Question 1

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

Accepted Answer

A) True 
 B)False  True

Question 2

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) $16,501. 
B) $33,118. 
C) $9,501. 
D) $13,000. 
A) $16,501. 
B) $33,118. 
C) $9,501. 
D) $13,000. C

Question 3

Joseph Company is considering replacing an existing piece of machinery with newer technology.In deciding whether to replace the existing machinery,management should consider which costs as relevant?

Accepted Answer

A) Future costs which will be classified as fixed rather than variable. 
B) Future costs which will be different under the two alternatives. 
C) Sunk costs associated with the old machine. 
D) Historical costs associated with the old machine. 
A) Future costs which will be classified as fixed rather than variable. 
B) Future costs which will be different under the two alternatives. 
C) Sunk costs associated with the old machine. 
D) Historical costs associated with the old machine. B

Question 4

When an investment fails to provide the desired rate of return,the investment should be rejected.

Accepted Answer

A) True 
 B)False

Question 5

Redman Company is considering an investment in new machinery.The details of the investment are as follows:   The company uses straight-line depreciation for its machinery and requires a 12% rate of return.The present value of $1 for 4 years at 12% is 0.636.The present value of an ordinary annuity for $1 for 4 years at 12% is 3.037.
(1)What is the payback period? (Round your answer to one decimal place.)
(2)What is the rate of return on average investment? (Round your percentage to one decimal place.)
(3)What is the net present value?
(4)Would you advise the company to invest in this machinery?

Accepted Answer

(1)3.3 years (2)13.6

Question 6

The higher the required rate of return of an investment,the less an investor will be willing to pay for the investment.

Accepted Answer

A) True 
 B)False

Question 7

The selection of an appropriate discount rate for determining net present value of a particular investment proposal does not depend upon:

Accepted Answer

A) The present value of the proposal's future cash flows. 
B) Alternative investment opportunities available. 
C) The nature of the investment proposal. 
D) The investor's cost of capital. 
A) The present value of the proposal's future cash flows. 
B) Alternative investment opportunities available. 
C) The nature of the investment proposal. 
D) The investor's cost of capital.

Question 8

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 9

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 10

Nonfinancial considerations are not accounted for in capital budgeting decisions.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following factors does the payback method consider?

Accepted Answer

A) Total profitability of an investment. 
B) The cash flows over the entire life of an investment. 
C) The timing of cash flows. 
D) The initial investment. 
A) Total profitability of an investment. 
B) The cash flows over the entire life of an investment. 
C) The timing of cash flows. 
D) The initial investment.

Question 12

Capital investments decisions are not affected by:

Accepted Answer

A) Income taxes. 
B) Non-financial considerations. 
C) Depreciation methods. 
D) Inventory levels. 
A) Income taxes. 
B) Non-financial considerations. 
C) Depreciation methods. 
D) Inventory levels.

Question 13

The payback period can be determined by multiplying the amount invested by net cash flows received annually.

Accepted Answer

A) True 
 B)False

Question 14

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: (rounded)
(a)Annual net cash flow: $__________
(b)Payback period: __________
(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

(a)95,000

Question 15

The reliability of estimates is a critical factor in capital budget proposals.

Accepted Answer

A) True 
 B)False

Question 16

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 17

Perhaps the most important financial considerations in a capital budgeting decision are its effects upon future cash flow and future profitability.

Accepted Answer

A) True 
 B)False

Question 18

Capital budget audits are often undertaken to ensure the accuracy of cash flow estimates.

Accepted Answer

A) True 
 B)False

Question 19

The annual net cash flow of an investment

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.

Joseph Company is considering replacing an existing piece of machinery with newer technology.In deciding whether to replace the existing machinery,management should consider which costs as relevant?

When an investment fails to provide the desired rate of return,the investment should be rejected.

The higher the required rate of return of an investment,the less an investor will be willing to pay for the investment.

The selection of an appropriate discount rate for determining net present value of a particular investment proposal does not depend upon:

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

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

Nonfinancial considerations are not accounted for in capital budgeting decisions.

Which of the following factors does the payback method consider?

Capital investments decisions are not affected by:

The payback period can be determined by multiplying the amount invested by net cash flows received annually.

The reliability of estimates is a critical factor in capital budget proposals.

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

Perhaps the most important financial considerations in a capital budgeting decision are its effects upon future cash flow and future profitability.

Capital budget audits are often undertaken to ensure the accuracy of cash flow estimates.

The annual net cash flow of an investment

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

Filters