Question 1

Net present value is calculated using the:

Accepted Answer

A)  required rate of return. 
B)  internal rate of return. 
C)  return on investment. 
D)  return on assets employed. 
A)  required rate of return. 
B)  internal rate of return. 
C)  return on investment. 
D)  return on assets employed.

Question 2

Which of the following statements about income taxes and capital budgeting decisions is/are correct?
i. Income taxes influence the amount of cash inflows and outflows in capital budgeting decisions.
ii. Income taxes are not cash flows.
iii. The effect of income taxes is not necessarily in the same year as the cash flow.

Accepted Answer

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

Question 3

When undertaking a net present value analysis, the first step in the process would be to determine:

Accepted Answer

A)  the interest rate at the end of the proposed investment period. 
B)  the internal rate of return on comparable projects in the past. 
C)  the return on assets for the organisation. 
D)  the cash flows during each year of the proposed investment. 
A)  the interest rate at the end of the proposed investment period. 
B)  the internal rate of return on comparable projects in the past. 
C)  the return on assets for the organisation. 
D)  the cash flows during each year of the proposed investment.

Question 4

According to the net present value method, if the present value of cost savings exceeds the acquisition cost of a new machine:

Accepted Answer

A)  the old machine should be retained. 
B)  the new machine should be purchased. 
C)  the old machine should be sold off without adding the new machine. 
D)  the old machine should be scrapped. 
A)  the old machine should be retained. 
B)  the new machine should be purchased. 
C)  the old machine should be sold off without adding the new machine. 
D)  the old machine should be scrapped.

Question 5

Which of the following statements about the accounting rate of return method is/are correct?
i. It is a simple way of screening investment proposals.
ii. It is used by some managers because they believe this method parallels financial accounting statements.
iii. It is more accurate than the payback method because it considers the time value of money.

Accepted Answer

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

Question 6

Importance of time value of money
A friend explains the rationale behind a purchase in the following way.
'The cost of insulating the attic is $300. The savings will be $50 per year. Since the investment will be recovered in six years and I plan to live here for 10 years, the investment is a good one.'
Evaluate your friend's rationale in terms of the time value of money.

Accepted Answer

The friend has ignored the fact that mon

Question 7

Cubbies Pty Ltd is considering the purchase of a new machine to replace an old machine. Selected cost data pertaining to the two machines is provided below.  
At the end of four years, the company plans to discontinue the product line for which the machines are used. Income taxes can be ignored. Using the incremental cost approach, calculate the current period (i.e. year zero) cash flows relevant to acquiring the new machine.

Accepted Answer

A)  $9000 outflow 
B)  $4000 inflow 
C)  $3000 outflow 
D)  $5000 outflow 
A)  $9000 outflow 
B)  $4000 inflow 
C)  $3000 outflow 
D)  $5000 outflow

Question 8

Volo Ltd has recently purchased two machines at $50 000 each. Each machine has a useful life of 5 years, and will be fully depreciated at the end of their useful lives. The government provides an investment allowance of 15 per cent. The tax rate is 30 per cent. The net cash flow impact of the investment allowance is:

Accepted Answer

A)  $900. 
B)  $4500. 
C)  $5250. 
D)  $15 000. 
A)  $900. 
B)  $4500. 
C)  $5250. 
D)  $15 000.

Question 9

The technique that compares a project's actual cash flows with the cash flows predicted in the original capital budget proposal is a post-completion audit.

Accepted Answer

A) True 
 B)False

Question 10

One limitation of traditional capital expenditure analysis is 'unrealistic status quo'. This refers to:

Accepted Answer

A)  the assumption that the tax rate remains unchanged throughout the life of an investment. 
B)  the assumption that the cost of capital remains unchanged throughout the life of an investment. 
C)  unrealistic estimates of expected time horizon of a project. 
D)  the assumption that the current cash flow of the company will remain unchanged if the proposed investment does not go ahead. 
A)  the assumption that the tax rate remains unchanged throughout the life of an investment. 
B)  the assumption that the cost of capital remains unchanged throughout the life of an investment. 
C)  unrealistic estimates of expected time horizon of a project. 
D)  the assumption that the current cash flow of the company will remain unchanged if the proposed investment does not go ahead.

Question 11

The use of future value to calculate the present value is called:

Accepted Answer

A)  compounding. 
B)  the annuity method. 
C)  discounting. 
D)  present value approach. 
A)  compounding. 
B)  the annuity method. 
C)  discounting. 
D)  present value approach.

Question 12

Accrual return on investment versus cash flows
The Flinders Island Airways Pty Ltd is planning a project that is expected to last for six years. During that time, the project is expected to generate net cash inflows of $75 000 per annum.
The project will require the purchase of a machine for $280 000. This new machine is expected to have a salvage value of $10 000 at the end of six years. In addition to its annual operating costs, the machine will require an overhaul costing $50 000 at the end of the fourth year. The company presently has a minimum desired rate of return of 12 per cent. Based on this information, the accountant prepared the following analysis:   
Therefore, the accountant recommends that the project be rejected, as it does not meet the company's minimum desired rate of return.
i. What criticism(s) would you make of the accountant's evaluation of the project?

Accepted Answer

ii. Use cash flow analysis to determine

Question 13

If a proposal's profitability index is greater than one, the:

Accepted Answer

A)  net present value is negative. 
B)  net present value is positive. 
C)  net present value cannot be determined by the profitability index. 
D)  proposal should be rejected. 
A)  net present value is negative. 
B)  net present value is positive. 
C)  net present value cannot be determined by the profitability index. 
D)  proposal should be rejected.

Question 14

Which of the following statements is incorrect?

Accepted Answer

A)  Discounted cash flow techniques explicitly recognise the time value of money. 
B)  Payback recognises the time value of money. 
C)  Accounting rate of return recognises the time value of money. 
D)  Payback recognises the time value of money AND accounting rate of return recognises the time value of money. 
A)  Discounted cash flow techniques explicitly recognise the time value of money. 
B)  Payback recognises the time value of money. 
C)  Accounting rate of return recognises the time value of money. 
D)  Payback recognises the time value of money AND accounting rate of return recognises the time value of money.

Question 15

The payback period is defined as:

Accepted Answer

A)  initial investment / annual cash inflow. 
B)  annual cash inflow / initial investment. 
C)  initial investment / useful life of investment. 
D)  initial investment / present value of the cash flows, exclusive of initial investment. 
A)  initial investment / annual cash inflow. 
B)  annual cash inflow / initial investment. 
C)  initial investment / useful life of investment. 
D)  initial investment / present value of the cash flows, exclusive of initial investment.

Question 16

Rogers Company purchased equipment for $30 000 in December of 2014. It is expected to generate $10 000 per year in additional revenue and $2000 per year in additional cash expenses beginning in 2015. Depreciation in 2015 will be $3000. The firm's tax rate is 40 per cent. What is the annual after-tax cash flow in 2015?

Accepted Answer

A)  $8000 
B)  $4800 
C)  $6000 
D)  $3600 
A)  $8000 
B)  $4800 
C)  $6000 
D)  $3600

Question 17

Magic Pty Ltd owes Jordan Pty Ltd money for the purchase of equipment. Jordan Pty Ltd has given Magic Pty Ltd three payment options:
Option 1: Immediate payment of $38 000 with no further payment.
Option 2: Three annual payments of $15 000 made at the end of each of the next three years.
Option 3: A single payment of $48 000 made at the end of the three years.
Magic Pty Ltd uses a hurdle rate of 10 per cent for investment decisions. Which option should Magic choose and what is the present value of that option?

Accepted Answer

A)  Option 1 $38 000 
B)  Option 2 $37 305 
C)  Option 3 $34 164 
D)  Option 3 $36 048 
A)  Option 1 $38 000 
B)  Option 2 $37 305 
C)  Option 3 $34 164 
D)  Option 3 $36 048

Question 18

What is the internal rate of return?

Accepted Answer

A)  The discount rate at which the present value of expected cash inflows and outflows is equal. 
B)  The discount rate that makes the net present value of the cash flows equal zero. 
C)  The discount rate at which the present value of expected cash inflows and outflows is equal AND the discount rate that makes the net present value of the cash flows equal zero. 
D)  The present value factor used to discount cash flows. 
A)  The discount rate at which the present value of expected cash inflows and outflows is equal. 
B)  The discount rate that makes the net present value of the cash flows equal zero. 
C)  The discount rate at which the present value of expected cash inflows and outflows is equal AND the discount rate that makes the net present value of the cash flows equal zero. 
D)  The present value factor used to discount cash flows.

Question 19

The accounting rate of return method focuses on:

Accepted Answer

A)  total accounting profit, which is based on accrual accounting procedures. 
B)  the incremental accounting profit that results from a project. 
C)  cash inflows from the project. 
D)  tax savings from a project. 
A)  total accounting profit, which is based on accrual accounting procedures. 
B)  the incremental accounting profit that results from a project. 
C)  cash inflows from the project. 
D)  tax savings from a project.

Question 20

The manager of George Pty Ltd is planning to purchase equipment costing $5000. The equipment will reduce operating costs by approximately $2000 per year over its three-year life. The manager has decided to purchase the equipment because over the three years the company will save $1000. The major problem with the manager's analysis is that:

Accepted Answer

A)  the manager does not consider the time value of money. 
B)  the manager used the internal rate of return rather than the present value. 
C)  the manager did not use the annuity method. 
D)  the amount to be saved is only an approximation. 
A)  the manager does not consider the time value of money. 
B)  the manager used the internal rate of return rather than the present value. 
C)  the manager did not use the annuity method. 
D)  the amount to be saved is only an approximation.

Net present value is calculated using the:

When undertaking a net present value analysis, the first step in the process would be to determine:

According to the net present value method, if the present value of cost savings exceeds the acquisition cost of a new machine:

The technique that compares a project's actual cash flows with the cash flows predicted in the original capital budget proposal is a post-completion audit.

One limitation of traditional capital expenditure analysis is 'unrealistic status quo'. This refers to:

The use of future value to calculate the present value is called:

If a proposal's profitability index is greater than one, the:

Which of the following statements is incorrect?

The payback period is defined as:

What is the internal rate of return?

The accounting rate of return method focuses on:

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

Net present value is calculated using the:

When undertaking a net present value analysis, the first step in the process would be to determine:

According to the net present value method, if the present value of cost savings exceeds the acquisition cost of a new machine:

The technique that compares a project's actual cash flows with the cash flows predicted in the original capital budget proposal is a post-completion audit.

One limitation of traditional capital expenditure analysis is 'unrealistic status quo'. This refers to:

The use of future value to calculate the present value is called:

If a proposal's profitability index is greater than one, the:

Which of the following statements is incorrect?

The payback period is defined as:

What is the internal rate of return?

The accounting rate of return method focuses on:

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