Question 1

A cost that has been incurred irrevocably by past actions is a (an):

Accepted Answer

A) Capital expenditure. 
B) Incremental cost. 
C) Sunk cost. 
D) Fixed cost. 
A) Capital expenditure. 
B) Incremental cost. 
C) Sunk cost. 
D) Fixed cost.

Question 2

Which of the following is not considered a capital investment?

Accepted Answer

A) The purchase of a large machine. 
B) The development of a new product line. 
C) The purchase of a large order of raw materials used in the production process. 
D) The acquisition of a subsidiary company. 
A) The purchase of a large machine. 
B) The development of a new product line. 
C) The purchase of a large order of raw materials used in the production process. 
D) The acquisition of a subsidiary company.

Question 3

Carter & Co.is trying to decide which of two investments they should consider.The following information is available:   Each investment is expected to have a useful life of 5 years.(Rounded)
(a)What is the rate of return on average investment of each investment?
(b)What is the payback period of each investment?

Accepted Answer

(a)Investment A = 12

Question 4

Capital investment proposals may not be evaluated by using:

Accepted Answer

A) The payback period. 
B) The return on investment method. 
C) The discounted cash flow method. 
D) The income statement method. 
A) The payback period. 
B) The return on investment method. 
C) The discounted cash flow method. 
D) The income statement method.

Question 5

Capital budgeting
Carry-Along is debating whether or not to invest in new equipment to manufacture a line of high-quality luggage.The new equipment would cost $850,000,with an estimated four-year life and no salvage value.The estimated annual operating results with the new equipment are as follows:   All revenue from the new luggage line 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 for the investment in the new equipment to produce the new luggage line: (rounded)
(a)Annual cash flow: $__________
(b)Payback period: __________
(c)Return on average investment: __________%
(d)Total present value of the expected future annual cash flows,discounted at an annual rate of 12% (an annuity table shows that the present value of $1 received annually for four years discounted at 12% is 3.037): $__________
(e)Net present value of the proposed investment: $__________

Accepted Answer

(a)300,000 (b)2.83 y

Question 6

In considering investment in new plant assets,the payback period is computed without regard to the total useful life of the investment.

Accepted Answer

A) True 
 B)False

Question 7

When management considers an investment,they look for the payback period to be:

Accepted Answer

A) Short. 
B) Long. 
C) Profitable. 
D) Useful. 
A) Short. 
B) Long. 
C) Profitable. 
D) Useful.

Question 8

The residual value of an asset should be subtracted from the cost of the asset when determining the average amount invested.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is generally not considered a capital budgeting technique?

Accepted Answer

A) Payback period. 
B) Return on average investment. 
C) Return on stockholders' equity. 
D) Discounted future cash flows. 
A) Payback period. 
B) Return on average investment. 
C) Return on stockholders' equity. 
D) Discounted future cash flows.

Question 10

When the net present value is greater than zero,the investment's rate of return is less than the discount rate.

Accepted Answer

A) True 
 B)False

Question 11

The discount rate used in discounting cash flows from proposed investments is usually the rate of return required by the investor.

Accepted Answer

A) True 
 B)False

Question 12

Most capital budgeting techniques involve analysis of net operating profits.

Accepted Answer

A) True 
 B)False

Question 13

The difference between the present value and future value depends on the rate of interest and the length of time that interest accumulates.

Accepted Answer

A) True 
 B)False

Question 14

The present value of money is always:

Accepted Answer

A) Less than its future amount. 
B) The same as its future amount. 
C) More than its future amount. 
D) More or less than its future amount depending upon the discount rate. 
A) Less than its future amount. 
B) The same as its future amount. 
C) More than its future amount. 
D) More or less than its future amount depending upon the discount rate.

Question 15

Which method of project selection gives consideration to the time value of money in a capital budgeting decision?

Accepted Answer

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

Question 16

In computing the return on average investment of a particular asset,the asset's annual depreciation expense may be viewed as:

Accepted Answer

A) An increase in the average amount invested over the life of the asset. 
B) An increase in the asset's carrying value each year. 
C) A recovery of the amount originally invested in the asset. 
D) A decrease in the asset's net cash flows. 
A) An increase in the average amount invested over the life of the asset. 
B) An increase in the asset's carrying value each year. 
C) A recovery of the amount originally invested in the asset. 
D) A decrease in the asset's net cash flows.

Question 17

The payback period considers total profitability over the life of an investment and takes into consideration the timing of an investment's future cash flows.

Accepted Answer

A) True 
 B)False

Question 18

The impact of a capital budgeting decision upon the environment is an example of a nonfinancial consideration.

Accepted Answer

A) True 
 B)False

Question 19

Capital budgeting computations
A project costing $80,000 has an estimated life of 3 years and no salvage value.The estimated net income and net after tax cash flows from the project are as follows:   The company's minimum desired rate of return for discounted cash flow analysis is 10%.The present value of $1 at compound interest of 10% at 1,2,and 3 years is 0.909,0.826,and 0.751 respectively.The present value of a $1 annuity for three years at 10% is 2.487.The company uses straight-line depreciation.
Compute
(a)Net present value of the project _________________________.
(b)The rate of return on average investment __________________.(rounded)
Calculations

Accepted Answer

(a)$26,910

Question 20

To compute a future amount from a present value,we need to know:

Accepted Answer

A) The future value and length of time. 
B) The interest rate and length of time. 
C) The future annuity amount. 
D) The present annuity amount. 
A) The future value and length of time. 
B) The interest rate and length of time. 
C) The future annuity amount. 
D) The present annuity amount.

Exam 26: Capital Budgeting

A cost that has been incurred irrevocably by past actions is a (an):

Which of the following is not considered a capital investment?

Capital investment proposals may not be evaluated by using:

In considering investment in new plant assets,the payback period is computed without regard to the total useful life of the investment.

When management considers an investment,they look for the payback period to be:

The residual value of an asset should be subtracted from the cost of the asset when determining the average amount invested.

Which of the following is generally not considered a capital budgeting technique?

When the net present value is greater than zero,the investment's rate of return is less than the discount rate.

The discount rate used in discounting cash flows from proposed investments is usually the rate of return required by the investor.

Most capital budgeting techniques involve analysis of net operating profits.

The difference between the present value and future value depends on the rate of interest and the length of time that interest accumulates.

The present value of money is always:

Which method of project selection gives consideration to the time value of money in a capital budgeting decision?

In computing the return on average investment of a particular asset,the asset's annual depreciation expense may be viewed as:

The payback period considers total profitability over the life of an investment and takes into consideration the timing of an investment's future cash flows.

The impact of a capital budgeting decision upon the environment is an example of a nonfinancial consideration.

To compute a future amount from a present value,we need to know:

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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