Question 1

To compute a future amount from a present value, we need to know:

Accepted Answer

A)  The future value. 
B)  The interest rate. 
C)  The future annuity amount. 
D)  The present annuity amount. 
A)  The future value. 
B)  The interest rate. 
C)  The future annuity amount. 
D)  The present annuity amount.

Question 2

Capital budgeting proposals often require input from all of the following stakeholders except:

Accepted Answer

A)  Managers. 
B)  Employees. 
C)  Shareholders. 
D)  Directors. 
A)  Managers. 
B)  Employees. 
C)  Shareholders. 
D)  Directors.

Question 3

The net present value of the investment in the machine under consideration is:

Accepted Answer

A)  $40,520. 
B)  $41,933. 
C)  $60,480. 
D)  $75,160. 
A)  $40,520. 
B)  $41,933. 
C)  $60,480. 
D)  $75,160.

Question 4

Most capital budgeting techniques involve analysis of net operating profits.

Accepted Answer

A) True 
 B)False

Question 5

The recognition of depreciation expense often causes the annual net income of an investment to be less than the amount of its annual net cash flows.

Accepted Answer

A) True 
 B)False

Question 6

Capital budgeting
Zhang Corporation is considering investing $190,000 in equipment to produce a new product. Useful service life of the equipment is estimated to be 5 years, with zero salvage value. Straight-line depreciation is used. The company estimates that production and sale of the new product will increase net income by $65,000 a year.
(a) The payback period will be __________ years.
(b) The expected rate of return on average investment will be _________.

Accepted Answer

(a) 1.8 ye

Question 7

The discount rate used in discounting cash flows from proposed investments is usually the rate of return required by the investor.

Accepted Answer

A) True 
 B)False

Question 8

Capital budgeting
Golden Flights, Inc. is considering buying some specialized machinery which would enable the company to obtain a six-year government contract for the design and engineering of a futuristic plane. The machinery costs $975,000 and must be destroyed for security reasons at the end of the six-year contract period. The estimated annual operating results of the project are as follows:
All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes. You are to compute the following three factors for this project:
(a) Payback period: __________ years
(b) Return on average investment: ___________%
(c) Net present value of the investment in this machinery, discounted at an annual rate of 12% (an annuity table shows that the present value of $1 received annually for six years discounted at 12% is 4.111): $___________
 $\begin{array}{l}
\text { Revenue from sales of new luggage line }&&\$925,000\
\text { Expenses other than depreciation } & \$ 625,000 \
\text { Depreciation (straight-line basis) } & 250,000&(875,000)\
\text { Increase in net income from the new line }&&\$50,000
\end{array}$

Accepted Answer

The answer of Capital budgeting
Golden Flights, Inc. is considering buying...

Question 9

Carter & Co. are trying to decide which of two investments they should consider. The following information is available:
Each investment is expected to have a useful life of 5 years.
(a) What is the rate of return on average investment of each investment?
(b) What is the payback period of each investment?
 $$\begin{array} { l r r } 
& \text { Investment } \mathrm { A } & \text { Investment B } \
\text { Cost } & \$ 400,000 & \$ 600,000 \
\text { Salvage value } & \$ 0 & \$ 40,000 \
\text { Annual cash flow } & \$ 104,000 & \$ 160,000
\end{array}$$

Accepted Answer

Investment A = 12%,

Question 10

Which of the following is not an important financial consideration in capital budgeting?

Accepted Answer

A)  The timing of the investment's future cash flows. 
B)  The investment's future profitability. 
C)  The sunk costs related to the investment. 
D)  The initial cost of the investment and its estimated salvage value. 
A)  The timing of the investment's future cash flows. 
B)  The investment's future profitability. 
C)  The sunk costs related to the investment. 
D)  The initial cost of the investment and its estimated salvage value.

Question 11

Discounting cash flows
Determine the present value of the following cash flows discounted at an annual rate of 10%:
(a) $96,000 to be received five years from today (the present value of $1 at a 10% compound interest rate for five years is 0.621): $___________
(b) $37,000 to be received annually for five years (the present value of $1 at 10% received annually for five years is 3.791): $___________
(c) $58,000 to be received annually for six years, with an additional $16,000 salvage value to be received at the end of the sixth year (the present value of $1 at 10% received annually for six years is 4.355, and the present value of $1 due six years hence at 10% is 0.564): $___________

Accepted Answer

(a) 59,616

Question 12

The accuracy of national capital budget decisions is critically dependent on:

Accepted Answer

A)  The project life span. 
B)  Currency exchange rates. 
C)  Employee morale. 
D)  Supplier availability. 
A)  The project life span. 
B)  Currency exchange rates. 
C)  Employee morale. 
D)  Supplier availability.

Question 13

Of the following techniques of capital budgeting, which one explicitly incorporates an estimate of an interest rate into the basic computation?

Accepted Answer

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

Question 14

Ignoring income taxes, what is the estimated annual net operating income increase/decrease?

Accepted Answer

A)  $9,375. 
B)  $12,875. 
C)  $43,125. 
D)  $54,125. 
A)  $9,375. 
B)  $12,875. 
C)  $43,125. 
D)  $54,125.

Question 15

Appraising rate of return adequacy
What factors should be taken into consideration when appraising the adequacy of the rate of return of a capital investment proposal?

Accepted Answer

In appraising the adequacy of a rate of

Question 16

Which of the following is not considered when using the payback period to evaluate an investment?

Accepted Answer

A)  The profitability of the investment over its entire life. 
B)  The annual net cash flow of the investment. 
C)  The cost of the investment. 
D)  The expected life of the investment. 
A)  The profitability of the investment over its entire life. 
B)  The annual net cash flow of the investment. 
C)  The cost of the investment. 
D)  The expected life of the investment.

Question 17

The return on average investment for this proposed investment is:

Accepted Answer

A)  8 1/3%. 
B)  50%. 
C)  25%. 
D)  11.1%. 
A)  8 1/3%. 
B)  50%. 
C)  25%. 
D)  11.1%.

Question 18

The present value of a future cash flow is the amount you would pay today for the right to receive that future amount.

Accepted Answer

A) True 
 B)False

Question 19

The return on average investment for this investment is approximately:

Accepted Answer

A)  10%. 
B)  20%. 
C)  31%. 
D)  50%. 
A)  10%. 
B)  20%. 
C)  31%. 
D)  50%.

Question 20

When using the net present value method for evaluating an investment, an increase in the required rate of return will:

Accepted Answer

A)  Make it more difficult to accept the investment. 
B)  Make it less difficult to accept the investment. 
C)  Not affect the decision if the length of the investment's benefits remain constant. 
D)  Not be a consideration because it is not used in the net present value method. 
A)  Make it more difficult to accept the investment. 
B)  Make it less difficult to accept the investment. 
C)  Not affect the decision if the length of the investment's benefits remain constant. 
D)  Not be a consideration because it is not used in the net present value method.

Exam 26: Capital Budgeting

To compute a future amount from a present value, we need to know:

Capital budgeting proposals often require input from all of the following stakeholders except:

The net present value of the investment in the machine under consideration is:

Most capital budgeting techniques involve analysis of net operating profits.

The recognition of depreciation expense often causes the annual net income of an investment to be less than the amount of its annual net cash flows.

The discount rate used in discounting cash flows from proposed investments is usually the rate of return required by the investor.

Which of the following is not an important financial consideration in capital budgeting?

The accuracy of national capital budget decisions is critically dependent on:

Of the following techniques of capital budgeting, which one explicitly incorporates an estimate of an interest rate into the basic computation?

Ignoring income taxes, what is the estimated annual net operating income increase/decrease?

Appraising rate of return adequacy What factors should be taken into consideration when appraising the adequacy of the rate of return of a capital investment proposal?

Which of the following is not considered when using the payback period to evaluate an investment?

The return on average investment for this proposed investment is:

The present value of a future cash flow is the amount you would pay today for the right to receive that future amount.

The return on average investment for this investment is approximately:

When using the net present value method for evaluating an investment, an increase in the required rate of return will:

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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