Question 1

The ___________ the discount rate used in a net present value analysis, the ___________ the present value of all future cash flows.

Accepted Answer

A)  lower, higher 
B)  lower, lower 
C)  higher, lower 
D)  EITHER lower, higher OR higher, lower 
A)  lower, higher 
B)  lower, lower 
C)  higher, lower 
D)  EITHER lower, higher OR higher, lower D

Question 2

Both the net present value method and the internal rate of return method focus on:

Accepted Answer

A)  periodic depreciation charges. 
B)  cash flows. 
C)  annuity discount factors. 
D)  total acquisition costs. 
A)  periodic depreciation charges. 
B)  cash flows. 
C)  annuity discount factors. 
D)  total acquisition costs. B

Question 3

When analysing capital expenditure proposals, if a firm is interested in cash inflows and cash outflows, depreciation resulting from the expenditure would always be treated as a cash outflow.

Accepted Answer

A) True 
 B)False  False

Question 4

Which of the following statements is true?

Accepted Answer

A)  For tax purposes, a business must use the straight-line method of depreciation. 
B)  For tax purposes, a business must use the diminishing value method of depreciation. 
C)  For tax purposes, a business may use either the straight line or diminishing value method of depreciation. 
D)  The depreciation method used for tax purposes must be the same as that used for external reporting. 
A)  For tax purposes, a business must use the straight-line method of depreciation. 
B)  For tax purposes, a business must use the diminishing value method of depreciation. 
C)  For tax purposes, a business may use either the straight line or diminishing value method of depreciation. 
D)  The depreciation method used for tax purposes must be the same as that used for external reporting.

Question 5

The mayor of Smalltown, Western Australia, is considering the purchase of a computer system to automate the city's rate collections. The system costs $75 000 and has an estimated life of five years. The mayor estimates the following savings will result if the system is purchased.  
If Smalltown uses a 10 per cent discount rate for capital budgeting decisions, what can be said about the internal rate of return (IRR) if the net present value at 12 per cent is positive?

Accepted Answer

A)  The IRR is greater than 12 per cent. 
B)  The IRR is between 10 per cent and 12 per cent. 
C)  The IRR is less than 10 per cent. 
D)  Insufficient information to determine. 
A)  The IRR is greater than 12 per cent. 
B)  The IRR is between 10 per cent and 12 per cent. 
C)  The IRR is less than 10 per cent. 
D)  Insufficient information to determine.

Question 6

The internal rate of return for a proposed investment can be calculated:

Accepted Answer

A)  if the cash flow table is identical to future values of a series of cash flows. 
B)  if the future value of a series of cash flows can be arrived at by the annuity accumulation factor. 
C)  by finding a discount rate that yields a zero net present value for a proposed investment. 
D)  by finding a discount rate that yields a positive net present value for a proposed investment. 
A)  if the cash flow table is identical to future values of a series of cash flows. 
B)  if the future value of a series of cash flows can be arrived at by the annuity accumulation factor. 
C)  by finding a discount rate that yields a zero net present value for a proposed investment. 
D)  by finding a discount rate that yields a positive net present value for a proposed investment.

Question 7

Which method of capital expenditure appraisal is used to rank projects of different initial outlays?

Accepted Answer

A)  Profitability index 
B)  Internal rate of return 
C)  Accounting rate of return 
D)  Net present value 
A)  Profitability index 
B)  Internal rate of return 
C)  Accounting rate of return 
D)  Net present value

Question 8

When managers use a discounted cash flow analysis method for investment projects, which of the following factors are not considered when projecting cash flows?

Accepted Answer

A)  Knowledge of market conditions 
B)  Historical accounting 
C)  Likely reactions from competitors 
D)  Economic trends 
A)  Knowledge of market conditions 
B)  Historical accounting 
C)  Likely reactions from competitors 
D)  Economic trends

Question 9

Which of the following is not an assumption of the models that analyse cash flows for capital investment decisions?

Accepted Answer

A)  It is assumed that all cash flows occur at the same time each year. 
B)  It is assumed that all cash flows occur at the beginning of the year. 
C)  Cash flows are assumed to be in the same period as accrual accounting revenue and expenses are recognised. 
D)  Tax implications of cash flows should be included. 
A)  It is assumed that all cash flows occur at the same time each year. 
B)  It is assumed that all cash flows occur at the beginning of the year. 
C)  Cash flows are assumed to be in the same period as accrual accounting revenue and expenses are recognised. 
D)  Tax implications of cash flows should be included.

Question 10

Comparisons between net present value (NPV) and internal rate of return (IRR) methods
Both the NPV and IRR methods have a reinvestment assumption.
i. State the assumption for each method.
ii. One of the advantages of the NPV method over the IRR method is the ability to adjust for risk considerations. Explain how this can be done.

Accepted Answer

i. In the NPV method, cash flows are ass

Question 11

A small business is likely to have capital expenditure processes that are likely to be:

Accepted Answer

A)  very strict. 
B)  highly structured. 
C)  informal. 
D)  highly formalised. 
A)  very strict. 
B)  highly structured. 
C)  informal. 
D)  highly formalised.

Question 12

Consider the following statements. Since money has a time value:
i. businesses will take tax deductions as early as possible.
ii. businesses will take tax deductions as late as possible.
iii. businesses will obtain a greater tax benefit by using the diminishing value method of depreciation.
Which of the above statements is/are correct?

Accepted Answer

A)  i 
B)  ii 
C)  i and iii 
D)  ii and iii 
A)  i 
B)  ii 
C)  i and iii 
D)  ii and iii

Question 13

Calculate the future value of money from the following:

Accepted Answer

A)  $150.00 
B)  $133.10 
C)  $161.05 
D)  $155.65 
A)  $150.00 
B)  $133.10 
C)  $161.05 
D)  $155.65

Question 14

Suppose a firm has an asset that originally cost $5000 and currently has accumulated depreciation of $2000. The firm is subject to a 28 per cent income tax rate. Suppose the firm sells the asset for $2000. What was the book value before sale?

Accepted Answer

A)  $5000 
B)  $2000 
C)  $3000 
D)  $1500 
A)  $5000 
B)  $2000 
C)  $3000 
D)  $1500

Question 15

Which of the following are limitations of traditional capital expenditure analysis?
i. Hurdle rates are too high.
ii. Rejection assumes the status quo will apply.
iii. There is often a high degree of uncertainty in cash flow forecasts.

Accepted Answer

A)  i 
B)  i and ii 
C)  ii and iii 
D)  All of the given answers 
A)  i 
B)  i and ii 
C)  ii and iii 
D)  All of the given answers

Question 16

Which of the following reasons would explain the popularity of the payback technique?

Accepted Answer

A)  It is simple to calculate. 
B)  Its results are easy to interpret and understand. 
C)  It provides a short-term filter to eliminate some projects. 
D)  All of the given answers 
A)  It is simple to calculate. 
B)  Its results are easy to interpret and understand. 
C)  It provides a short-term filter to eliminate some projects. 
D)  All of the given answers

Question 17

What will $5000 invested at 10 per cent today accumulate to at the end of five years?

Accepted Answer

A)  $8810 
B)  $5500 
C)  $8055 
D)  $30 525 
A)  $8810 
B)  $5500 
C)  $8055 
D)  $30 525

Question 18

Which of the following statements regarding the assumptions underlying discounted cash flow analysis is/are true?
i. All cash flows are treated as though they occur at year-end.
ii. Cash flows associated with the investment project are treated as if they are known with certainty.
iii. The discount rate is always the same as the average cost of capital.

Accepted Answer

A)  i 
B)  i and ii 
C)  ii 
D)  All of the given answers 
A)  i 
B)  i and ii 
C)  ii 
D)  All of the given answers

Question 19

The manager of Malan Pty Ltd wants to buy a new machine to replace the one currently being used. The new machine will cost $100 000 with no disposal value at the end of a five-year useful life. The manager estimates that the machine will reduce annual operating costs by $30 000. Depreciation will be $20 000 per year for five years. The tax rate for each year is expected to be 20 per cent and the company has an after-tax hurdle rate of 12 per cent. What is the after-tax payback period of the machine?

Accepted Answer

A)  3.33 years 
B)  3.57 years 
C)  4.17 years 
D)  4.55 years 
A)  3.33 years 
B)  3.57 years 
C)  4.17 years 
D)  4.55 years

Question 20

The cost of capital is the maximum return needed to compensate suppliers of capital for committing resources to a project.

Accepted Answer

A) True 
 B)False

The _ the discount rate used in a net present value analysis, the _ the present value of all future cash flows.

Both the net present value method and the internal rate of return method focus on:

When analysing capital expenditure proposals, if a firm is interested in cash inflows and cash outflows, depreciation resulting from the expenditure would always be treated as a cash outflow.

Which of the following statements is true?

The internal rate of return for a proposed investment can be calculated:

Which method of capital expenditure appraisal is used to rank projects of different initial outlays?

When managers use a discounted cash flow analysis method for investment projects, which of the following factors are not considered when projecting cash flows?

Which of the following is not an assumption of the models that analyse cash flows for capital investment decisions?

A small business is likely to have capital expenditure processes that are likely to be:

Calculate the future value of money from the following:

Suppose a firm has an asset that originally cost $5000 and currently has accumulated depreciation of $2000. The firm is subject to a 28 per cent income tax rate. Suppose the firm sells the asset for $2000. What was the book value before sale?

Which of the following are limitations of traditional capital expenditure analysis? i. Hurdle rates are too high. ii. Rejection assumes the status quo will apply. iii. There is often a high degree of uncertainty in cash flow forecasts.

Which of the following reasons would explain the popularity of the payback technique?

What will $5000 invested at 10 per cent today accumulate to at the end of five years?

The cost of capital is the maximum return needed to compensate suppliers of capital for committing resources to a project.

Management Accounting: Information for Creating Value and Managing Resources

Management Accounting: Cost Terms and Concepts

Cost Behaviour, Cost Drivers and Cost Estimation

Product Costing Systems

Process Costing and Operation Costing

Service Costing

A Closer Look at Overhead Costs

Activity-Based Costing

Budgeting Systems

Standard Costs for Control: Direct Material and Direct Labour

Standard Costs for Control: Flexible Budgets and Manufacturing Overhead

Managing and Reporting Performance

Financial Performance Measures and Incentive Schemes

Strategic Performance Measurement Systems

Managing Suppliers and Customers

Managing Costs and Quality

Sustainability and Management Accounting

Cost Volume Profit Analysis

Information for Decisions: Relevant Costs and Benefits

Pricing and Product Mix Decisions

Filters

Exam 21: Information for Capital Expenditure Decisions

The ___________ the discount rate used in a net present value analysis, the ___________ the present value of all future cash flows.

Both the net present value method and the internal rate of return method focus on:

When analysing capital expenditure proposals, if a firm is interested in cash inflows and cash outflows, depreciation resulting from the expenditure would always be treated as a cash outflow.

Which of the following statements is true?

The internal rate of return for a proposed investment can be calculated:

Which method of capital expenditure appraisal is used to rank projects of different initial outlays?

When managers use a discounted cash flow analysis method for investment projects, which of the following factors are not considered when projecting cash flows?

Which of the following is not an assumption of the models that analyse cash flows for capital investment decisions?

A small business is likely to have capital expenditure processes that are likely to be:

Calculate the future value of money from the following:

Suppose a firm has an asset that originally cost $5000 and currently has accumulated depreciation of $2000. The firm is subject to a 28 per cent income tax rate. Suppose the firm sells the asset for $2000. What was the book value before sale?

Which of the following are limitations of traditional capital expenditure analysis? i. Hurdle rates are too high. ii. Rejection assumes the status quo will apply. iii. There is often a high degree of uncertainty in cash flow forecasts.

Which of the following reasons would explain the popularity of the payback technique?

What will $5000 invested at 10 per cent today accumulate to at the end of five years?

The cost of capital is the maximum return needed to compensate suppliers of capital for committing resources to a project.

Management Accounting: Information for Creating Value and Managing Resources

Management Accounting: Cost Terms and Concepts

Cost Behaviour, Cost Drivers and Cost Estimation

Product Costing Systems

Process Costing and Operation Costing

Service Costing

A Closer Look at Overhead Costs

Activity-Based Costing

Budgeting Systems

Standard Costs for Control: Direct Material and Direct Labour

Standard Costs for Control: Flexible Budgets and Manufacturing Overhead

Managing and Reporting Performance

Financial Performance Measures and Incentive Schemes

Strategic Performance Measurement Systems

Managing Suppliers and Customers

Managing Costs and Quality

Sustainability and Management Accounting

Cost Volume Profit Analysis

Information for Decisions: Relevant Costs and Benefits

Pricing and Product Mix Decisions

Filters

The _ the discount rate used in a net present value analysis, the _ the present value of all future cash flows.