Question 1

An investment's annual net cash flow will always be equal to its:

Accepted Answer

A) Annual revenue less its annual expenses. 
B) Annual cash receipts less its annual cash disbursements. 
C) Annual revenue less its annual cash disbursements. 
D) Annual net income plus its annual depreciation expense. 
A) Annual revenue less its annual expenses. 
B) Annual cash receipts less its annual cash disbursements. 
C) Annual revenue less its annual cash disbursements. 
D) Annual net income plus its annual depreciation expense.

Question 2

Results of capital budgeting processes may have serious implications for employees.

Accepted Answer

A) True 
 B)False

Question 3

The accuracy of capital budget decisions is critically dependent on:

Accepted Answer

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

Question 4

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 5

To determine the average investment over the life of an asset,divide the total depreciation of the investment by two.

Accepted Answer

A) True 
 B)False

Question 6

When straight-line depreciation is used,the average carrying value of an asset with no salvage value is equal to the asset's original cost divided by its estimated useful life.

Accepted Answer

A) True 
 B)False

Question 7

Return on average investment vs.discounting cash flows
The computation of return on average investment ignores one characteristic of the earnings stream which is considered in discounting cash flows.What is this characteristic? Why is it important?

Accepted Answer

Discounting cash flows takes into consid

Question 8

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) Discounted cash flows method. 
D) Accounting book value method. 
A) Payback method. 
B) Average rate of return. 
C) Discounted cash flows method. 
D) Accounting book value method.

Question 9

A short payback period is preferred so that the investment's costs can be put to other uses.

Accepted Answer

A) True 
 B)False

Question 10

Accounting terminology
Listed below are eight technical accounting terms introduced or emphasized in this chapter.   Each of the following statements may (or may not)describe one of these technical terms.In the space provided beside each statement,indicate the accounting term described,or answer "None" if the statement does not correctly describe any of the terms.
____ (a)The process of analyzing investments in plant assets.
____ (b)The number of years required to recover the entire cost of an investment from its net cash flows.
____ (c)A stream of equal cash flows to be received or paid.
____ (d)The estimated average annual income of an investment expressed as a percentage of its average initial cost.
____ (e)The numerator in the return on average investment computation.
____ (f)The amount an investor should be willing to pay today for the right to receive a specified amount of cash at a specified future date.
____ (g)The process of computing the present value of future cash flows.

Accepted Answer

(a)Capital budgeting (b)Payback period (

Question 11

The net present value of an investment proposal is the difference between the total present value of future net cash flows and the cost of the investment.

Accepted Answer

A) True 
 B)False

Question 12

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.

Question 13

Sterling Corporation has borrowed $75,000 that must be repaid in two years.This $75,000 is to be invested in an eight-year project with an estimated annual net cash flow of $15,000.The payback period for this investment is:

Accepted Answer

A) Two years. 
B) Five years. 
C) Eight years. 
D) Indeterminable with the given information. 
A) Two years. 
B) Five years. 
C) Eight years. 
D) Indeterminable with the given information.

Question 14

Non-financial factors are relevant in capital budgeting.

Accepted Answer

A) True 
 B)False

Question 15

The average carrying value (or average investment)of an asset with no salvage value is equal to:

Accepted Answer

A) The original cost of the asset divided by its estimated useful life. 
B) The original cost of the asset divided by two. 
C) The average annual net cash flow of the asset multiplied by the asset's estimated useful life. 
D) The average annual net income of the asset multiplied by the asset's estimated useful life. 
A) The original cost of the asset divided by its estimated useful life. 
B) The original cost of the asset divided by two. 
C) The average annual net cash flow of the asset multiplied by the asset's estimated useful life. 
D) The average annual net income of the asset multiplied by the asset's estimated useful life.

Question 16

A failure of the return on average investment method is that no consideration is given to the time value of money.

Accepted Answer

A) True 
 B)False

Question 17

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): $__________

Accepted Answer

(a)2.34 (b

Question 18

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 19

Capital budgeting estimates often involve a considerable degree of uncertainty.

Accepted Answer

A) True 
 B)False

Question 20

In capital budgeting,the investment proposal with the shortest payback period always has the highest rate of return.

Accepted Answer

A) True 
 B)False

Exam 26: Capital Budgeting

An investment's annual net cash flow will always be equal to its:

Results of capital budgeting processes may have serious implications for employees.

The accuracy of capital budget decisions is critically dependent on:

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.

To determine the average investment over the life of an asset,divide the total depreciation of the investment by two.

When straight-line depreciation is used,the average carrying value of an asset with no salvage value is equal to the asset's original cost divided by its estimated useful life.

Return on average investment vs.discounting cash flows The computation of return on average investment ignores one characteristic of the earnings stream which is considered in discounting cash flows.What is this characteristic? Why is it important?

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

A short payback period is preferred so that the investment's costs can be put to other uses.

The net present value of an investment proposal is the difference between the total present value of future net cash flows and the cost of the investment.

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

Sterling Corporation has borrowed $75,000 that must be repaid in two years.This $75,000 is to be invested in an eight-year project with an estimated annual net cash flow of $15,000.The payback period for this investment is:

Non-financial factors are relevant in capital budgeting.

The average carrying value (or average investment)of an asset with no salvage value is equal to:

A failure of the return on average investment method is that no consideration is given to the time value of money.

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?

Capital budgeting estimates often involve a considerable degree of uncertainty.

In capital budgeting,the investment proposal with the shortest payback period always has the highest rate of return.

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

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