Question 1

The hurdle rate that is used in a net-present-value analysis is the same as the firm's:

Accepted Answer

A)  discount rate. 
B)  internal rate of return. 
C)  minimum desired rate of return. 
D)  objective rate of return. 
E)  discount rate and minimum desired rate of return. 
A)  discount rate. 
B)  internal rate of return. 
C)  minimum desired rate of return. 
D)  objective rate of return. 
E)  discount rate and minimum desired rate of return.

Question 2

When income taxes are considered in capital budgeting, the cash flows related to a company's advertising expense would be correctly figured by taking the cash paid for advertising and:

Accepted Answer

A)  adding the result of multiplying (advertising expense × tax rate). 
B)  adding the tax rate. 
C)  adding the result of multiplying [advertising expense × (1 - tax rate)]. 
D)  subtracting the result of multiplying (advertising expense × tax rate). 
E)  subtracting the result of multiplying [advertising expense × (1 - tax rate)]. 
A)  adding the result of multiplying (advertising expense × tax rate). 
B)  adding the tax rate. 
C)  adding the result of multiplying [advertising expense × (1 - tax rate)]. 
D)  subtracting the result of multiplying (advertising expense × tax rate). 
E)  subtracting the result of multiplying [advertising expense × (1 - tax rate)].

Question 3

Crossword Company is studying a capital project that will produce $600,000 of added sales revenue, $400,000 of additional cash operating expenses, and $50,000 of depreciation. Assuming a 30% income tax rate, the company's after-tax cash inflow (outflow) is:

Accepted Answer

A)  $105,000. 
B)  $125,000. 
C)  $155,000. 
D)  $175,000. 
E)  None of the other answers are correct. 
A)  $105,000. 
B)  $125,000. 
C)  $155,000. 
D)  $175,000. 
E)  None of the other answers are correct.

Question 4

A company's hurdle rate is generally influenced by:

Accepted Answer

A)  the cost of capital. 
B)  the firm's depreciable assets. 
C)  whether management uses the net-present-value method or the internal-rate-of-return method. 
D)  project risk. 
E)  Both the cost of capital and project risk. 
A)  the cost of capital. 
B)  the firm's depreciable assets. 
C)  whether management uses the net-present-value method or the internal-rate-of-return method. 
D)  project risk. 
E)  Both the cost of capital and project risk.

Question 5

A machine was sold in December 20x3 for $9,000. It was purchased in January 20x1 for $15,000, and depreciation of $12,000 was recorded from the date of purchase through the date of disposal. Assuming a 40% income tax rate, the after-tax cash inflow at the time of sale is:

Accepted Answer

A)  $3,600. 
B)  $6,600. 
C)  $8,400. 
D)  $9,000. 
E)  $11,400. 
A)  $3,600. 
B)  $6,600. 
C)  $8,400. 
D)  $9,000. 
E)  $11,400.

Question 6

Schille Company is considering a $5.4 million asset investment that has a four-year service life and a $400,000 salvage value. The investment is expected to produce annual savings in cash operating costs of $860,000 and will require a $250,000 overhaul in year 3, which is fully-deductible for tax purposes.
Schille uses the net-present-value method to analyze investments. Asset investments are depreciated by the straight-line method, ignoring salvage values in related computations.
Required:
A. Ignoring income taxes, determine the (pre-discounted) cash-flow amounts that would be used in a net-present-value analysis for (1) the asset acquisition, (2) annual savings in cash operating costs, (3) annual straight-line depreciation, (4) the overhaul in year 3, and (5) disposal of the asset in year 4. Note cash outflows in parentheses.
B. Repeat requirement "A," assuming the company is subject to a 30% income tax rate. Assume the company depreciates the asset using the optional straight-line method. Additionally, it depreciates it over the asset's service life (not its MACRS life).

Accepted Answer

A. Asset acquisition: $(5,400,000)
Annua

Question 7

When income taxes are considered in capital budgeting, the cash flows related to a company's depreciation expense would be correctly figured by taking the cash paid for depreciation and:

Accepted Answer

A)  adding the result of multiplying (depreciation expense × tax rate). 
B)  adding the result of multiplying [depreciation expense × (1 - tax rate)]. 
C)  subtracting the result of multiplying (depreciation expense × tax rate). 
D)  subtracting the result of multiplying [depreciation expense × (1 - tax rate)]. 
E)  None of the other answers because there is no cash paid for depreciation. 
A)  adding the result of multiplying (depreciation expense × tax rate). 
B)  adding the result of multiplying [depreciation expense × (1 - tax rate)]. 
C)  subtracting the result of multiplying (depreciation expense × tax rate). 
D)  subtracting the result of multiplying [depreciation expense × (1 - tax rate)]. 
E)  None of the other answers because there is no cash paid for depreciation.

Question 8

Which of the following project evaluation methods focuses on accounting income rather than cash flows?

Accepted Answer

A)  Net present value. 
B)  Accounting rate of return. 
C)  Internal rate of return. 
D)  Payback period. 
E)  None of the other answers are correct. 
A)  Net present value. 
B)  Accounting rate of return. 
C)  Internal rate of return. 
D)  Payback period. 
E)  None of the other answers are correct.

Question 9

Dahlia Corporation, which is subject to a 30% income tax rate, is considering a $420,000 asset that will result in the following over its six-year life:
Average revenue: $920,000
Average operating expenses (excluding depreciation): $770,000
Average depreciation: $70,000
The after-tax accounting rate of return on the initial investment is:

Accepted Answer

A)  13.33%. 
B)  19.05%. 
C)  25.00%. 
D)  35.71%. 
E)  None of the other answers are correct. 
A)  13.33%. 
B)  19.05%. 
C)  25.00%. 
D)  35.71%. 
E)  None of the other answers are correct.

Question 10

Wexford Corporation is considering the acquisition of a new machine that costs $350,000. The machine is expected to have a four-year service life and will produce annual savings in cash operating costs of $100,000. Wexford uses the optional straight-line method of depreciation and depreciates the asset over its four-year service life. The company is subject to a 30% income tax rate, has an after-tax hurdle rate of 12%, and rounds calculations to the nearest dollar.
Required:
A. Determine the annual after-tax cash flows that result from acquisition of the machine.
B. Calculate the machine's Net present value. Is the machine an attractive investment? Why?

Accepted Answer

A. Annual cash operating costs: $(100,00

Question 11

Paige Company is contemplating the acquisition of a machine that costs $50,000 and promises to reduce annual cash operating costs by $11,000 over each of the next six years. Which of the following is a proper way to evaluate this investment if the company desires a 12% return on all investments?

Accepted Answer

A)  $50,000 versus -$11,000 × 6. 
B)  $50,000 versus -$66,000 × 0.507. 
C)  $50,000 versus -$66,000 × 4.111. 
D)  $50,000 versus -$11,000 × 4.111. 
E) $50,000 × 0.893 versus -$11,000 × 4.111. 
A)  $50,000 versus -$11,000 × 6. 
B)  $50,000 versus -$66,000 × 0.507. 
C)  $50,000 versus -$66,000 × 4.111. 
D)  $50,000 versus -$11,000 × 4.111. 
E) $50,000 × 0.893 versus -$11,000 × 4.111.

Question 12

Harrison Township is studying a 700-acre site for a new landfill. The new site will save $70,000 in annual operating costs for 10 years, as Harrison currently uses the landfill of a neighboring municipality. Other data are:
Purchase price per acre: $550
Site preparation costs: $110,000
Hurdle rate: 6%
Ignore income taxes.
Required:
A. Use the net-present-value method and determine whether the landfill should be acquired.
B. Determine the landfill's approximate internal rate of return.

Accepted Answer

A. @#IMG-DLM& Yes, the landfill should be acquired

Question 13

A depreciation tax shield is a(n):

Accepted Answer

A)  after-tax cash outflow. 
B)  increase in income tax. 
C)  factor that has no effect on cash flows. 
D)  reduction in income tax. 
E)  sporadic fluctuation in income tax. 
A)  after-tax cash outflow. 
B)  increase in income tax. 
C)  factor that has no effect on cash flows. 
D)  reduction in income tax. 
E)  sporadic fluctuation in income tax.

Question 14

The payback method is a popular way to analyze investment proposals.
Required:
A. Explain how the payback period is determined. Generally speaking, from a payback perspective, which projects are viewed to be the most attractive?
B. Can the payback method take income taxes into consideration? Explain.
C. What are the deficiencies of the payback method?

Accepted Answer

A. The payback period is the time requir

Question 15

Assume that a capital project is being analyzed by a discounted-cash-flow approach, and an employee first assumes no income taxes and then later assumes a 30% income tax rate. How would depreciation expense be incorporated in the analysis?

Accepted Answer

A)  Choice A 
B)  Choice B 
C)  Choice C 
D)  Choice D 
E)  Choice E 
A)  Choice A 
B)  Choice B 
C)  Choice C 
D)  Choice D 
E)  Choice E

Question 16

A company used the net-present-value method to analyze an investment and found the investment to be very attractive. If the firm used Modified Accelerated Cost Recovery System (MACRS) and changes to the straight-line depreciation, the investment's net present value will:

Accepted Answer

A)  increase. 
B)  remain the same. 
C)  decrease. 
D)  change, but the direction cannot be determined based on the data presented. 
E)  fluctuate in an erratic manner. 
A)  increase. 
B)  remain the same. 
C)  decrease. 
D)  change, but the direction cannot be determined based on the data presented. 
E)  fluctuate in an erratic manner.

Question 17

Wrikeman evaluates future projects by using the profitability index. The company is currently reviewing five similar projects and must choose one of the following: $$\begin{array} { c c c } 
\text { Project } & \begin{array} { c } 
\text { Initial } \
\text { Investment }
\end{array} & \begin{array} { c } 
\text { Present Value } \
\text { of Cash Inflows }
\end{array} \
1 & \$ 100,000 & \$ 97,000 \
2 & 50,000 & 80,000 \
3 & 75,000 & 110,000 \
4 & 60,000 & 100,000 \
5 & 150,000 & 200,000
\end{array}$$ Which project should Wrikeman select if the decision is based entirely on the profitability index?

Accepted Answer

A)  Project 1. 
B)  Project 2. 
C)  Project 3. 
D)  Project 4. 
E)  Project 5. 
A)  Project 1. 
B)  Project 2. 
C)  Project 3. 
D)  Project 4. 
E)  Project 5.

Question 18

The internal rate of return equates the present value of a project's cash inflows with the present value of the cash outflows.

Accepted Answer

A) True 
 B)False

Question 19

James Company has an asset that cost $5,000 and currently has accumulated depreciation of $2,000. Suppose the firm sold the asset for $2,500 and is subject to a 30% income tax rate.
The net after-tax cash flow of the disposal is:

Accepted Answer

A)  $2,100. 
B)  $2,350. 
C)  $2,500. 
D)  $2,650. 
E)  None of the other answers are correct. 
A)  $2,100. 
B)  $2,350. 
C)  $2,500. 
D)  $2,650. 
E)  None of the other answers are correct.

Question 20

Which of the following would not involve a capital-budgeting analysis?

Accepted Answer

A)  The acquisition of new equipment. 
B)  The addition of a new product line. 
C)  The adoption of a new cost driver for overhead application. 
D)  The construction of a new distribution facility. 
E)  The decision of a pro football team to trade for and sign a star quarterback to a long-term contract. 
A)  The acquisition of new equipment. 
B)  The addition of a new product line. 
C)  The adoption of a new cost driver for overhead application. 
D)  The construction of a new distribution facility. 
E)  The decision of a pro football team to trade for and sign a star quarterback to a long-term contract.

The hurdle rate that is used in a net-present-value analysis is the same as the firm's:

When income taxes are considered in capital budgeting, the cash flows related to a company's advertising expense would be correctly figured by taking the cash paid for advertising and:

Crossword Company is studying a capital project that will produce $600,000 of added sales revenue, $400,000 of additional cash operating expenses, and $50,000 of depreciation. Assuming a 30% income tax rate, the company's after-tax cash inflow (outflow) is:

A company's hurdle rate is generally influenced by:

A machine was sold in December 20x3 for $9,000. It was purchased in January 20x1 for $15,000, and depreciation of $12,000 was recorded from the date of purchase through the date of disposal. Assuming a 40% income tax rate, the after-tax cash inflow at the time of sale is:

When income taxes are considered in capital budgeting, the cash flows related to a company's depreciation expense would be correctly figured by taking the cash paid for depreciation and:

Which of the following project evaluation methods focuses on accounting income rather than cash flows?

Paige Company is contemplating the acquisition of a machine that costs $50,000 and promises to reduce annual cash operating costs by $11,000 over each of the next six years. Which of the following is a proper way to evaluate this investment if the company desires a 12% return on all investments?

A depreciation tax shield is a(n):

Assume that a capital project is being analyzed by a discounted-cash-flow approach, and an employee first assumes no income taxes and then later assumes a 30% income tax rate. How would depreciation expense be incorporated in the analysis?

A company used the net-present-value method to analyze an investment and found the investment to be very attractive. If the firm used Modified Accelerated Cost Recovery System (MACRS) and changes to the straight-line depreciation, the investment's net present value will:

The internal rate of return equates the present value of a project's cash inflows with the present value of the cash outflows.

James Company has an asset that cost $5,000 and currently has accumulated depreciation of $2,000. Suppose the firm sold the asset for $2,500 and is subject to a 30% income tax rate. The net after-tax cash flow of the disposal is:

Which of the following would not involve a capital-budgeting analysis?

The Changing Role of Managerial Accounting in a Dynamic Business Environment

Basic Cost Management Concepts

Product Costing and Cost Accumulation in a Batch Production Environment

Process Costing and Hybrid Product-Costing Systems

Activity-Based Costing and Management

Activity Analysis, Cost Behavior, and Cost Estimation

Cost-Volume-Profit Analysis

Variable Costing and the Costs of Quality and Sustainability

Financial Planning and Analysis: the Master Budget

Standard Costing and Analysis of Direct Costs

Flexible Budgeting and Analysis of Overhead Costs

Responsibility Accounting, Operational Performance Measures, and the Balanced Scorecard

Investment Centers and Transfer Pricing

Decision Making: Relevant Costs and Benefits

Target Costing and Cost Analysis for Pricing Decisions

Allocation of Support Activity Costs and Joint Costs

The Sarbanes-Oxley Act, Internal Controls, and Management Accounting

Compound Interest and the Concept of Present Value

Inventory Management

Filters

Exam 16: Capital Expenditure Decisions

The hurdle rate that is used in a net-present-value analysis is the same as the firm's:

When income taxes are considered in capital budgeting, the cash flows related to a company's advertising expense would be correctly figured by taking the cash paid for advertising and:

Crossword Company is studying a capital project that will produce $600,000 of added sales revenue, $400,000 of additional cash operating expenses, and $50,000 of depreciation. Assuming a 30% income tax rate, the company's after-tax cash inflow (outflow) is:

A company's hurdle rate is generally influenced by:

A machine was sold in December 20x3 for $9,000. It was purchased in January 20x1 for $15,000, and depreciation of $12,000 was recorded from the date of purchase through the date of disposal. Assuming a 40% income tax rate, the after-tax cash inflow at the time of sale is:

When income taxes are considered in capital budgeting, the cash flows related to a company's depreciation expense would be correctly figured by taking the cash paid for depreciation and:

Which of the following project evaluation methods focuses on accounting income rather than cash flows?

Paige Company is contemplating the acquisition of a machine that costs $50,000 and promises to reduce annual cash operating costs by $11,000 over each of the next six years. Which of the following is a proper way to evaluate this investment if the company desires a 12% return on all investments?

A depreciation tax shield is a(n):

Assume that a capital project is being analyzed by a discounted-cash-flow approach, and an employee first assumes no income taxes and then later assumes a 30% income tax rate. How would depreciation expense be incorporated in the analysis?

A company used the net-present-value method to analyze an investment and found the investment to be very attractive. If the firm used Modified Accelerated Cost Recovery System (MACRS) and changes to the straight-line depreciation, the investment's net present value will:

The internal rate of return equates the present value of a project's cash inflows with the present value of the cash outflows.

James Company has an asset that cost $5,000 and currently has accumulated depreciation of $2,000. Suppose the firm sold the asset for $2,500 and is subject to a 30% income tax rate. The net after-tax cash flow of the disposal is:

Which of the following would not involve a capital-budgeting analysis?

The Changing Role of Managerial Accounting in a Dynamic Business Environment

Basic Cost Management Concepts

Product Costing and Cost Accumulation in a Batch Production Environment

Process Costing and Hybrid Product-Costing Systems

Activity-Based Costing and Management

Activity Analysis, Cost Behavior, and Cost Estimation

Cost-Volume-Profit Analysis

Variable Costing and the Costs of Quality and Sustainability

Financial Planning and Analysis: the Master Budget

Standard Costing and Analysis of Direct Costs

Flexible Budgeting and Analysis of Overhead Costs

Responsibility Accounting, Operational Performance Measures, and the Balanced Scorecard

Investment Centers and Transfer Pricing

Decision Making: Relevant Costs and Benefits

Target Costing and Cost Analysis for Pricing Decisions

Allocation of Support Activity Costs and Joint Costs

The Sarbanes-Oxley Act, Internal Controls, and Management Accounting

Compound Interest and the Concept of Present Value

Inventory Management

Filters