Question 1

Capital budgeting decisions are risky because:

Accepted Answer

A)  The outcome is uncertain. 
B)  Large amounts of money are usually involved. 
C)  The investment involves a long-term commitment. 
D)  The decision could be difficult or impossible to reverse. 
E)  All of these are true 
A)  The outcome is uncertain. 
B)  Large amounts of money are usually involved. 
C)  The investment involves a long-term commitment. 
D)  The decision could be difficult or impossible to reverse. 
E)  All of these are true

Question 2

A minimum acceptable rate of return for an investment decision is called the:

Accepted Answer

A)  Internal rate of return. 
B)  Average rate of return. 
C)  Hurdle rate. 
D)  Maximum rate. 
E)  Payback rate. 
A)  Internal rate of return. 
B)  Average rate of return. 
C)  Hurdle rate. 
D)  Maximum rate. 
E)  Payback rate.

Question 3

If the internal rate of return (IRR) of an investment is below the hurdle rate, the project should be accepted.

Accepted Answer

A) True 
 B)False

Question 4

A company is evaluating the purchase of a machine for $900,000 with a six-year useful life and no salvage value. The company uses straight-line depreciation and it assumes that the annual net cash flow from using the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is the company's average investment?

Accepted Answer

($900,000

Question 5

What is capital budgeting? Why are capital budgeting decisions often difficult and risky?

Accepted Answer

Capital budgeting is the process of anal

Question 6

A sunk cost will change with a future course of action.

Accepted Answer

A) True 
 B)False

Question 7

Fleming Company had the following results of operations for the past year:
A foreign company (whose sales will not affect Fleming's regular sales) offers to buy 2,000 units at $5.00 per unit. In addition to variable manufacturing costs, there would be shipping costs of $1,200 in total on these units. Should Fleming take this order? Explain.

Accepted Answer

Thus, since operating income w

Question 8

When making capital budgeting decisions, companies usually prefer shorter payback periods. Explain why shorter payback periods are desirable.

Accepted Answer

Shorter payback periods increase return

Question 9

The accounting rate of return is calculated as:

Accepted Answer

A)  The after-tax income divided by the total investment. 
B)  The after-tax income divided by the annual average investment. 
C)  The cash flows divided by the annual average investment. 
D)  The cash flows divided by the total investment. 
E)  The annual average investment divided by the after-tax income. 
A)  The after-tax income divided by the total investment. 
B)  The after-tax income divided by the annual average investment. 
C)  The cash flows divided by the annual average investment. 
D)  The cash flows divided by the total investment. 
E)  The annual average investment divided by the after-tax income.

Question 10

Incremental costs should be considered in a make or buy decision.

Accepted Answer

A) True 
 B)False

Question 11

Two investments with exactly the same payback periods are always equally valuable to an investor.

Accepted Answer

A) True 
 B)False

Question 12

A company purchases a machine for $1,000,000. The machine has an expected life of 9 years and no salvage value. The company anticipates a yearly net income of $60,000 after taxes of 30% to be received uniformly throughout each year. What is the accounting rate of return?

Accepted Answer

Accounting rate of r

Question 13

How does the calculation of break-even time (BET) differ from the calculation of payback period (PBP)?

Accepted Answer

The calculation of BET adjusts

Question 14

Capital budgeting is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

Accepted Answer

A) True 
 B)False

Question 15

After-tax net income divided by the annual average investment in an investment, is the:

Accepted Answer

A)  Net present value rate. 
B)  Payback rate. 
C)  Accounting rate of return. 
D)  Earnings from investment. 
E)  Profit rate. 
A)  Net present value rate. 
B)  Payback rate. 
C)  Accounting rate of return. 
D)  Earnings from investment. 
E)  Profit rate.

Question 16

An out-of-pocket cost requires a current and/or future outlay of cash.

Accepted Answer

A) True 
 B)False

Question 17

Capital budgeting decisions are risky because the outcome is uncertain, large amounts are usually involved, the investment involves a long-term commitment, and the decision could be difficult or impossible to reverse.

Accepted Answer

A) True 
 B)False

Question 18

In evaluating capital budgeting alternatives, there are two primary methods that do not consider the time value of money. These methods are _______________ and _________________. There are also two primary methods that consider the time value of money; these are ___________________ and ______________________.

Accepted Answer

Payback Period; Acco

Question 19

A machine costs $180,000 and is expected to yield an after-tax net income of $10,800 each year. Management estimates the machine will have a ten-year life, a $20,000 salvage value, and straight-line depreciation is used. Compute the accounting rate of return for the investment.

Accepted Answer

A)  12.0%. 
B)  26.8%. 
C)  11.8%. 
D)  10.8%. 
E)  28.8%. 
A)  12.0%. 
B)  26.8%. 
C)  11.8%. 
D)  10.8%. 
E)  28.8%.

Question 20

Relevant benefits refer to the additional or incremental revenue generated by selecting a particular course or action over another.

Accepted Answer

A) True 
 B)False

Exam 25: Capital Budgeting and Managerial Decisions

Capital budgeting decisions are risky because:

A minimum acceptable rate of return for an investment decision is called the:

If the internal rate of return (IRR) of an investment is below the hurdle rate, the project should be accepted.

What is capital budgeting? Why are capital budgeting decisions often difficult and risky?

A sunk cost will change with a future course of action.

When making capital budgeting decisions, companies usually prefer shorter payback periods. Explain why shorter payback periods are desirable.

The accounting rate of return is calculated as:

Incremental costs should be considered in a make or buy decision.

Two investments with exactly the same payback periods are always equally valuable to an investor.

A company purchases a machine for $1,000,000. The machine has an expected life of 9 years and no salvage value. The company anticipates a yearly net income of $60,000 after taxes of 30% to be received uniformly throughout each year. What is the accounting rate of return?

How does the calculation of break-even time (BET) differ from the calculation of payback period (PBP)?

Capital budgeting is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

After-tax net income divided by the annual average investment in an investment, is the:

An out-of-pocket cost requires a current and/or future outlay of cash.

Capital budgeting decisions are risky because the outcome is uncertain, large amounts are usually involved, the investment involves a long-term commitment, and the decision could be difficult or impossible to reverse.

A machine costs $180,000 and is expected to yield an after-tax net income of $10,800 each year. Management estimates the machine will have a ten-year life, a $20,000 salvage value, and straight-line depreciation is used. Compute the accounting rate of return for the investment.

Relevant benefits refer to the additional or incremental revenue generated by selecting a particular course or action over another.

Accounting in Business

Analyzing and Recording Transactions

Adjusting Accounts and Preparing Financial Statements

Completing the Accounting Cycle

Accounting for Merchandising Operations

Inventories and Cost of Sales

Accounting Information Systems

Cash and Internal Controls

Accounting for Receivables

Long-Term Assets

Current Liabilities and Payroll Accounting

Accounting for Partnerships

Accounting for Corporations

Long-Term Liabilities

Investments and International Operations

Statement of Cash Flows

Analysis of Financial Statements

Managerial Accounting Concepts and Principles

Job Order Cost Accounting

Process Cost Accounting

Cost Allocation and Performance Measurement

Cost-Volume-Profit Analysis

Master Budgets and Planning

Flexible Budgets and Standard Costs

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