Question 1

The present value index indicates:

Accepted Answer

A)  the time it will take to recover the initial cash outflow of an investment. 
B)  the additional cash inflows from operating activities. 
C)  the rate of return per dollar invested in a capital project. 
D)  the ratio of the net present value of an investment to the initial investment. 
A)  the time it will take to recover the initial cash outflow of an investment. 
B)  the additional cash inflows from operating activities. 
C)  the rate of return per dollar invested in a capital project. 
D)  the ratio of the net present value of an investment to the initial investment.

Question 2

Morrisey Company has two investment opportunities. Both investments cost $5,500 and will provide the same total future cash inflows. The cash receipt schedule for each investment is given below: $$\begin{array} { | l | c | c | } 
\hline & \text { levestment I } & \text { lovestment II } \
\hline \text { Penod 1 } & \$ 1,000 & \$ 1,000 \
\hline \text { Penod 2 } & 1,000 & 2,000 \
\hline \text { Penod 3 } & 2,000 & 3,000 \
\hline \text { Penod 4 } & 4,000 & 2,000 \
\hline \text { Total } & \$ , 000 & \$ 8 , 000 \
\hline & & \
\hline
\end{array}$$ The net present value of Investment II assuming an 8% minimum rate of return would be which of the following amounts? (Do not round your PV factors and intermediate calculations. Round your answer to nearest whole dollar.)

Accepted Answer

A)  $6,492 
B)  $992 
C)  $5,880 
D)  $380 
A)  $6,492 
B)  $992 
C)  $5,880 
D)  $380

Question 3

Which method of evaluating capital investment decisions uses the concept of present value to compute a rate of return?

Accepted Answer

A)  Internal rate of return 
B)  Unadjusted rate of return 
C)  Net present value 
D)  Payback 
A)  Internal rate of return 
B)  Unadjusted rate of return 
C)  Net present value 
D)  Payback

Question 4

In performing capital budgeting analysis that takes time value of money into account, cash flows generated by a capital project are assumed to be reinvested at the project's rate of return.

Accepted Answer

A) True 
 B)False

Question 5

How does depreciation serve as a tax shield? How is the amount of the annual tax shield calculated?

Accepted Answer

Recording depreciation on a tax return r

Question 6

Which of the following are not present value methods of analyzing capital investment proposals?

Accepted Answer

A)  Internal rate of return and payback 
B)  Unadjusted rate of return and net present value 
C)  Net present value and payback 
D)  Payback and unadjusted rate of return 
A)  Internal rate of return and payback 
B)  Unadjusted rate of return and net present value 
C)  Net present value and payback 
D)  Payback and unadjusted rate of return

Question 7

Evergreen Company has two investment opportunities. Both investments cost $5,000 and will provide the same total future cash inflows. The cash receipt schedule for each investment is given below: $\begin{array}{|l|r|r|}
\hline &\text { Invertment I}&\text { Invertment II}\
\hline \text { Period 1 } & \$ 1,000 & \$ 3,000 \
\hline \text { Period 2 } & 1,000 & 2,000 \
\hline\text { Period 3 } & 2,000 & 2,000 \
\hline \text { Period 4 } & 4,000 & 1,000 \
\hline \text { Total } & \$ 8,000 & \$ 8,000 \
\hline
\end{array}$ Select the correct statement.

Accepted Answer

A)  Evergreen should choose Investment I because of the time value of money. 
B)  Evergreen should choose Investment II because it generates more immediate cash inflows. 
C)  Evergreen should be indifferent between the two investments because they provide the same total cash inflows. 
D)  Time value of money techniques are not useful for comparing these investments. 
A)  Evergreen should choose Investment I because of the time value of money. 
B)  Evergreen should choose Investment II because it generates more immediate cash inflows. 
C)  Evergreen should be indifferent between the two investments because they provide the same total cash inflows. 
D)  Time value of money techniques are not useful for comparing these investments.

Question 8

An investment that cost $30,000 provided annual cash inflows of $9,000 per year for five years. The desired rate of return is 10%. The internal rate of return from the investment was (Do not round your PV factors and intermediate calculations.):

Accepted Answer

A)  less than the desired rate of return. 
B)  equal to the desired rate of return. 
C)  greater than the desired rate of return. 
D)  the answer cannot be determined from the information provided. 
A)  less than the desired rate of return. 
B)  equal to the desired rate of return. 
C)  greater than the desired rate of return. 
D)  the answer cannot be determined from the information provided.

Question 9

Cash outflows can be categorized into all of the following groups except:

Accepted Answer

A)  opportunity costs associated with selecting a specific capital project. 
B)  outflows associated with the initial investment. 
C)  working capital commitments. 
D)  increases in operating expenses. 
A)  opportunity costs associated with selecting a specific capital project. 
B)  outflows associated with the initial investment. 
C)  working capital commitments. 
D)  increases in operating expenses.

Question 10

A series of equal cash flows at fixed intervals is termed a(n):

Accepted Answer

A)  net cash flow. 
B)  lump sum. 
C)  annuity. 
D)  return on investment. 
A)  net cash flow. 
B)  lump sum. 
C)  annuity. 
D)  return on investment.

Question 11

Indicate whether each of the following statements is true or false.
1. Internal rate of return measures the difference between an investment's rate of return and the company's required rate of return.
2. A spreadsheet program is useful in doing internal rate of return analyses.
3. Capital investment analyses should take tax consequences into account.
4. Depreciation on equipment or a building has the effect of sheltering some of a corporation's income from income taxes.
5. The amount of a depreciation tax shield is calculated by multiplying the amount of depreciation by (1 - the tax rate).

Accepted Answer

1. False
2

Question 12

Cash outflows generated by capital investments include all of the following except:

Accepted Answer

A)  annual depreciation of the capital asset. 
B)  initial investment in the capital asset. 
C)  increase in operating expenses. 
D)  increase in the amount of required working capital. 
A)  annual depreciation of the capital asset. 
B)  initial investment in the capital asset. 
C)  increase in operating expenses. 
D)  increase in the amount of required working capital.

Question 13

Generally, the unadjusted rate of return should be calculated based on the average investment rather than the amount of the original investment in a depreciable asset such as equipment.

Accepted Answer

A) True 
 B)False

Question 14

How would an organization benefit from conducting postaudits of its capital investment decisions?

Accepted Answer

The purpose of postaudits is to focus on

Question 15

Which of the following is the approximate internal rate of return for an investment that costs $33,550 and provides a $5,000 annuity for 10 years?

Accepted Answer

A)  5% 
B)  6% 
C)  8% 
D)  10% 
A)  5% 
B)  6% 
C)  8% 
D)  10%

Question 16

Why does a company use its cost of capital as the minimum required rate of return for its capital investment decisions?

Accepted Answer

The cost of capital measures the return

Question 17

Indicate whether each of the following statements is true or false.
1. A capital investment is a purchase of a long-term operational asset.
2. Investments in capital assets normally are recovered by selling the assets.
3. The profitability of a business is greatly influenced by the quality of its capital investment decisions.
4. A capital investment decision exchanges current cash inflows for future cash outflows.
5. The time value of money concept is often used in making capital investment decisions.

Accepted Answer

1. True
2.

Question 18

An investment that costs $20,000 will produce annual cash flows of $5,000 for a period of 6 years. Further, the investment has an expected salvage value of $3,000. Given a desired rate of return of 12%, the investment will generate a (Do not round your PV factors and intermediate calculations. Round your answer to the nearest whole dollar.):

Accepted Answer

A)  positive net present value of $2,077. 
B)  negative net present value of $2,077. 
C)  positive net present value of $22,077. 
D)  positive net present value of $557. 
A)  positive net present value of $2,077. 
B)  negative net present value of $2,077. 
C)  positive net present value of $22,077. 
D)  positive net present value of $557.

Question 19

Select the incorrect statement concerning the internal rate of return (IRR) method of evaluating capital projects.

Accepted Answer

A)  The higher the IRR the better. 
B)  The internal rate of return is that rate that makes the present value of the initial outlay equal to zero. 
C)  If a project has a positive net present value then its IRR will exceed the hurdle rate. 
D)  A project whose IRR is less than the cost of capital should be rejected. 
A)  The higher the IRR the better. 
B)  The internal rate of return is that rate that makes the present value of the initial outlay equal to zero. 
C)  If a project has a positive net present value then its IRR will exceed the hurdle rate. 
D)  A project whose IRR is less than the cost of capital should be rejected.

Question 20

Generally, a company should use the MACRS method to calculate depreciation on its income tax return, due to the effects of the time value of money.

Accepted Answer

A) True 
 B)False

The present value index indicates:

Which method of evaluating capital investment decisions uses the concept of present value to compute a rate of return?

In performing capital budgeting analysis that takes time value of money into account, cash flows generated by a capital project are assumed to be reinvested at the project's rate of return.

How does depreciation serve as a tax shield? How is the amount of the annual tax shield calculated?

Which of the following are not present value methods of analyzing capital investment proposals?

An investment that cost $30,000 provided annual cash inflows of $9,000 per year for five years. The desired rate of return is 10%. The internal rate of return from the investment was (Do not round your PV factors and intermediate calculations.):

Cash outflows can be categorized into all of the following groups except:

A series of equal cash flows at fixed intervals is termed a(n):

Cash outflows generated by capital investments include all of the following except:

Generally, the unadjusted rate of return should be calculated based on the average investment rather than the amount of the original investment in a depreciable asset such as equipment.

How would an organization benefit from conducting postaudits of its capital investment decisions?

Which of the following is the approximate internal rate of return for an investment that costs $33,550 and provides a $5,000 annuity for 10 years?

Why does a company use its cost of capital as the minimum required rate of return for its capital investment decisions?

Select the incorrect statement concerning the internal rate of return (IRR) method of evaluating capital projects.

Generally, a company should use the MACRS method to calculate depreciation on its income tax return, due to the effects of the time value of money.

An Introduction to Accounting

Accounting for Accruals and Deferrals

Accounting for Merchandising Businesses

Internal Controls, Accounting for Cash, and Ethics

Accounting for Receivables and Inventory Cost Flow

Accounting for Long-Term Operational Assets

Accounting for Liabilities

Proprietorships, Partnerships, and Corporations

Financial Statement Analysis

An Introduction to Management Accounting

Cost Behavior, Operating Leverage, and Profitability Analysis

Cost Accumulation, Tracing, and Allocation

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

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Exam 16: Planning for Capital Investments

The present value index indicates:

Which method of evaluating capital investment decisions uses the concept of present value to compute a rate of return?

In performing capital budgeting analysis that takes time value of money into account, cash flows generated by a capital project are assumed to be reinvested at the project's rate of return.

How does depreciation serve as a tax shield? How is the amount of the annual tax shield calculated?

Which of the following are not present value methods of analyzing capital investment proposals?

An investment that cost $30,000 provided annual cash inflows of $9,000 per year for five years. The desired rate of return is 10%. The internal rate of return from the investment was (Do not round your PV factors and intermediate calculations.):

Cash outflows can be categorized into all of the following groups except:

A series of equal cash flows at fixed intervals is termed a(n):

Cash outflows generated by capital investments include all of the following except:

Generally, the unadjusted rate of return should be calculated based on the average investment rather than the amount of the original investment in a depreciable asset such as equipment.

How would an organization benefit from conducting postaudits of its capital investment decisions?

Which of the following is the approximate internal rate of return for an investment that costs $33,550 and provides a $5,000 annuity for 10 years?

Why does a company use its cost of capital as the minimum required rate of return for its capital investment decisions?

Select the incorrect statement concerning the internal rate of return (IRR) method of evaluating capital projects.

Generally, a company should use the MACRS method to calculate depreciation on its income tax return, due to the effects of the time value of money.

An Introduction to Accounting

Accounting for Accruals and Deferrals

Accounting for Merchandising Businesses

Internal Controls, Accounting for Cash, and Ethics

Accounting for Receivables and Inventory Cost Flow

Accounting for Long-Term Operational Assets

Accounting for Liabilities

Proprietorships, Partnerships, and Corporations

Financial Statement Analysis

An Introduction to Management Accounting

Cost Behavior, Operating Leverage, and Profitability Analysis

Cost Accumulation, Tracing, and Allocation

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Filters