Question 1

The assumption regarding ordinary annuities is that cash flows occur at the end of each period.

Accepted Answer

A) True 
 B)False

Question 2

Describe the general approaches companies may use in evaluating potential capital investments.

Accepted Answer

The basic approach to making capital bud

Question 3

The cost of capital is called all of the following except:

Accepted Answer

A)  cutoff rate. 
B)  discount rate. 
C)  hurdle rate. 
D)  All of these are terms for the cost of capital. 
A)  cutoff rate. 
B)  discount rate. 
C)  hurdle rate. 
D)  All of these are terms for the cost of capital.

Question 4

An investment that costs $40,000 will produce annual cash flows of $12,000 for a period of 4 years. Given a desired rate of return of 10%, the investment will generate a (Do not round your PV factors and intermediate calculations. Round your answer to nearest whole dollar):

Accepted Answer

A)  positive net present value of $38,038. 
B)  positive net present value of $1,962. 
C)  negative net present value of $38,038. 
D)  negative net present value of $1,962. 
A)  positive net present value of $38,038. 
B)  positive net present value of $1,962. 
C)  negative net present value of $38,038. 
D)  negative net present value of $1,962.

Question 5

Select the term from the list provided that best matches each of the following definitions or descriptions. Put the number of the term in the answer column.

Accepted Answer

The answer of Select the term from the list provided...

Question 6

Cash outflows from a capital investment project include:

Accepted Answer

A)  increases in operating expenses. 
B)  the reduction in the amount of working capital. 
C)  terminal salvage value. 
D)  all of these answers are correct. 
A)  increases in operating expenses. 
B)  the reduction in the amount of working capital. 
C)  terminal salvage value. 
D)  all of these answers are correct.

Question 7

All of the following are capital investment decisions except:

Accepted Answer

A)  acquiring $100,000 of common stock. 
B)  buying a $5,000,000 manufacturing plant. 
C)  purchasing equipment for $80,000. 
D)  paying $600,000 to renovate a restaurant. 
A)  acquiring $100,000 of common stock. 
B)  buying a $5,000,000 manufacturing plant. 
C)  purchasing equipment for $80,000. 
D)  paying $600,000 to renovate a restaurant.

Question 8

The instantaneous computation power of spreadsheet software makes it ideal for answering "what-if" questions regarding present values.

Accepted Answer

A) True 
 B)False

Question 9

Redmond Company is considering investing in one of the following two projects: $$\begin{array}{l}
\text {Annual Cash Inflows  }\
\begin{array} {| l | l |  l | } 
\hline \text {Year  }&\text {Project A }&\text { Project B}\
\hline 1&\$2,000&\$4,000\
\hline 2&3,000&2,000\
\hline 3&3,000&2,000\
\hline 4&1,000&1,000\
\hline\text {  Total}&\$9,000&\$9,000\\hline
\end{array}
\end{array}$$ 
Required:
1) Which project is more desirable strictly in terms of cash inflows? Why?
2) Compute the present value of each project's cash inflows assuming the company's required rate of return is 12%.
3) What is the maximum amount Redmond should be willing to pay for each project?
4) Suppose each project costs $7,000. Which project(s) should be accepted? Note that only one project can be accepted.

Accepted Answer

1) Project B is more desirable because t

Question 10

A customary assumption in capital budgeting analysis is that:

Accepted Answer

A)  the desired rate of return includes the effects of compounding. 
B)  the cash inflows generated by the investment are not reinvestment. 
C)  annual cash flows occur at the beginning of each period. 
D)  the time value of money is ignored. 
A)  the desired rate of return includes the effects of compounding. 
B)  the cash inflows generated by the investment are not reinvestment. 
C)  annual cash flows occur at the beginning of each period. 
D)  the time value of money is ignored.

Question 11

Indicate whether each of the following statements is true or false.
1. When unequal cash inflows are expected from a capital investment, the payback period can be calculated by accumulating incremental cash inflows or by using average annual cash inflows.
2. The unadjusted rate of return is also called the simple rate of return.
3. The unadjusted rate of return can be calculated as average increase in cash inflows divided by net cost of the original investment.
4. The unadjusted rate of return does not take the time value of money into account.
5. The unadjusted rate of return should be calculated using the initial cost of the investment, rather than the average invested capital.

Accepted Answer

1. True
2.

Question 12

Bruce Company is considering replacing one of its delivery trucks. The truck in question was purchased two years ago at a cost of $41,000. At the time of purchase the truck was expected to have a $5,000 salvage value at the end of its six-year life. Given the use of straight-line depreciation, the truck has a current book value of $29,000. If sold today, the company could get $22,000 for the truck. It costs $20,000 per year to operate the existing truck. The new truck would cost $46,000 and would cost only $14,000 per year to operate. The new truck would be depreciated on a straight-line basis over its four-year useful life to its expected salvage value of $10,000. The company's required rate of return is 14%. Ignore income taxes.
Required:
1) Identify the cash flows for each alternative by completing the following table: $$\begin{array} { | c | c | l | l | l | } 
\hline &{ \text { Keep Existing Truck } } &&{ \text { Replace Existing Truck } } \
\hline \text { Year } & \text { Cash Outflows } & \text { Cash Inflows } & \text { Cash Outflows } & \text { Cash Inflows } \
\hline 0 & & & & \
\hline 1 & & & & \
\hline 2 & & & & \
\hline 3 & & & & \
\hline 4 & & & & \
\hline
\end{array}$$ 
2) The company's objective is to minimize costs. Complete the following table to determine whether the existing truck should be replaced. Ignore income taxes. What is your recommendation? $$\begin{array} { | c | c | c | c | c | c | c | } 
\hline & &  { \text { Keep Existing Truck } } &  { \text { Replace Existing Truck } } \
\hline & & & \text { Present Value of } & & & \
\hline & 14 \% & \text { Net Cash } & \text { Net Cash } & & \text { Net Cash } & \text { Present Value of Net } \
\hline \text { Year } & \begin{array} { c } 
\text { PV } \
\text { Factor }
\end{array} & \text { Outflows } & \text { Outflows } & & \text { Outflows } & \text { Cash Outflows } \
\hline 0 & & & & & \
\hline 1 & & & & & \
\hline 2 & & & & & & \
\hline 3 & & & & & & \
\hline 4 & & & & & & \
\hline
\end{array}$$

Accepted Answer

1) Cash flows for each alternative: @#IMG-DLM& 2)

Question 13

The time value of money concept recognizes that a dollar today is worth more than a dollar tomorrow. Which of the following is not a factor in causing the present value of cash inflows to diminish over time?

Accepted Answer

A)  Current expenses. 
B)  Earning potential, such as interest. 
C)  Risk of uncollectability. 
D)  Inflation reduces future purchasing power. 
A)  Current expenses. 
B)  Earning potential, such as interest. 
C)  Risk of uncollectability. 
D)  Inflation reduces future purchasing power.

Question 14

The compensation a company receives for investing in capital assets is referred to as a return on investment.

Accepted Answer

A) True 
 B)False

Question 15

The payback method of evaluating capital investments measures the recovery of the investment, but it does not measure profitability.

Accepted Answer

A) True 
 B)False

Question 16

Describe the decision rules management should use for accepting and rejecting capital projects under each of the following capital budgeting models: net present value model, internal rate of return model, payback period, and the unadjusted rate of return model.

Accepted Answer

Management should accept projects whose

Question 17

Langdon Company is considering purchasing a capital investment that is expected to provide annual cash inflows of $10,000 per year for 3 years. Assuming that Langdon's required rate of return is 8%, what is the present value of these cash inflows? (Do not round PV factors and intermediate calculations. Round your final answer to the nearest dollar.)

Accepted Answer

A)  $24,018 
B)  $24,869 
C)  $33,121 
D)  $25,771 
A)  $24,018 
B)  $24,869 
C)  $33,121 
D)  $25,771

Question 18

When a capital investment is expected to provide unequal annual cash inflows, the payback period cannot be calculated.

Accepted Answer

A) True 
 B)False

Question 19

Mendez Company is considering a capital project that costs $16,000. The project will deliver the following cash flows: $$\begin{array} { | l | c | c | c | c | } 
\hline \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } \
\hline \$ 8,000 & \$ 6,000 & \$ 5,000 & \$ 6,000 & \$ 5,000 \
\hline
\end{array}$$ Using the incremental approach, the payback period for the investment is:

Accepted Answer

A)  5 years. 
B)  2 years. 
C)  2.4 years. 
D)  1.66 years. 
A)  5 years. 
B)  2 years. 
C)  2.4 years. 
D)  1.66 years.

Question 20

When the effect of income taxes is considered in a capital budgeting analysis, the amount of depreciation expense must be added back to after-tax income to calculate the annual cash inflow.

Accepted Answer

A) True 
 B)False

The assumption regarding ordinary annuities is that cash flows occur at the end of each period.

Describe the general approaches companies may use in evaluating potential capital investments.

The cost of capital is called all of the following except:

An investment that costs $40,000 will produce annual cash flows of $12,000 for a period of 4 years. Given a desired rate of return of 10%, the investment will generate a (Do not round your PV factors and intermediate calculations. Round your answer to nearest whole dollar):

Select the term from the list provided that best matches each of the following definitions or descriptions. Put the number of the term in the answer column.

Cash outflows from a capital investment project include:

All of the following are capital investment decisions except:

The instantaneous computation power of spreadsheet software makes it ideal for answering "what-if" questions regarding present values.

A customary assumption in capital budgeting analysis is that:

The time value of money concept recognizes that a dollar today is worth more than a dollar tomorrow. Which of the following is not a factor in causing the present value of cash inflows to diminish over time?

The compensation a company receives for investing in capital assets is referred to as a return on investment.

The payback method of evaluating capital investments measures the recovery of the investment, but it does not measure profitability.

Describe the decision rules management should use for accepting and rejecting capital projects under each of the following capital budgeting models: net present value model, internal rate of return model, payback period, and the unadjusted rate of return model.

When a capital investment is expected to provide unequal annual cash inflows, the payback period cannot be calculated.

Mendez Company is considering a capital project that costs $16,000. The project will deliver the following cash flows: Year 1 Year 2 Year 3 Year 4 Year 5 \ 8,000 \ 6,000 \ 5,000 \ 6,000 \ 5,000 Using the incremental approach, the payback period for the investment is:

When the effect of income taxes is considered in a capital budgeting analysis, the amount of depreciation expense must be added back to after-tax income to calculate the annual cash inflow.

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 assumption regarding ordinary annuities is that cash flows occur at the end of each period.

Describe the general approaches companies may use in evaluating potential capital investments.

The cost of capital is called all of the following except:

An investment that costs $40,000 will produce annual cash flows of $12,000 for a period of 4 years. Given a desired rate of return of 10%, the investment will generate a (Do not round your PV factors and intermediate calculations. Round your answer to nearest whole dollar):

Select the term from the list provided that best matches each of the following definitions or descriptions. Put the number of the term in the answer column.

Cash outflows from a capital investment project include:

All of the following are capital investment decisions except:

The instantaneous computation power of spreadsheet software makes it ideal for answering "what-if" questions regarding present values.

A customary assumption in capital budgeting analysis is that:

The time value of money concept recognizes that a dollar today is worth more than a dollar tomorrow. Which of the following is not a factor in causing the present value of cash inflows to diminish over time?

The compensation a company receives for investing in capital assets is referred to as a return on investment.

The payback method of evaluating capital investments measures the recovery of the investment, but it does not measure profitability.

Describe the decision rules management should use for accepting and rejecting capital projects under each of the following capital budgeting models: net present value model, internal rate of return model, payback period, and the unadjusted rate of return model.

When a capital investment is expected to provide unequal annual cash inflows, the payback period cannot be calculated.

Mendez Company is considering a capital project that costs $16,000. The project will deliver the following cash flows: Year 1 Year 2 Year 3 Year 4 Year 5 \ 8,000 \ 6,000 \ 5,000 \ 6,000 \ 5,000 Using the incremental approach, the payback period for the investment is:

When the effect of income taxes is considered in a capital budgeting analysis, the amount of depreciation expense must be added back to after-tax income to calculate the annual cash inflow.

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