Question 1

Net 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 2

The net present value method of evaluating capital investments suggests that an investment with net cash inflows which exceed the initial cost of the investment is desirable.

Accepted Answer

A) True 
 B)False

Question 3

The Accounting Rate of Return method evaluates the lifetime return of an investment,whereas Return on Investment evaluates the annual return of an investment.

Accepted Answer

A) True 
 B)False

Question 4

Peter Smith has just won the state lottery and has 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.$510,000 (lump sum)six years from now
The annual discount rate is 9%.Compute the present value of the third option.(Round to nearest whole dollar. )
Present value of $1:

Accepted Answer

A) $250,000 
B) $76,667 
C) $79,467 
D) $303,960 
A) $250,000 
B) $76,667 
C) $79,467 
D) $303,960

Question 5

Which of the following most accurately describes an annuity?

Accepted Answer

A) an investment which produces increasing cash flows over time 
B) a series of unequal cash payments made at equal time intervals 
C) a stream of equal cash payments made at equal time intervals 
D) a term that does not apply to mortgage payable or bond payable 
A) an investment which produces increasing cash flows over time 
B) a series of unequal cash payments made at equal time intervals 
C) a stream of equal cash payments made at equal time intervals 
D) a term that does not apply to mortgage payable or bond payable

Question 6

A company is evaluating three possible investments.Each uses the straight-line method of depreciation.The following information is provided by the company:
 
What is the accounting rate of return for Project C? (Round your answer to two decimal places. )

Accepted Answer

A) 14.29% 
B) 7.56% 
C) 33.33% 
D) 10.48% 
A) 14.29% 
B) 7.56% 
C) 33.33% 
D) 10.48%

Question 7

Many service,merchandising,and manufacturing firms use discounted cash flow methods to make capital investment decisions.

Accepted Answer

A) True 
 B)False

Question 8

Capital rationing is a process adopted when a company has limited resources,and it must find ways to reduce operating expenses in all of its divisions and units.

Accepted Answer

A) True 
 B)False

Question 9

A company seeking investment opportunities has collected the following information:
 
If the company makes a decision based on the net present value,which project will be selected?

Accepted Answer

A) Project A 
B) Project B 
C) Project C 
D) Project D 
A) Project A 
B) Project B 
C) Project C 
D) Project D

Question 10

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 11

Paramount Carpets is considering purchasing new equipment costing $736,000.The company's management has estimated that the equipment will generate cash flows as follows:
 
Considering the residual value is zero,calculate the payback period.(Round your answer to two decimal places. )

Accepted Answer

A) 4.39 years 
B) 3.15 years 
C) 3.62 years 
D) 3.81 years 
A) 4.39 years 
B) 3.15 years 
C) 3.62 years 
D) 3.81 years

Question 12

Compound interest means that interest is calculated only on the principal amount.

Accepted Answer

A) True 
 B)False

Question 13

If an investment's internal rate of return is higher than the required rate of return,the company should reject the investment.

Accepted Answer

A) True 
 B)False

Question 14

A company is considering an iron ore extraction project that requires an initial investment of $518,000 and will yield annual cash inflows of $158,000 for four years.The company's discount rate is 9%.What is the NPV of the project?
Present value of an ordinary annuity of $1:

Accepted Answer

A) $6,080 
B) $(103,600) 
C) $103,600 
D) $(6,080) 
A) $6,080 
B) $(103,600) 
C) $103,600 
D) $(6,080)

Question 15

Discounted cash flow methods typically ________.

Accepted Answer

A) use simple interest calculations 
B) assume that cash flows will be reinvested when received 
C) focus on the payback period 
D) comply with the requirements of GAAP 
A) use simple interest calculations 
B) assume that cash flows will be reinvested when received 
C) focus on the payback period 
D) comply with the requirements of GAAP

Question 16

When a company is evaluating an investment proposal with high risk,a low discount rate should be used.

Accepted Answer

A) True 
 B)False

Question 17

Safe Driving School is considering purchasing new autos costing $235,000.The company's management has estimated that the autos will generate cash flows as follows:
   
Considering the residual value is zero,calculate the payback period.Round to one decimal place

Accepted Answer

By the end of 2 years,Safe Driving has r

Question 18

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 19

The payback and accounting rate of return (ARR)methods are suitable for investments with a relatively short time span.

Accepted Answer

A) True 
 B)False

Question 20

When evaluating a potential investment,managers should use only one measure for making a sound investment decision.

Accepted Answer

A) True 
 B)False

Exam 26: Capital Investment Decisions

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

The net present value method of evaluating capital investments suggests that an investment with net cash inflows which exceed the initial cost of the investment is desirable.

The Accounting Rate of Return method evaluates the lifetime return of an investment,whereas Return on Investment evaluates the annual return of an investment.

Which of the following most accurately describes an annuity?

A company is evaluating three possible investments.Each uses the straight-line method of depreciation.The following information is provided by the company: What is the accounting rate of return for Project C? (Round your answer to two decimal places. )

Many service,merchandising,and manufacturing firms use discounted cash flow methods to make capital investment decisions.

Capital rationing is a process adopted when a company has limited resources,and it must find ways to reduce operating expenses in all of its divisions and units.

A company seeking investment opportunities has collected the following information: If the company makes a decision based on the net present value,which project will be selected?

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

Paramount Carpets is considering purchasing new equipment costing $736,000.The company's management has estimated that the equipment will generate cash flows as follows: Considering the residual value is zero,calculate the payback period.(Round your answer to two decimal places. )

Compound interest means that interest is calculated only on the principal amount.

If an investment's internal rate of return is higher than the required rate of return,the company should reject the investment.

A company is considering an iron ore extraction project that requires an initial investment of $518,000 and will yield annual cash inflows of $158,000 for four years.The company's discount rate is 9%.What is the NPV of the project? Present value of an ordinary annuity of $1:

Discounted cash flow methods typically ________.

When a company is evaluating an investment proposal with high risk,a low discount rate should be used.

Safe Driving School is considering purchasing new autos costing $235,000.The company's management has estimated that the autos will generate cash flows as follows: Considering the residual value is zero,calculate the payback period.Round to one decimal place

Which of the following best describes the profitability index?

The payback and accounting rate of return (ARR)methods are suitable for investments with a relatively short time span.

When evaluating a potential investment,managers should use only one measure for making a sound investment decision.

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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