Question 1

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 C

Question 2

The following information is provided by Westwind Systems:
   
Calculate the profitability index for Project C.Show your calculations and round to two decimal places.

Accepted Answer

Profitability Index = Present value of net cash inflows / Initial investment = $800,000 / $560,000 = 1.43

Question 3

When comparing several investments with the same initial cost,the decision should be made on the basis of the ________.

Accepted Answer

A) highest total cash inflows 
B) longest payback period 
C) highest NPV 
D) highest ARR 
A) highest total cash inflows 
B) longest payback period 
C) highest NPV 
D) highest ARR C

Question 4

An annuity is a stream of equal cash payments made at equal time intervals.

Accepted Answer

A) True 
 B)False

Question 5

Ken Jones has just won the state lottery.The state offers the following three payout options for after-tax prize money:
1.$50,000 per year at the end of each of the next six years
2.$300,000 (lump sum)now
3.$400,000 (lump sum)six years from now
Calculate the present value of each scenario using an 8% annual discount rate.Round to nearest whole dollar.
Present value of an ordinary annuity of $1:
   
Present value of $1:

Accepted Answer

Scenario 1: Present value of l

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

The fact that invested cash earns income over time is called the time value of money.

Accepted Answer

A) True 
 B)False

Question 8

Martin Production 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:
   
Compute the accounting rate of return on the investment,Show your calculations and round to two decimal places.

Accepted Answer

Calculation of accounting rate

Question 9

Under what circumstances is the investment with the shortest payback the best choice? How should managers use the payback method?

Accepted Answer

The investment with the shortest payback

Question 10

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 11

Capital budgeting involves ________.

Accepted Answer

A) budgeting for yearly operational expenses 
B) preparing the sales budget for the coming year 
C) deciding among various long-term investments 
D) analyzing various alternatives of financing available to a company 
A) budgeting for yearly operational expenses 
B) preparing the sales budget for the coming year 
C) deciding among various long-term investments 
D) analyzing various alternatives of financing available to a company

Question 12

List three cash inflows and three cash outflows for capital investments.

Accepted Answer

The answer of List three cash inflows and three cash...

Question 13

Gregory Cable Company is considering investing $450,000 in telecommunications equipment that has an estimated life of five years with no residual value.The cash flows are as shown below:
   
Present value of an ordinary annuity of $1:
   
Present value of $1:

Accepted Answer

The IRR is

Question 14

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 15

McAfee Automobiles Manufacturing is considering two alternative investment proposals with the following data:
 
Calculate the accounting rate of return for Proposal Y.(Round any intermediate calculations and your final answer to two decimal places. )

Accepted Answer

A) 16.10% 
B) 10.63% 
C) 6.27% 
D) 10.80% 
A) 16.10% 
B) 10.63% 
C) 6.27% 
D) 10.80%

Question 16

Glades Thread Company is evaluating an investment that will cost $760,000 and will yield cash flows of $255,000 in the first year,$360,000 in the second year,and $380,000 in the third and the final year.Use the table below and determine the internal rate of return.
Present value of $1:
 
The IRR of the project will be ________.

Accepted Answer

A) between 10% and 11% 
B) less than 9% 
C) less than 10%,more than 9% 
D) more than 11% 
A) between 10% and 11% 
B) less than 9% 
C) less than 10%,more than 9% 
D) more than 11%

Question 17

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 18

A company is evaluating three possible investments.The following information is provided by the company:
 
What is the payback period for Project A? (Assume that the company uses the straight-line depreciation method. )(Round your answer to two decimal places. )

Accepted Answer

A) 2.85 years 
B) 1.50 years 
C) 3.85 years 
D) 5.00 years 
A) 2.85 years 
B) 1.50 years 
C) 3.85 years 
D) 5.00 years

Question 19

When projecting future cash flows of an investment ________.

Accepted Answer

A) cash flows includes depreciation 
B) cash inflows and outflows are treated separately,rather than being netted together 
C) cash flows are projected by accounting personnel without considering input from other departments 
D) the initial investment is a significant cash outflow that is treated separately from all other cash flows 
A) cash flows includes depreciation 
B) cash inflows and outflows are treated separately,rather than being netted together 
C) cash flows are projected by accounting personnel without considering input from other departments 
D) the initial investment is a significant cash outflow that is treated separately from all other cash flows

Question 20

Peri Corporation is considering an investment opportunity with the following expected net cash inflows: Year 1,$260,000;Year 2,$340,000;Year 3,$390,000.The company uses a discount rate of 11%,and the initial cost of the investment is $770,000.
Present Value of $1:
 
The IRR of the project will be ________.

Accepted Answer

A) less than 11% 
B) between 11% and 12% 
C) between 12% and 13% 
D) more than 11% 
A) less than 11% 
B) between 11% and 12% 
C) between 12% and 13% 
D) more than 11%

Exam 26: Capital Investment Decisions

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

The following information is provided by Westwind Systems: Calculate the profitability index for Project C.Show your calculations and round to two decimal places.

When comparing several investments with the same initial cost,the decision should be made on the basis of the ________.

An annuity is a stream of equal cash payments made at equal time intervals.

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

The fact that invested cash earns income over time is called the time value of money.

Under what circumstances is the investment with the shortest payback the best choice? How should managers use the payback method?

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

Capital budgeting involves ________.

List three cash inflows and three cash outflows for capital investments.

Gregory Cable Company is considering investing $450,000 in telecommunications equipment that has an estimated life of five years with no residual value.The cash flows are as shown below: Present value of an ordinary annuity of $1: Present value of $1:

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

McAfee Automobiles Manufacturing is considering two alternative investment proposals with the following data: Calculate the accounting rate of return for Proposal Y.(Round any intermediate calculations and your final answer to two decimal places. )

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

A company is evaluating three possible investments.The following information is provided by the company: What is the payback period for Project A? (Assume that the company uses the straight-line depreciation method. )(Round your answer to two decimal places. )

When projecting future cash flows of an investment ________.

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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