Question 1

When using the NPV method, the interest rate used to discount cash flows shouldnot be thought of as the:

Accepted Answer

A)  hurdle rate. 
B)  internal rate of return. 
C)  minimum required rate of return. 
D)  discount rate. 
A)  hurdle rate. 
B)  internal rate of return. 
C)  minimum required rate of return. 
D)  discount rate.

Question 2

Why do capital investment decisions require consideration of the time value of money?

Accepted Answer

Capital investment decisions are long-te

Question 3

Bluebird Inc. requires all capital investments to generate an internal rate of return of 14%. Bluebird is currently considering an investment that is expected to generate annual cash inflows of $12,000 for 5 years. The cost of the investment should not exceed:

Accepted Answer

A)  $60,000. 
B)  $41,197. 
C)  $31,164. 
D)  $6,233. 
A)  $60,000. 
B)  $41,197. 
C)  $31,164. 
D)  $6,233.

Question 4

The calculation of the profitability index (PI) is most helpful for which type of decisions?

Accepted Answer

A)  Screening decisions 
B)  Preference decisions 
C)  Qualitative decisions 
D)  Short-term decisions 
A)  Screening decisions 
B)  Preference decisions 
C)  Qualitative decisions 
D)  Short-term decisions

Question 5

Which of the following statements comparing the NPV and IRR methods is false?

Accepted Answer

A)  Both the NPV and IRR methods can be used for screening decisions. 
B)  Only the NPV method can be used to compare investments of various size or magnitude. 
C)  Both the NPV and IRR methods can take income tax effects into account. 
D)  Both the NPV and IRR methods are used for long-term decision making. 
A)  Both the NPV and IRR methods can be used for screening decisions. 
B)  Only the NPV method can be used to compare investments of various size or magnitude. 
C)  Both the NPV and IRR methods can take income tax effects into account. 
D)  Both the NPV and IRR methods are used for long-term decision making.

Question 6

Adam's Manufacturing has the following information available regarding one of the projects it is considering:   The profitability index of this project is:

Accepted Answer

A)  6.25. 
B)  0.16. 
C)  1.16. 
D)  0.86. 
A)  6.25. 
B)  0.16. 
C)  1.16. 
D)  0.86.

Question 7

Palatial Products Inc. is considering the purchase of a new industrial machine. The estimated cost of the machine is $190,000. The machine is expected to generate annual cash inflows for the next four years as follows:
   The machine is not expected to have a residual value at the end of its useful life. The company uses a discount rate of 10%.
Required: Compute the net present value of the machine. (Ignore income taxes)

Accepted Answer

The answer of Palatial Products Inc. is considering the purchase...

Question 8

The Mayfield Company is considering a project that will require an initial investment of $24,000 and is expected to generate future cash flows of $3,000 each year for the next 10 years.
Required: Calculate the payback period in years.

Accepted Answer

Payback period is 8

Question 9

If the net present value of an investment is negative, then:

Accepted Answer

A)  the present value of the cash inflows is greater than the present value of the cash outflows. 
B)  the discount rate is negative. 
C)  the actual rate of return is less than the discount rate used. 
D)  increasing the cost of the investment will change the net present value to a positive number. 
A)  the present value of the cash inflows is greater than the present value of the cash outflows. 
B)  the discount rate is negative. 
C)  the actual rate of return is less than the discount rate used. 
D)  increasing the cost of the investment will change the net present value to a positive number.

Question 10

Which of the following statements is false regarding the impact of taxes on net present value computations?

Accepted Answer

A)  Most for-profit companies should take into account the impact of income taxes on capital investment decisions. 
B)  The disposal of a long-term asset may have tax consequences. 
C)  After-tax cash inflows will be less than before-tax cash inflows. 
D)  All tax-deductible expenses involve cash outflows. 
A)  Most for-profit companies should take into account the impact of income taxes on capital investment decisions. 
B)  The disposal of a long-term asset may have tax consequences. 
C)  After-tax cash inflows will be less than before-tax cash inflows. 
D)  All tax-deductible expenses involve cash outflows.

Question 11

NC Products Inc. is considering investing in one of two projects. Both projects have a net present value of $25,000; however, Project #1 requires an initial investment of $300,000 while Project #2 requires an initial investment of $700,000. Based on this information, which of the following statements is true?

Accepted Answer

A)  Project #2 will have a higher profitability index. 
B)  Project #1 will have a higher profitability index. 
C)  Both projects will have the same profitability index. 
D)  There is not enough information to determine the profitability index of either project. 
A)  Project #2 will have a higher profitability index. 
B)  Project #1 will have a higher profitability index. 
C)  Both projects will have the same profitability index. 
D)  There is not enough information to determine the profitability index of either project.

Question 12

The length of time needed for a long-term project to recapture its initial investment amount is called the:

Accepted Answer

A)  discount period. 
B)  internal rate of return. 
C)  present value. 
D)  payback period. 
A)  discount period. 
B)  internal rate of return. 
C)  present value. 
D)  payback period.

Question 13

Woody Manufacturing Inc. is considering the purchase of a new machine. They have narrowed their choices down to two machines, Machine #1 and Machine #2, each having a cost of $35,000. The following information is available regarding the expected cash inflows from each machine:   When using net present value analysis, Woody uses the same cost of capital for both machines and both machines have a positive net present value.
Based on the above information, which of the following statements is true?

Accepted Answer

A)  Machine #1 will have a higher net present value than Machine #2. 
B)  Machine #1 will have a lower net present value than Machine #2. 
C)  Machines #1 and #2 will have the same net present values. 
D)  Machines #1 and #2 will have the same internal rates of return. 
A)  Machine #1 will have a higher net present value than Machine #2. 
B)  Machine #1 will have a lower net present value than Machine #2. 
C)  Machines #1 and #2 will have the same net present values. 
D)  Machines #1 and #2 will have the same internal rates of return.

Question 14

Cameo Inc., a local company specializing in home repairs, is considering replacing its older van with a new and larger one. The estimated cost of the new van will be $45,000. Using a discount rate of 16%, the company calculates a net present value for the new van of $(7,000). Based on this information, which of the following statements is true?

Accepted Answer

A)  The actual rate of return on the new van is negative. 
B)  If the company purchases the van, they are guaranteed a rate of return of 16%. 
C)  Using a higher discount rate should cause the net present value to become positive. 
D)  If the actual cost of the new van ends up being less than $38,000, the net present value will become positive. 
A)  The actual rate of return on the new van is negative. 
B)  If the company purchases the van, they are guaranteed a rate of return of 16%. 
C)  Using a higher discount rate should cause the net present value to become positive. 
D)  If the actual cost of the new van ends up being less than $38,000, the net present value will become positive.

Question 15

Which of the following is not a typical cash outflow associated with a capital investment?

Accepted Answer

A)  Repairs and maintenance needed for purchased equipment 
B)  Additional operating costs resulting from the capital investment 
C)  Salvage value received when the newly purchased equipment is sold 
D)  Purchase price of new equipment 
A)  Repairs and maintenance needed for purchased equipment 
B)  Additional operating costs resulting from the capital investment 
C)  Salvage value received when the newly purchased equipment is sold 
D)  Purchase price of new equipment

Question 16

Putnam Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, $2,000 for years 6 through 10.
Required: Calculate the project's payback period in years.

Accepted Answer

The payback period i

Question 17

Assuming taxes are a consideration, which of the following would not have an overall positive effect on cash inflows when a company is computing the net present value of a potential capital investment?

Accepted Answer

A)  The asset's salvage value 
B)  Cost savings per year 
C)  Depreciation expense 
D)  Initial capital investment 
A)  The asset's salvage value 
B)  Cost savings per year 
C)  Depreciation expense 
D)  Initial capital investment

Question 18

Deciding whether or not an investment meets a predetermined company standard is called a:

Accepted Answer

A)  preference decision. 
B)  payback decision. 
C)  screening decision. 
D)  profitability decision. 
A)  preference decision. 
B)  payback decision. 
C)  screening decision. 
D)  profitability decision.

Question 19

Which of the following statements is true regarding the concept of the time value of money?

Accepted Answer

A)  A dollar paid today is worth the same as a dollar paid in the future. 
B)  A dollar received today is worth the same as a dollar received in the future. 
C)  A dollar received today is worth more than a dollar received in the future. 
D)  A dollar received today is worth less than a dollar received in the future. 
A)  A dollar paid today is worth the same as a dollar paid in the future. 
B)  A dollar received today is worth the same as a dollar received in the future. 
C)  A dollar received today is worth more than a dollar received in the future. 
D)  A dollar received today is worth less than a dollar received in the future.

Question 20

Clinton Inc. is considering the purchase of a new equipment costing $200,000. The equipment is expected to reduce annual operating costs by $70,000 and will be depreciated using the straight-line method (with no half-year convention) over five years with no salvage value at the end of its useful life. Assuming a 40 percent income tax rate, the equipment's payback period is:

Accepted Answer

A)  2.44 years. 
B)  2.86 years. 
C)  3.45 years. 
D)  4.76 years. 
A)  2.44 years. 
B)  2.86 years. 
C)  3.45 years. 
D)  4.76 years.

When using the NPV method, the interest rate used to discount cash flows shouldnot be thought of as the:

Why do capital investment decisions require consideration of the time value of money?

Bluebird Inc. requires all capital investments to generate an internal rate of return of 14%. Bluebird is currently considering an investment that is expected to generate annual cash inflows of $12,000 for 5 years. The cost of the investment should not exceed:

The calculation of the profitability index (PI) is most helpful for which type of decisions?

Which of the following statements comparing the NPV and IRR methods is false?

Adam's Manufacturing has the following information available regarding one of the projects it is considering: The profitability index of this project is:

The Mayfield Company is considering a project that will require an initial investment of $24,000 and is expected to generate future cash flows of $3,000 each year for the next 10 years. Required: Calculate the payback period in years.

If the net present value of an investment is negative, then:

Which of the following statements is false regarding the impact of taxes on net present value computations?

The length of time needed for a long-term project to recapture its initial investment amount is called the:

Which of the following is not a typical cash outflow associated with a capital investment?

Putnam Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, $2,000 for years 6 through 10. Required: Calculate the project's payback period in years.

Assuming taxes are a consideration, which of the following would not have an overall positive effect on cash inflows when a company is computing the net present value of a potential capital investment?

Deciding whether or not an investment meets a predetermined company standard is called a:

Which of the following statements is true regarding the concept of the time value of money?

Introduction to Managerial Accounting

Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows

Job Costing, Process Costing, and Operations Costing

Activity-Based Costing

Cost Behavior

Cost-Volume-Profit Analysis

Relevant Costs and Product Planning Decisions

The Use of Budgets in Planning and Decision Making

Variance Analysis A Tool for Cost Control and Performance Evaluation

Decentralization, Performance Evaluation, and the Balanced Scorecard

Financial Statement Analysis

The Statement of Cash Flows

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Exam 8: Long-Term Capital Investment Decisions

When using the NPV method, the interest rate used to discount cash flows shouldnot be thought of as the:

Why do capital investment decisions require consideration of the time value of money?

Bluebird Inc. requires all capital investments to generate an internal rate of return of 14%. Bluebird is currently considering an investment that is expected to generate annual cash inflows of $12,000 for 5 years. The cost of the investment should not exceed:

The calculation of the profitability index (PI) is most helpful for which type of decisions?

Which of the following statements comparing the NPV and IRR methods is false?

Adam's Manufacturing has the following information available regarding one of the projects it is considering: The profitability index of this project is:

The Mayfield Company is considering a project that will require an initial investment of $24,000 and is expected to generate future cash flows of $3,000 each year for the next 10 years. Required: Calculate the payback period in years.

If the net present value of an investment is negative, then:

Which of the following statements is false regarding the impact of taxes on net present value computations?

The length of time needed for a long-term project to recapture its initial investment amount is called the:

Which of the following is not a typical cash outflow associated with a capital investment?

Putnam Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, $2,000 for years 6 through 10. Required: Calculate the project's payback period in years.

Assuming taxes are a consideration, which of the following would not have an overall positive effect on cash inflows when a company is computing the net present value of a potential capital investment?

Deciding whether or not an investment meets a predetermined company standard is called a:

Which of the following statements is true regarding the concept of the time value of money?

Introduction to Managerial Accounting

Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows

Job Costing, Process Costing, and Operations Costing

Activity-Based Costing

Cost Behavior

Cost-Volume-Profit Analysis

Relevant Costs and Product Planning Decisions

The Use of Budgets in Planning and Decision Making

Variance Analysis A Tool for Cost Control and Performance Evaluation

Decentralization, Performance Evaluation, and the Balanced Scorecard

Financial Statement Analysis

The Statement of Cash Flows

Filters