Question 1

The payback period method, unlike the net present value method, does not ignore cash flows after the point of cost recovery.

Accepted Answer

A) True 
 B)False

Question 2

A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from this investment are $36,000 (year 1), $30,000 (year 2), $18,000 (year 3), $12,000 (year 4) and $6,000 (year 5). The payback period is:

Accepted Answer

A)  4.50 years. 
B)  4.25 years. 
C)  3.50 years. 
D)  3.00 years. 
E)  2.50 years. 
A)  4.50 years. 
B)  4.25 years. 
C)  3.50 years. 
D)  3.00 years. 
E)  2.50 years.

Question 3

Accounting rate of return gives managers an estimate of how soon they will recover their initial investment.

Accepted Answer

A) True 
 B)False

Question 4

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 5

A company is trying to decide which of two new product lines to introduce in the coming year. The company requires a 12% return on investment. The predicted revenue and cost data for each product line follows:

The company has a 30% tax rate and it uses the straight-line depreciation method. The present value of an annuity of 1 for 5 years at 12% is 3.6048. Compute the net present value for each piece of equipment under each of the two product lines. Which, if either of these two investments is acceptable?

Accepted Answer

@#IMG-DLM& *Annual depreciation: A $2,500,000/5 yr

Question 6

Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.

Accepted Answer

A) True 
 B)False

Question 7

All projects with a profitability index of less than 1 should be accepted.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

The answer of ________ is the process of analyzing alternative...

Question 9

Capital budgeting decisions usually involve analysis of:

Accepted Answer

A)  Cash outflows only. 
B)  Short-term investments only. 
C)  Long-term investments only. 
D)  Investments with certain outcomes only. 
E)  Operating revenues. 
A)  Cash outflows only. 
B)  Short-term investments only. 
C)  Long-term investments only. 
D)  Investments with certain outcomes only. 
E)  Operating revenues.

Question 10

The following present value factors are provided for use in this problem.   Xavier Co. wants to purchase a machine for $37,000 with a four year life and a $1,000 salvage value. Xavier requires an 8% return on investment. The expected year-end net cash flows are $12,000 in each of the four years. What is the machine's net present value?

Accepted Answer

A)  $3,480. 
B)  $2,745. 
C)  $40,480. 
D)  ($3,480). 
E)  ($2,745). 
A)  $3,480. 
B)  $2,745. 
C)  $40,480. 
D)  ($3,480). 
E)  ($2,745).

Question 11

A machine costs $180,000 and will have an eight-year life, a $20,000 salvage value, and straight-line depreciation is used. Management estimates the machine will yield an after-tax net income of $12,500 each year. Compute the accounting rate of return for the investment.

Accepted Answer

A)  12.5%. 
B)  26.8%. 
C)  11.8%. 
D)  10.8%. 
E)  22.5%. 
A)  12.5%. 
B)  26.8%. 
C)  11.8%. 
D)  10.8%. 
E)  22.5%.

Question 12

Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments. The company is considering two different investments. Each require an initial investment of $15,000 and will produce cash flows as follows:   The present value factors of $1 each year at 15% are:
  The present value of an annuity of $1 for 3 years at 15% is 2.2832
Which investment should Alfarsi choose?

Accepted Answer

A)  Only Investment A is acceptable. 
B)  Only Investment B is acceptable. 
C)  Both investments are acceptable, but A should be selected because it has the greater net present value. 
D)  Both investments are acceptable, but B should be selected because it has the greater net present value. 
E)  Neither machine is acceptable. 
A)  Only Investment A is acceptable. 
B)  Only Investment B is acceptable. 
C)  Both investments are acceptable, but A should be selected because it has the greater net present value. 
D)  Both investments are acceptable, but B should be selected because it has the greater net present value. 
E)  Neither machine is acceptable.

Question 13

Two investments with exactly the same payback periods are not equally valuable to an investor because the timing of net cash flows may be different.

Accepted Answer

A) True 
 B)False

Question 14

The payback period method of evaluating an investment ignores cash inflows after the point where an investment's costs are fully recovered.

Accepted Answer

A) True 
 B)False

Question 15

Neither the net present value nor the internal rate of return methods of evaluating investments consider the time value of money.

Accepted Answer

A) True 
 B)False

Question 16

A company buys a machine for $60,000 that has an expected life of 9 years and no salvage value. The company uses straight-line depreciation. The company anticipates a yearly net income of $2,850 after taxes of 30%, with the cash flows to be received evenly throughout each year. What is the accounting rate of return?

Accepted Answer

A)  2.85%. 
B)  4.75%. 
C)  6.65%. 
D)  9.50%. 
E)  42.75%. 
A)  2.85%. 
B)  4.75%. 
C)  6.65%. 
D)  9.50%. 
E)  42.75%.

Question 17

The following present value factors are provided for use in this problem.   Cliff Co. wants to purchase a machine for $40,000, but needs to earn a return of 8%. The expected year-end net cash flows are $12,000 in each of the first three years, and $16,000 in the fourth year. What is the machine's net present value?

Accepted Answer

A)  $(9,075). 
B)  $2,685. 
C)  $42,685. 
D)  $(28,240). 
E)  $52,000. 
A)  $(9,075). 
B)  $2,685. 
C)  $42,685. 
D)  $(28,240). 
E)  $52,000.

Question 18

The following relates to a proposed equipment purchase:   The annual average investment amount used to calculate the accounting rate of return is:

Accepted Answer

A)  $72,000 
B)  $70,000 
C)  $37,000 
D)  $74,000 
E)  $48,950 
A)  $72,000 
B)  $70,000 
C)  $37,000 
D)  $74,000 
E)  $48,950

Question 19

Turk Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows:   Turk Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575. Which machine should Turk purchase?

Accepted Answer

A)  Only Machine A is acceptable. 
B)  Only Machine B is acceptable. 
C)  Both machines are acceptable, but A should be selected because it has the greater net present value. 
D)  Both machines are acceptable, but B should be selected because it has the greater net present value. 
E)  Neither machine is acceptable. 
A)  Only Machine A is acceptable. 
B)  Only Machine B is acceptable. 
C)  Both machines are acceptable, but A should be selected because it has the greater net present value. 
D)  Both machines are acceptable, but B should be selected because it has the greater net present value. 
E)  Neither machine is acceptable.

Question 20

A company is considering a proposal to invest $40,000 in a project that would provide the following net cash flows:
Year 1 $ 6,500
Year 2 12,700
Year 3 15,000
Year 4 12,800
Compute the project's payback period.

Accepted Answer

@#IMG-DLM& Payback period = 3

The payback period method, unlike the net present value method, does not ignore cash flows after the point of cost recovery.

A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from this investment are $36,000 (year 1), $30,000 (year 2), $18,000 (year 3), $12,000 (year 4) and $6,000 (year 5). The payback period is:

Accounting rate of return gives managers an estimate of how soon they will recover their initial investment.

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

Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.

All projects with a profitability index of less than 1 should be accepted.

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

Capital budgeting decisions usually involve analysis of:

A machine costs $180,000 and will have an eight-year life, a $20,000 salvage value, and straight-line depreciation is used. Management estimates the machine will yield an after-tax net income of $12,500 each year. Compute the accounting rate of return for the investment.

Two investments with exactly the same payback periods are not equally valuable to an investor because the timing of net cash flows may be different.

The payback period method of evaluating an investment ignores cash inflows after the point where an investment's costs are fully recovered.

Neither the net present value nor the internal rate of return methods of evaluating investments consider the time value of money.

The following relates to a proposed equipment purchase: The annual average investment amount used to calculate the accounting rate of return is:

A company is considering a proposal to invest $40,000 in a project that would provide the following net cash flows: Year 1 $ 6,500 Year 2 12,700 Year 3 15,000 Year 4 12,800 Compute the project's payback period.

Managerial Accounting Concepts and Principles

Job Order Costing and Analysis

Process Costing and Analysis

Activity-Based Costing and Analysis

Cost Behavior and Cost-Volume-Profit Analysis

Variable Costing and Analysis

Master Budgets and Performance Planning

Flexible Budgets and Standard Costs

Performance Measurement and Responsibility Accounting

Relevant Costing for Managerial Decisions

Reporting Cash Flows

Analysis of Financial Statements

Time Value of Money

Lean Principles and Accounting

Accounting for Business Transactions

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Exam 11: Capital Budgeting and Investment Analysis

The payback period method, unlike the net present value method, does not ignore cash flows after the point of cost recovery.

A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from this investment are $36,000 (year 1), $30,000 (year 2), $18,000 (year 3), $12,000 (year 4) and $6,000 (year 5). The payback period is:

Accounting rate of return gives managers an estimate of how soon they will recover their initial investment.

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

Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.

All projects with a profitability index of less than 1 should be accepted.

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

Capital budgeting decisions usually involve analysis of:

A machine costs $180,000 and will have an eight-year life, a $20,000 salvage value, and straight-line depreciation is used. Management estimates the machine will yield an after-tax net income of $12,500 each year. Compute the accounting rate of return for the investment.

Two investments with exactly the same payback periods are not equally valuable to an investor because the timing of net cash flows may be different.

The payback period method of evaluating an investment ignores cash inflows after the point where an investment's costs are fully recovered.

Neither the net present value nor the internal rate of return methods of evaluating investments consider the time value of money.

The following relates to a proposed equipment purchase: The annual average investment amount used to calculate the accounting rate of return is:

A company is considering a proposal to invest $40,000 in a project that would provide the following net cash flows: Year 1 $ 6,500 Year 2 12,700 Year 3 15,000 Year 4 12,800 Compute the project's payback period.

Managerial Accounting Concepts and Principles

Job Order Costing and Analysis

Process Costing and Analysis

Activity-Based Costing and Analysis

Cost Behavior and Cost-Volume-Profit Analysis

Variable Costing and Analysis

Master Budgets and Performance Planning

Flexible Budgets and Standard Costs

Performance Measurement and Responsibility Accounting

Relevant Costing for Managerial Decisions

Reporting Cash Flows

Analysis of Financial Statements

Time Value of Money

Lean Principles and Accounting

Accounting for Business Transactions

Filters