Question 1

The present value of money is always less than its future value.

Accepted Answer

A) True 
 B)False

Question 2

The average carrying value (or average investment) of an asset with no salvage value is equal to:

Accepted Answer

A)  The original cost of the asset divided by its estimated useful life. 
B)  The original cost of the asset divided by two. 
C)  The average annual net cash flow of the asset multiplied by the asset's estimated useful life. 
D)  The average annual net income of the asset multiplied by the asset's estimated useful life. 
A)  The original cost of the asset divided by its estimated useful life. 
B)  The original cost of the asset divided by two. 
C)  The average annual net cash flow of the asset multiplied by the asset's estimated useful life. 
D)  The average annual net income of the asset multiplied by the asset's estimated useful life.

Question 3

When management considers an investment, they look for the payback period to be:

Accepted Answer

A)  Short. 
B)  Long. 
C)  Profitable. 
D)  Useful. 
A)  Short. 
B)  Long. 
C)  Profitable. 
D)  Useful.

Question 4

Which method of project selection gives consideration to the time value of money in a capital budgeting decision?

Accepted Answer

A)  Payback method. 
B)  Average rate of return. 
C)  Net present value method. 
D)  Accounting rate of return. 
A)  Payback method. 
B)  Average rate of return. 
C)  Net present value method. 
D)  Accounting rate of return.

Question 5

The management of Trylon Farms is considering the purchase of equipment costing $320,000. The equipment has a useful life of eight years, with $20,000 residual value. The use of this equipment will produce positive annual cash flow of $60,000 for eight years, as well as $20,000 from sale of the equipment at the end of the eighth year. Compute the net present value of this investment, discounted at an annual rate of 10%. (Present value of $1 due in eight years, discounted at 10%, is 0.467; present value of $1 received annually for eight years, discounted at 10%, is 5.335.)

Accepted Answer

A)  $9,340. 
B)  $320,100. 
C)  $9,440. 
D)  $329,440. 
A)  $9,340. 
B)  $320,100. 
C)  $9,440. 
D)  $329,440.

Question 6

The payback period of the machine is approximately:

Accepted Answer

A)  Four years. 
B)  Eight years. 
C)  Five years. 
D)  Ten years. 
A)  Four years. 
B)  Eight years. 
C)  Five years. 
D)  Ten years.

Question 7

An investment cost $80,000 with no salvage value, a 5 year useful life, and had an expected annual increase in net income of $7,000. Straight line depreciation is used. What is the expected rate of return on this investment?

Accepted Answer

A)  2.8%. 
B)  20%. 
C)  8.8%. 
D)  10.4%. 
A)  2.8%. 
B)  20%. 
C)  8.8%. 
D)  10.4%.

Question 8

Capital budgeting
Flynn Corporation is debating whether to purchase a new computerized production system. The system will cost $450,000, and have an estimated 10-year life with a salvage value of $70,000. The estimated operating results from the new production system are as follows:
All revenue and expenses other than depreciation will be received and paid in cash. Compute the following for this proposal:
(a) Annual net cash flow: $___________
(b) Payback period: __________ years
(c) Return on average investment: ___________%
(d) Net present value, discounted at an annual rate of 6% (present value of $1 due in 10 years, discounted at 6%, is 0.558; present value of $1 received annually for 10 years, discounted at 6%, is 7.360): $___________

Accepted Answer

95,000
4.7

Question 9

What is the annual net cash flow expected from the cutting machine investment? ____________

Accepted Answer

The answer of What is the annual net cash flow...

Question 10

Which of the following is generally not considered a capital budgeting technique?

Accepted Answer

A)  Payback period. 
B)  Return on average investment. 
C)  Return on stockholders' equity. 
D)  Discounting of future cash flows. 
A)  Payback period. 
B)  Return on average investment. 
C)  Return on stockholders' equity. 
D)  Discounting of future cash flows.

Question 11

Which of the following capital budgeting measures requires the discounting of an investment's future cash flows?

Accepted Answer

A)  Payback period. 
B)  Net present value. 
C)  Return on average investment. 
D)  Accounting rate of return. 
A)  Payback period. 
B)  Net present value. 
C)  Return on average investment. 
D)  Accounting rate of return.

Question 12

The above data indicate that:

Accepted Answer

A)  After considering the timing of future cash flows, each of the three proposals is expected to provide a rate of return in excess of 15%. 
B)  Proposal A will generate net losses annually. 
C)  If the salvage value of proposal A were $52,000 instead of zero, proposal A would have the highest net present value. 
D)  The present value of proposal B's future cash flows is $2,471,600. 
A)  After considering the timing of future cash flows, each of the three proposals is expected to provide a rate of return in excess of 15%. 
B)  Proposal A will generate net losses annually. 
C)  If the salvage value of proposal A were $52,000 instead of zero, proposal A would have the highest net present value. 
D)  The present value of proposal B's future cash flows is $2,471,600.

Question 13

By how much would Terme's annual gross profit increase if the investment is undertaken?

Accepted Answer

A)  $750,000. 
B)  $84,375. 
C)  $187,500. 
D)  $103,125. 
A)  $750,000. 
B)  $84,375. 
C)  $187,500. 
D)  $103,125.

Question 14

In considering investment in new plant assets, the payback period is computed without regard to the total useful life of the investment.

Accepted Answer

A) True 
 B)False

Question 15

On the basis of the above data, which of the following is false?

Accepted Answer

A)  Proposal A should be considered unacceptable. 
B)  Proposal C is the best alternative because it has the shortest payback period, which is the most meaningful of the capital budgeting statistics. 
C)  Proposal A's negative net present value indicates that this alternative will not generate management's required rate of return. 
D)  Although proposals B and C are each acceptable, proposal B is a better investment considering the time value of money. 
A)  Proposal A should be considered unacceptable. 
B)  Proposal C is the best alternative because it has the shortest payback period, which is the most meaningful of the capital budgeting statistics. 
C)  Proposal A's negative net present value indicates that this alternative will not generate management's required rate of return. 
D)  Although proposals B and C are each acceptable, proposal B is a better investment considering the time value of money.

Question 16

A machine cost $46,000 and had a useful life of 4 years and a residual value of $7,000. What is the net present value of the machine if the annual cash flow is $16,000 and the company uses a discount rate of 10%? An annuity table shows the present value of $1 at 10% for 4 years to be 0.683. The present value of an ordinary annuity of $1 discounted at 10% for 4 years is 3.170.

Accepted Answer

A)  $56,501. 
B)  $33,118. 
C)  $9,501. 
D)  $63,000. 
A)  $56,501. 
B)  $33,118. 
C)  $9,501. 
D)  $63,000.

Question 17

The payback period analysis fails to consider the cash flows over the entire life of the investment.

Accepted Answer

A) True 
 B)False

Question 18

The payback period considers total profitability over the life of an investment and takes into consideration the timing of an investment's future cash flows.

Accepted Answer

A) True 
 B)False

Question 19

Capital investments are difficult, if not impossible, to reverse once funds have been invested.

Accepted Answer

A) True 
 B)False

Question 20

The payback period:

Accepted Answer

A)  Is the length of time necessary to recover the entire cost of an investment from its resulting annual net cash flow. 
B)  Is the length of time necessary to recover the entire cost of an investment from its resulting annual net income. 
C)  Takes into consideration the profitability of an investment over its entire life, but ignores the timing of its future cash flows. 
D)  Takes into consideration both the profitability of an investment over its entire life and the timing of its future cash flows. 
A)  Is the length of time necessary to recover the entire cost of an investment from its resulting annual net cash flow. 
B)  Is the length of time necessary to recover the entire cost of an investment from its resulting annual net income. 
C)  Takes into consideration the profitability of an investment over its entire life, but ignores the timing of its future cash flows. 
D)  Takes into consideration both the profitability of an investment over its entire life and the timing of its future cash flows.

Exam 26: Capital Budgeting

The present value of money is always less than its future value.

The average carrying value (or average investment) of an asset with no salvage value is equal to:

When management considers an investment, they look for the payback period to be:

Which method of project selection gives consideration to the time value of money in a capital budgeting decision?

The payback period of the machine is approximately:

An investment cost $80,000 with no salvage value, a 5 year useful life, and had an expected annual increase in net income of $7,000. Straight line depreciation is used. What is the expected rate of return on this investment?

What is the annual net cash flow expected from the cutting machine investment? ____________

Which of the following is generally not considered a capital budgeting technique?

Which of the following capital budgeting measures requires the discounting of an investment's future cash flows?

The above data indicate that:

By how much would Terme's annual gross profit increase if the investment is undertaken?

In considering investment in new plant assets, the payback period is computed without regard to the total useful life of the investment.

On the basis of the above data, which of the following is false?

The payback period analysis fails to consider the cash flows over the entire life of the investment.

The payback period considers total profitability over the life of an investment and takes into consideration the timing of an investment's future cash flows.

Capital investments are difficult, if not impossible, to reverse once funds have been invested.

The payback period:

Accounting: Information for Decision Making

Basic Financial Statements

The Accounting Cycle: Capturing Economic Events

The Accounting Cycle: Accruals and Deferrals

The Accounting Cycle: Reporting Financial Results

Merchandising Activities

Financial Assets

Inventories and the Cost of Goods Sold

Plant and Intangible Assets

Liabilities

Stockholders Equity: Paid-In Capital

Income and Changes in Retained Earnings

Statement of Cash Flows

Financial Statement Analysis

Global Business and Accounting

Management Accounting: a Business Partner

Job Order Cost Systems and Overhead Allocations

Process Costing

Costing and the Value Chain

Cost-Volume-Profit Analysis

Incremental Analysis

Responsibility Accounting and Transfer Pricing

Operational Budgeting

Standard Cost Systems

Rewarding Business Performance

Forms of Business Organization

The Time Value of Money: Future Amounts and Present Values Answer Key

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