hline
\end{array}$$ What is the net present value of Investment II assuming an 8% minimum rate of return? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.Do not round your intermediate calculations.Round your answer to the nearest whole dollar.)

Accepted Answer

A)  $6,492 
B)  $992 
C)  $5,880 
D)  $380 
A)  $6,492 
B)  $992 
C)  $5,880 
D)  $380

Question 10

The assumption regarding ordinary annuities is that cash flows occur at the end of each period.

Accepted Answer

A) True 
 B)False

Question 11

Depreciation on a capital investment (such as equipment)has the effect of decreasing the amount of income taxes that the company owning the asset must pay.

Accepted Answer

A) True 
 B)False

Question 12

Which method for evaluating capital investment proposals reduces the present value of cash outflows from the present value of cash inflows?

Accepted Answer

A)  Payback method 
B)  Internal rate of return 
C)  Net present value 
D)  Unadjusted rate of return 
A)  Payback method 
B)  Internal rate of return 
C)  Net present value 
D)  Unadjusted rate of return

Question 13

Cash inflows from a capital investment may include the salvage value of capital assets and increases in revenues.

Accepted Answer

A) True 
 B)False

Question 14

The cost of capital is sometimes referred to as the hurdle or discount rate.

Accepted Answer

A) True 
 B)False

Question 15

Alcorn Company is considering purchasing equipment that costs $400,000.The equipment has an estimated useful life of 8 years and no salvage value.Alcorn believes that the annual cash inflows from using the equipment will be $80,000.
(PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)
Required:
1)Calculate the net present value of the equipment assuming that Alcorn's cost of capital is 12%.Is the equipment an acceptable investment?
2)Calculate the net present value of the equipment assuming that Alcorn's cost of capital is 10%.Is the equipment an acceptable investment?
3)What general conclusion can you reach from your results to parts 1)and 2)?

Accepted Answer

1)Net present value = ($80,000 × 4.96764

Question 16

The difference between an ordinary annuity and an annuity due is:

Accepted Answer

A)  an ordinary annuity represents a present value and an annuity due represents a future value. 
B)  an ordinary annuity represents a future value and an annuity due represents a present value. 
C)  an ordinary annuity assumes the cash flows occur at the beginning of the period and an annuity due assumes the cash flows occur at the end of the period. 
D)  an ordinary annuity assumes the cash flows occur at the end of the period and an annuity due assumes the cash flows occur at the beginning of the period. 
A)  an ordinary annuity represents a present value and an annuity due represents a future value. 
B)  an ordinary annuity represents a future value and an annuity due represents a present value. 
C)  an ordinary annuity assumes the cash flows occur at the beginning of the period and an annuity due assumes the cash flows occur at the end of the period. 
D)  an ordinary annuity assumes the cash flows occur at the end of the period and an annuity due assumes the cash flows occur at the beginning of the period.

Question 17

Burgess Corporation is considering purchasing equipment that costs $235,000.The equipment has an estimated useful life of 5 years and no salvage value.Burgess believes that the annual cash inflows from using the equipment will be $65,000.
(PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)
Required:
1)Calculate the net present value of the equipment assuming that Burgess's cost of capital is 12%.Is the equipment an acceptable investment?
2)Calculate the net present value of the equipment assuming that Burgess's cost of capital is 10%.Is the equipment an acceptable investment?
3)Based on your results to parts 1)and 2),estimate the internal rate of return for the investment in the equipment.

Accepted Answer

1)Net present value = ($65,000 × 3.60477

Question 18

Capital investment decisions involve investments in current assets.

Accepted Answer

A) True 
 B)False

Question 19

Paul Company is considering purchasing a capital investment that is expected to provide annual cash inflows of $12,000 per year for 3 years.Assuming that the required rate of return is 10%,what is the present value of these cash inflows? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.Do not round PV factors and intermediate calculations.Round your final answer to the nearest dollar.)

Accepted Answer

A)  $9,016 
B)  $28,822 
C)  $29,842 
D)  $27,047 
A)  $9,016 
B)  $28,822 
C)  $29,842 
D)  $27,047

Question 20

Which method of evaluating capital investment decisions uses the concept of present value to compute a rate of return?

Accepted Answer

A)  Internal rate of return 
B)  Unadjusted rate of return 
C)  Net present value 
D)  Payback 
A)  Internal rate of return 
B)  Unadjusted rate of return 
C)  Net present value 
D)  Payback

Which of the following is not a factor in explaining why the present value of a future dollar is less than one dollar?

The review of a capital budgeting decision to determine whether a project was accepted that should have been rejected is referred to as:

The rate of return that equates the present value of cash inflows and outflows is the:

The amount of the depreciation tax shield can be calculated by multiplying the amount of depreciation expense by the tax rate.

Matt needs to compute the present value of $5,000 to be received four years from now.He should multiply $5,000 by the appropriate present value interest factor obtained from the present value of $1 table.

Because of the expense of applying multiple techniques,managers should use a single capital budgeting technique to analyze potential capital investments.

Why is the time value of money often taken into account in analyzing a capital investment?

The assumption regarding ordinary annuities is that cash flows occur at the end of each period.

Depreciation on a capital investment (such as equipment)has the effect of decreasing the amount of income taxes that the company owning the asset must pay.

Which method for evaluating capital investment proposals reduces the present value of cash outflows from the present value of cash inflows?

Cash inflows from a capital investment may include the salvage value of capital assets and increases in revenues.

The cost of capital is sometimes referred to as the hurdle or discount rate.

The difference between an ordinary annuity and an annuity due is:

Capital investment decisions involve investments in current assets.

Which method of evaluating capital investment decisions uses the concept of present value to compute a rate of return?

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

Which of the following is not a factor in explaining why the present value of a future dollar is less than one dollar?

The review of a capital budgeting decision to determine whether a project was accepted that should have been rejected is referred to as:

The rate of return that equates the present value of cash inflows and outflows is the:

The amount of the depreciation tax shield can be calculated by multiplying the amount of depreciation expense by the tax rate.

Matt needs to compute the present value of $5,000 to be received four years from now.He should multiply $5,000 by the appropriate present value interest factor obtained from the present value of $1 table.

Because of the expense of applying multiple techniques,managers should use a single capital budgeting technique to analyze potential capital investments.

Why is the time value of money often taken into account in analyzing a capital investment?

The assumption regarding ordinary annuities is that cash flows occur at the end of each period.

Depreciation on a capital investment (such as equipment)has the effect of decreasing the amount of income taxes that the company owning the asset must pay.

Which method for evaluating capital investment proposals reduces the present value of cash outflows from the present value of cash inflows?

Cash inflows from a capital investment may include the salvage value of capital assets and increases in revenues.

The cost of capital is sometimes referred to as the hurdle or discount rate.

The difference between an ordinary annuity and an annuity due is:

Capital investment decisions involve investments in current assets.

Which method of evaluating capital investment decisions uses the concept of present value to compute a rate of return?

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