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

Cash inflows include future cash revenue generated from an investment and any future residual value of the asset but exclude any future savings in ongoing cash operating costs resulting from the investment.

Accepted Answer

A) True 
 B)False

Question 3

Two methods of analyzing potential capital investments-payback and accounting rate of return-ignore the time value of money.

Accepted Answer

A) True 
 B)False

Question 4

Which capital budgeting method uses accrual accounting,rather than net cash flows,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 5

Ipswich Corporation is considering an investment opportunity with the expected net cash inflows of $300,000 for four years.The residual value of the investment,at the end of four years,would be $70,000.The company uses a discount rate of 14%,and the initial investment is $290,000.Calculate the NPV of the investment.
Present value of an ordinary annuity of $1:
   
Present value of $1:

Accepted Answer

The answer of Ipswich Corporation is considering an investment opportunity...

Question 6

Gamma Corporation is considering an investment of $516,000 in a land development project.The investment will yield cash inflows of $200,000 per year for five years.The company uses a discount rate of 9%.What is the net present value of the investment?
Present value of an ordinary annuity of $1:

Accepted Answer

A) $237,360 
B) $262,000 
C) $340,560 
D) $200,000 
A) $237,360 
B) $262,000 
C) $340,560 
D) $200,000

Question 7

Which of the following situations suggests the acceptance of an investment proposal?

Accepted Answer

A) The present value of the net cash inflows exceeds the initial investment. 
B) The IRR is lower than the hurdle rate. 
C) The cash inflows are less than the initial investment. 
D) The investment will have a residual value. 
A) The present value of the net cash inflows exceeds the initial investment. 
B) The IRR is lower than the hurdle rate. 
C) The cash inflows are less than the initial investment. 
D) The investment will have a residual value.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Dartis Tools Co.is considering investing in specialized equipment costing $670,000.The equipment has a useful life of five years and a residual value of $61,000.Depreciation is calculated using the straight-line method.The expected net cash inflows from the investment are given below:
 
What is the accounting rate of return on the investment? (Round your answer to two decimal places. )

Accepted Answer

A) 10.21% 
B) 11.23% 
C) 9.36% 
D) 4.68% 
A) 10.21% 
B) 11.23% 
C) 9.36% 
D) 4.68%

Question 10

When the internal rate of return is the same as the required rate of return,the net present value of an investment will be positive.

Accepted Answer

A) True 
 B)False

Question 11

The last step in the capital budgeting process is control,which compares the actual results with the projected results.These comparisons are known as ________.

Accepted Answer

A) net cash inflows 
B) post-audits 
C) rankings 
D) variance analysis 
A) net cash inflows 
B) post-audits 
C) rankings 
D) variance analysis

Question 12

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 13

Discounted cash flow 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 14

The payback and accounting rate of return methods are often used to perform an initial screening of investments.

Accepted Answer

A) True 
 B)False

Question 15

Lloyd's Moving Company is considering purchasing new equipment that costs $728,000.Its management estimates that the equipment will generate cash flows as follows:
 
Present value of $1:
 
The company's annual required rate of return is 9%.Using the factors in the table,calculate the present value of the cash flows.(Round all calculations to the nearest whole dollar. )

Accepted Answer

A) $870,000 
B) $839,674 
C) $853,320 
D) $872,000 
A) $870,000 
B) $839,674 
C) $853,320 
D) $872,000

Question 16

Which of the following best describes a capital budgeting post-audit?

Accepted Answer

A) an audit of an operating unit of a company 
B) an audit performed only at the end of the project's life span 
C) an analysis of an investment's cash flows prior to committing to the initial investment 
D) a comparison of actual results of capital investments with projected results 
A) an audit of an operating unit of a company 
B) an audit performed only at the end of the project's life span 
C) an analysis of an investment's cash flows prior to committing to the initial investment 
D) a comparison of actual results of capital investments with projected results

Question 17

Flint Systems is considering investing in production-management software that costs $640,000,has $67,000 residual value,and leads to cost savings of $1,850,000 per year over its five-year life.Calculate the average amount invested in the asset that should be used for calculating the accounting rate of return.

Accepted Answer

A) $707,000 
B) $640,000 
C) $353,500 
D) $67,000 
A) $707,000 
B) $640,000 
C) $353,500 
D) $67,000

Question 18

The following details are provided by a manufacturing company:
 
Calculate the payback period for the investment.(Round your answer to two decimal places. )

Accepted Answer

A) 2.98 years 
B) 2.82 years 
C) 1.98 years 
D) 2.20 years 
A) 2.98 years 
B) 2.82 years 
C) 1.98 years 
D) 2.20 years

Question 19

When computing the present value,the interest rate will vary depending on the amount of risk.Riskier investments,such as FDIC-insured bank deposits,command higher interest rates.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

Profitability Index = Present

Exam 26: Capital Investment Decisions

Which of the following describes the time value of money?

Cash inflows include future cash revenue generated from an investment and any future residual value of the asset but exclude any future savings in ongoing cash operating costs resulting from the investment.

Two methods of analyzing potential capital investments-payback and accounting rate of return-ignore the time value of money.

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

Gamma Corporation is considering an investment of $516,000 in a land development project.The investment will yield cash inflows of $200,000 per year for five years.The company uses a discount rate of 9%.What is the net present value of the investment? Present value of an ordinary annuity of $1:

Which of the following situations suggests the acceptance of an investment proposal?

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

When the internal rate of return is the same as the required rate of return,the net present value of an investment will be positive.

The last step in the capital budgeting process is control,which compares the actual results with the projected results.These comparisons are known as ________.

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

Discounted cash flow methods,such as net present value and internal rate of return,________.

The payback and accounting rate of return methods are often used to perform an initial screening of investments.

Which of the following best describes a capital budgeting post-audit?

The following details are provided by a manufacturing company: Calculate the payback period for the investment.(Round your answer to two decimal places. )

When computing the present value,the interest rate will vary depending on the amount of risk.Riskier investments,such as FDIC-insured bank deposits,command higher interest rates.

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

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