Question 1

The company's minimum rate of return is also referred to as its profit margin.

Accepted Answer

A) True 
 B)False

Question 2

Assume revenues are received in cash and expenses,except for depreciation,are paid in cash.Based on this assumption,which of the following statements is true?

Accepted Answer

A) Net cash flows for a period are equal to net income minus depreciation expense. 
B) Net cash flows for a period are equal to net income. 
C) Net cash flows for a period are equal to net income plus depreciation expense. 
D) Net cash flows for a period are equal to net income plus income tax expense. 
A) Net cash flows for a period are equal to net income minus depreciation expense. 
B) Net cash flows for a period are equal to net income. 
C) Net cash flows for a period are equal to net income plus depreciation expense. 
D) Net cash flows for a period are equal to net income plus income tax expense.

Question 3

The accounting rate-of-return method is a precise but difficult way to measure the performance of a capital investment.

Accepted Answer

A) True 
 B)False

Question 4

Projected disposal or residual values of replacement equipment are relevant to capital investment analysis because

Accepted Answer

A) they represent future cash inflows. 
B) they usually differ among alternatives. 
C) they reduce income taxes. 
D) they represent future cash inflows and usually differ among alternatives. 
A) they represent future cash inflows. 
B) they usually differ among alternatives. 
C) they reduce income taxes. 
D) they represent future cash inflows and usually differ among alternatives.

Question 5

Managers use both quantitative and qualitative information to analyze the effects of capital investment decisions on their organization's resources and profits.

Accepted Answer

A) True 
 B)False

Question 6

Net present value analysis is based on a project's cash flows.

Accepted Answer

A) True 
 B)False

Question 7

The Pink Thai Restaurant is considering the purchase of a second oven that would accommodate its new take-out business.The oven would cost $17,000,has an estimated residual value of $5,000,and would be useful for six years.Annual net cash inflows would increase by $3,960.Pink Thai uses the straight-line method of depreciation.Using the above facts and the present value factors given below,calculate the following.
a.Payback period (Round your answer to one decimal place. )
b.Accounting rate of return (Round your answer to one decimal place. )
c.Net present value of the investment based on a 15 percent minimum desired rate of return (Use parentheses to indicate a negative net present value.Round your answer to the nearest dollar,if necessary. )

Accepted Answer

a.4.3 years (Payback period)= $17,000 (I

Question 8

Rodriguez Inc.is considering a project that costs $200,000.The company expects the annual cash revenues to be $75,000 and annual expenses (including depreciation)to be $30,000.The project has a ten-year useful life and a residual value of $25,000.Assume Rodriguez Inc.uses the straight-line method of depreciation. 
-Using the above information for Rodriguez,the project's payback period (rounded to two decimal places)is

Accepted Answer

A) 2.31 years. 
B) 3.20 years. 
C) 2.14 years. 
D) 2.50 years. 
A) 2.31 years. 
B) 3.20 years. 
C) 2.14 years. 
D) 2.50 years.

Question 9

The payback period is based on a net present value of cash flows.

Accepted Answer

A) True 
 B)False

Question 10

The payback period equals the cost of the capital investment divided by net income.

Accepted Answer

A) True 
 B)False

Question 11

The minimum rate of return is also known as the hurdle rate.

Accepted Answer

A) True 
 B)False

Question 12

You are given the following present value factors at 8 percent,the Tehachapi Glass Company's minimum desired rate of return:
  The Tehachapi Glass Company is considering the replacement of a piece of equipment.The old machine has a carrying value of $800 and a remaining estimated life of five years,with no residual value at that time.Present residual value is $200.The new equipment will cost $1,200,including transportation and installation.It has an estimated life of five years,with no residual value.Annual cash operating costs are $405 for the old machine and $165 for the new machine.Round answers to two decimal places.
a.Compute the present value of the operating cash outflows for the old machine.
b.Compute the present value of the operating cash outflows for the new machine.
c.Compute the present value of the cash operating savings if the new machine is purchased.
d.What is the net present value of the replacement alternative?

Accepted Answer

a.Present value = $405 × 3.993 = $1,617.

Question 13

Conducting post completion audits to determine if capital investment goals were achieved falls under which stage of the management process?

Accepted Answer

A) Planning 
B) Performing 
C) Evaluating 
D) Communicating 
A) Planning 
B) Performing 
C) Evaluating 
D) Communicating

Question 14

The minimum rate of return on an investment is also known as a

Accepted Answer

A) hurdle rate. 
B) payback rate. 
C) net present value. 
D) profit margin. 
A) hurdle rate. 
B) payback rate. 
C) net present value. 
D) profit margin.

Question 15

Boston Corp.is evaluating three projects.Each project will return a total of $600,000 to the company in cash flows over a three-year period.The cash flows for the three projects are as follows:   Using the payback period method,which project represents the best investment for Boston?

Accepted Answer

A) Project A 
B) Project B 
C) Project C 
D) All projects are equally good investments. 
A) Project A 
B) Project B 
C) Project C 
D) All projects are equally good investments.

Question 16

As part of the performing stage of management,capital investment decisions are implemented with proper controls.

Accepted Answer

A) True 
 B)False

Question 17

The following data have been gathered for a capital investment decision.The amounts relate to a 14 percent discount factor.
  
a.Compute the present value of the following cash inflows.Use a discount rate of 14 percent.
   b.What would have been the present value of the cash flows if they were received in equal installments over the five-year period at the same discount rate?
c.If the answers to parts (a)and (b)differ,explain the reason(s)why.

Accepted Answer

a.
 @#IMG-DLM& 
b.$240,000 @#LAT-DLM& 5 = $48,000 per year
$

Question 18

Sabrina Company has a tax rate of 30 percent and is considering a capital project that will make the following annual contribution to operating income:   Using the income adjustment procedure,net cash inflows are

Accepted Answer

A) $38,500. 
B) $43,500. 
C) $83,500. 
D) $100,000. 
A) $38,500. 
B) $43,500. 
C) $83,500. 
D) $100,000.

Question 19

Identifying the need for a new capital investment is the last step in the six-step process of capital investment analysis.

Accepted Answer

A) True 
 B)False

Question 20

Evaluating capital investment proposals prior to making a decision falls under which stage of the management process?

Accepted Answer

A) Planning 
B) Performing 
C) Evaluating 
D) Communicating 
A) Planning 
B) Performing 
C) Evaluating 
D) Communicating

Exam 24: Capital Investment Analysis

The company's minimum rate of return is also referred to as its profit margin.

Assume revenues are received in cash and expenses,except for depreciation,are paid in cash.Based on this assumption,which of the following statements is true?

The accounting rate-of-return method is a precise but difficult way to measure the performance of a capital investment.

Projected disposal or residual values of replacement equipment are relevant to capital investment analysis because

Managers use both quantitative and qualitative information to analyze the effects of capital investment decisions on their organization's resources and profits.

Net present value analysis is based on a project's cash flows.

The payback period is based on a net present value of cash flows.

The payback period equals the cost of the capital investment divided by net income.

The minimum rate of return is also known as the hurdle rate.

Conducting post completion audits to determine if capital investment goals were achieved falls under which stage of the management process?

The minimum rate of return on an investment is also known as a

Boston Corp.is evaluating three projects.Each project will return a total of $600,000 to the company in cash flows over a three-year period.The cash flows for the three projects are as follows: Using the payback period method,which project represents the best investment for Boston?

As part of the performing stage of management,capital investment decisions are implemented with proper controls.

Sabrina Company has a tax rate of 30 percent and is considering a capital project that will make the following annual contribution to operating income: Using the income adjustment procedure,net cash inflows are

Identifying the need for a new capital investment is the last step in the six-step process of capital investment analysis.

Evaluating capital investment proposals prior to making a decision falls under which stage of the management process?

Uses of Accounting Information and the Financial Statements

Measurement Concepts: Recording Business Transactions

Measuring Business Income: Adjusting the Accounts

Foundations of Financial Reporting and the Classified Balance Sheet

Accounting for Merchandising Operations

Inventories

Cash and Internal Control

Receivables

Long-Term Assets

Current Liabilities and Fair Value Accounting

Long-Term Liabilities

Stockholders Equity

The Statement of Cash Flows

Financial Statement Analysis

Managerial Accounting and Cost Concepts

Costing Systems: Job Order Costing

Costing Systems: Process Costing

Value-Based Systems: Activity-Based Costing and Lean Accounting

Cost-Volume-Profit Analysis

The Budgeting Process

Flexible Budgets and Performance Analysis

Standard Costing and Variance Analysis

Short-Run Decision Analysis

Pricing Decisions, including Target Costing and Transfer Pricing

Quality Management and Measurement

Accounting for Unincorporated Businesses

Accounting for Investments

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