Question 1

There is only one method of evaluating capital budgeting decisions.

Accepted Answer

A) True 
 B)False

Question 2

A postaudit is:

Accepted Answer

A)  An evaluation of the effectiveness of the budgeting committee. 
B)  An analysis of the capital budgeting method used. 
C)  An evaluation of a project's actual results versus its projected results. 
D)  A review by outside auditors to assess efficiency. 
E)  An analysis of risk changes over the life of an investment. 
A)  An evaluation of the effectiveness of the budgeting committee. 
B)  An analysis of the capital budgeting method used. 
C)  An evaluation of a project's actual results versus its projected results. 
D)  A review by outside auditors to assess efficiency. 
E)  An analysis of risk changes over the life of an investment.

Question 3

All capital investment evaluation methods use the time value of money concept.

Accepted Answer

A) True 
 B)False

Question 4

The rate that yields a net present value of zero for an investment is the:

Accepted Answer

A)  Internal rate of return. 
B)  Accounting rate of return. 
C)  Net present value rate of return. 
D)  Zero rate of return. 
E)  Payback rate of return. 
A)  Internal rate of return. 
B)  Accounting rate of return. 
C)  Net present value rate of return. 
D)  Zero rate of return. 
E)  Payback rate of return.

Question 5

A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.

Accepted Answer

A) True 
 B)False

Question 6

The payback method, unlike the net present value method, ignores cash flows after the point of cost recovery.

Accepted Answer

A) True 
 B)False

Question 7

An estimate of an asset's value to the company, calculated by discounting the future cash flows from the investment at the project's required rate of return and then subtracting the initial amount of the investment, is known as:

Accepted Answer

A)  Annual net cash flows. 
B)  Rate of return on investment. 
C)  Net present value. 
D)  Payback period. 
E)  Unamortized carrying value. 
A)  Annual net cash flows. 
B)  Rate of return on investment. 
C)  Net present value. 
D)  Payback period. 
E)  Unamortized carrying value.

Question 8

Vextra Corporation is considering the purchase of new equipment costing $35,000. The projected annual cash inflow is $11,000, to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Vextra requires a 12% return on its investments. The present value of an annuity of $1 for different periods follows:   What is the net present value of the machine?

Accepted Answer

A)  $(33,410). 
B)  $(3,100). 
C)  $35,000. 
D)  $3,410. 
E)  $(1,590). 
A)  $(33,410). 
B)  $(3,100). 
C)  $35,000. 
D)  $3,410. 
E)  $(1,590).

Question 9

The time value of money is considered when calculating the payback period of an investment.

Accepted Answer

A) True 
 B)False

Question 10

The payback period is the amount of time for the investment to generate enough net cash flow to return the initial cost of investment.

Accepted Answer

A) True 
 B)False

Question 11

A company is considering the purchase of a new machine for $48,000. Management predicts that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $12,000 per year including depreciation of $3,000 per year. Income tax expense is $1,600 per year based on a tax rate of 40%. What is the payback period for the new machine?

Accepted Answer

A)  20.0 years. 
B)  6.0 years. 
C)  7.5 years. 
D)  12.0 years. 
E)  8.9 years. 
A)  20.0 years. 
B)  6.0 years. 
C)  7.5 years. 
D)  12.0 years. 
E)  8.9 years.

Question 12

A new manufacturing machine is expected to cost $278,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the accounting rate of return for the investment.

Accepted Answer

A)  22.7%. 
B)  23.4%. 
C)  46.9%. 
D)  12.2%. 
E)  24.5%. 
A)  22.7%. 
B)  23.4%. 
C)  46.9%. 
D)  12.2%. 
E)  24.5%.

Question 13

Porter Co. is analyzing two potential investments.   The payback period in years for Project X is:

Accepted Answer

A)  2.00. 
B)  3.83. 
C)  3.50. 
D)  2.83. 
E)  4.00. 
A)  2.00. 
B)  3.83. 
C)  3.50. 
D)  2.83. 
E)  4.00.

Question 14

Porter Co. is analyzing two potential investments.   If the company is using the payback period method and it requires a payback of three years or less, which project(s) should be selected?

Accepted Answer

A)  Project Y. 
B)  Project X. 
C)  Both X and Y are acceptable projects. 
D)  Neither X nor Y is an acceptable project. 
E)  Project Y because it has a lower initial investment. 
A)  Project Y. 
B)  Project X. 
C)  Both X and Y are acceptable projects. 
D)  Neither X nor Y is an acceptable project. 
E)  Project Y because it has a lower initial investment.

Question 15

Tressor Company is considering a 5-year project. The company plans to invest $90,000 now and it forecasts cash flows for each year of $27,000. The company requires that investments yield a discount rate of at least 14%. Selected factors for a present value of an annuity of $1 for five years are shown below:   Calculate the internal rate of return to determine whether it should accept this project.

Accepted Answer

A)  The project should be accepted because it will earn more than 14%. 
B)  The project should be accepted because it will earn more than 10%. 
C)  The project will earn more than 12% but less than 14%. At a hurdle rate of 14%, the project should be rejected. 
D)  The project should be rejected because it will earn less than 14%. 
E)  The project should be rejected because it will not earn exactly 14%. 
A)  The project should be accepted because it will earn more than 14%. 
B)  The project should be accepted because it will earn more than 10%. 
C)  The project will earn more than 12% but less than 14%. At a hurdle rate of 14%, the project should be rejected. 
D)  The project should be rejected because it will earn less than 14%. 
E)  The project should be rejected because it will not earn exactly 14%.

Question 16

Watson Corporation is considering buying a machine for $25,000. Its estimated useful life is 5 years, with no salvage value. Watson anticipates annual net income after taxes of $1,500 from the new machine. What is the accounting rate of return assuming that Watson uses straight-line depreciation and that income is earned uniformly throughout each year?

Accepted Answer

A)  6.0%. 
B)  8.0%. 
C)  8.5%. 
D)  10.0%. 
E)  12.0%. 
A)  6.0%. 
B)  8.0%. 
C)  8.5%. 
D)  10.0%. 
E)  12.0%.

Question 17

Which of the following cash flows is not considered when using the net present value method?

Accepted Answer

A)  Future cash inflows. 
B)  Future cash outflows. 
C)  Past cash outflows. 
D)  Non-uniform cash inflows. 
E)  Future year-end cash flows. 
A)  Future cash inflows. 
B)  Future cash outflows. 
C)  Past cash outflows. 
D)  Non-uniform cash inflows. 
E)  Future year-end cash flows.

Question 18

A new manufacturing machine is expected to cost $278,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the payback period for the purchase.

Accepted Answer

A)  8.7 years. 
B)  3.8 years. 
C)  4.2 years. 
D)  7.3 years. 
E)  5.4 years. 
A)  8.7 years. 
B)  3.8 years. 
C)  4.2 years. 
D)  7.3 years. 
E)  5.4 years.

Question 19

A capital budgeting method that considers how quickly a project recovers costs is known as ________. An enhancement to this method that also considers the time value of money is called ________.

Accepted Answer

payback period; brea

Question 20

A company is considering purchasing a machine for $85,000. The machine is expected to generate a net after-tax income of $11,250 per year. Depreciation expense would be $8,500. What is the payback period for this machine?

Accepted Answer

$85,000/($

There is only one method of evaluating capital budgeting decisions.

A postaudit is:

All capital investment evaluation methods use the time value of money concept.

The rate that yields a net present value of zero for an investment is the:

A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.

The payback method, unlike the net present value method, ignores cash flows after the point of cost recovery.

An estimate of an asset's value to the company, calculated by discounting the future cash flows from the investment at the project's required rate of return and then subtracting the initial amount of the investment, is known as:

The time value of money is considered when calculating the payback period of an investment.

The payback period is the amount of time for the investment to generate enough net cash flow to return the initial cost of investment.

A new manufacturing machine is expected to cost $278,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the accounting rate of return for the investment.

Porter Co. is analyzing two potential investments. The payback period in years for Project X is:

Porter Co. is analyzing two potential investments. If the company is using the payback period method and it requires a payback of three years or less, which project(s) should be selected?

Which of the following cash flows is not considered when using the net present value method?

A new manufacturing machine is expected to cost $278,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the payback period for the purchase.

A capital budgeting method that considers how quickly a project recovers costs is known as . An enhancement to this method that also considers the time value of money is called .

A company is considering purchasing a machine for $85,000. The machine is expected to generate a net after-tax income of $11,250 per year. Depreciation expense would be $8,500. What is the payback period for this machine?

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

Exam 11: Capital Budgeting and Investment Analysis

There is only one method of evaluating capital budgeting decisions.

A postaudit is:

All capital investment evaluation methods use the time value of money concept.

The rate that yields a net present value of zero for an investment is the:

A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.

The payback method, unlike the net present value method, ignores cash flows after the point of cost recovery.

An estimate of an asset's value to the company, calculated by discounting the future cash flows from the investment at the project's required rate of return and then subtracting the initial amount of the investment, is known as:

The time value of money is considered when calculating the payback period of an investment.

The payback period is the amount of time for the investment to generate enough net cash flow to return the initial cost of investment.

A new manufacturing machine is expected to cost $278,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the accounting rate of return for the investment.

Porter Co. is analyzing two potential investments. The payback period in years for Project X is:

Porter Co. is analyzing two potential investments. If the company is using the payback period method and it requires a payback of three years or less, which project(s) should be selected?

Which of the following cash flows is not considered when using the net present value method?

A new manufacturing machine is expected to cost $278,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the payback period for the purchase.

A capital budgeting method that considers how quickly a project recovers costs is known as ________. An enhancement to this method that also considers the time value of money is called ________.

A company is considering purchasing a machine for $85,000. The machine is expected to generate a net after-tax income of $11,250 per year. Depreciation expense would be $8,500. What is the payback period for this machine?

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

A capital budgeting method that considers how quickly a project recovers costs is known as . An enhancement to this method that also considers the time value of money is called .