Question 1

Alien Corp. is considering the purchase of a new truck which costs $14,340. The truck is expected to save $3,600 in operating costs annually for the next 7 years. How low can the annual cost savings be and still provide a 15% return? Ignore income taxes.

Accepted Answer

A)  $5,967 
B)  $475 
C)  $7,458 
D)  $3,441

Question 2

Arnold Company is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: $\begin{array}{lr}\text { Cost of new machine }&\$100,000\
\text { Annual cost savings in cash expenses }&45,000\
\text { Terminal value } & 8,000 \
\text { Maintenance required in the 4th year } & 5,000 \
\text { Book value of the old machine } & 20,000
\end{array}$ The new machine would replace an old fully-amortized machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Arnold uses the straight-line method for amortization on all machines (ignore the half-year convention). Note: some amounts are rounded.
The present value of the cash flows for year 4, excluding the maintenance, is:

Accepted Answer

A)  $21,319 
B)  $28,951 
C)  $23,545 
D)  $21,624

Question 3

In completing a sensitivity analysis for a capital budgeting project, which of the following would typically be varied?
I. Discount rate
II. Future cash flows
III. Future accrual-basis revenues and expenses

Accepted Answer

A)  I and III only 
B)  II and III only 
C)  I and II only 
D)  I, II, and III

Question 4

Qualitative factors that might override the acceptance of a positive NPV project include:

Accepted Answer

A)  The time value of money 
B)  A negative environmental impact that could harm an organization's reputation 
C)  The discount rate 
D)  The risk free rate

Question 5

Uniform cash flows from a capital project are necessary for which of the following calculations?
I. Net present value
II. Internal rate of return
III. Profitability index

Accepted Answer

A)  I and II only 
B)  II and III only 
C)  I and III only 
D)  None of the above (not I, II, or III)

Question 6

Allen Corporation has the following equity structure: $$\begin{array} { l c l } 
& \text { Market Value } & \text { After Tax Cost } \
\text { Long-term debt } & \$ 700,000 & 15 \% \
\text { Preferred stock } & 50,000 & 5 \
\text { Common stock } & 250,000 & 15
\end{array}$$ The weighted average cost of capital is

Accepted Answer

A)  14.5% 
B)  8.2% 
C)  8.7% 
D)  10.3%

Question 7

Under the general quantitative rule, a project with a net present value less than zero should not be accepted.

Accepted Answer

A) True 
 B)False

Question 8

Several methods are used to make long-term strategic decisions, including:
I. Net present value
II. Internal rate of return
III. Cost-volume-profit

Accepted Answer

A)  II and III only 
B)  I and II only 
C)  I and III only 
D)  III only

Question 9

The most appropriate method(s) for long term decisions:

Accepted Answer

A)  Incorporate the time value of money 
B)  Is the payback method 
C)  Is the accounting rate of return method 
D)  Incorporates allocated costs

Question 10

Cash flows to be considered in capital budgeting decisions generally fall into three major groups: initial investment, incremental operating cash flows, and terminal cash flows.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is the best example of a capital budgeting decision?

Accepted Answer

A)  Deciding the price of a product for the next six months 
B)  Forecasting accrual basis profits for the next five years 
C)  Purchasing a piece of equipment with an expected life of eight years 
D)  Deciding which product to emphasize when there are constrained resources

Question 12

Which of the following NPV analysis methods requires adjustment of a project's terminal value for inflation? $\begin{array} { l l l } 
 & \text { Real } & \text { Nominal } \\end{array}$
A)$\begin{array} { l l l } & \text { Yes } & \text { Yes }\end{array}$
B)$\begin{array} { l l l }  & \text { Yes } & \text { Nos } \\end{array}$
C)$\begin{array} { l l l } & \text { Nos } & \text { No } \\end{array}$
D)$\begin{array} { l l l }& \text { No } & \text { Yes }
\end{array}$

Accepted Answer

The answer of Which of the following NPV analysis methods...

Question 13

Sebastian is presenting a capital budgeting project to Viola, his division manager. Which one of the following is likely to have the least amount of bias when evaluating this project?

Accepted Answer

A)  Sebastian 
B)  Viola 
C)  The company's accountant 
D)  Cannot be determined

Question 14

Because of its complex calculation, few managers rely on the payback period as a capital budgeting analysis tool.

Accepted Answer

A) True 
 B)False

Question 15

The cost of disposing of an old asset is considered irrelevant in capital budgeting decisions.

Accepted Answer

A) True 
 B)False

Question 16

Qualitative factors often influence strategic investment decisions. Which of the following is the best example of such a factor?

Accepted Answer

A)  Changes in product prices based on consumer demand 
B)  Changes in consumer demand based on product prices 
C)  Increased ability to ship product in a timely manner 
D)  Discount rate estimates

Question 17

The net present value method is:

Accepted Answer

A)  Used to appraise a capital project's qualitative factors 
B)  Used to show how long the initial investment will be at risk 
C)  The sum of the cash inflows, discounted to time zero 
D)  The sum of the projected cash inflows and outflows valued in today's dollars

Question 18

Rams, Inc. has invested in a machine with a cost of $37,164 and annual cost savings of $6,000. The discount rate is 8%, and the machine's internal rate of return is 12%. Ignore income taxes. The estimated life of the machine is:

Accepted Answer

A)  6.2 years 
B)  8 years 
C)  12 years 
D)  Cannot be determined

Question 19

Capital budgeting decisions typically fall into which of the following major categories?
I. Developing or expanding products or services
II. Allocating costs to products or services
III. Replacing or reorganizing assets or services

Accepted Answer

A)  I and II only 
B)  II and III only 
C)  I and III only 
D)  I, II, and III

Question 20

The risk premium for a particular project is:

Accepted Answer

A)  The estimate of a rate of return for a project with similar risk 
B)  The weighted average cost of capital for a firm 
C)  Something that can be found in risk tables in textbooks 
D)  Usually the same for all of the projects an organization would consider

Exam 13: Pricing Decisions

Alien Corp. is considering the purchase of a new truck which costs $14,340. The truck is expected to save $3,600 in operating costs annually for the next 7 years. How low can the annual cost savings be and still provide a 15% return? Ignore income taxes.

In completing a sensitivity analysis for a capital budgeting project, which of the following would typically be varied? I. Discount rate II. Future cash flows III. Future accrual-basis revenues and expenses

Qualitative factors that might override the acceptance of a positive NPV project include:

Uniform cash flows from a capital project are necessary for which of the following calculations? I. Net present value II. Internal rate of return III. Profitability index

Under the general quantitative rule, a project with a net present value less than zero should not be accepted.

Several methods are used to make long-term strategic decisions, including: I. Net present value II. Internal rate of return III. Cost-volume-profit

The most appropriate method(s) for long term decisions:

Cash flows to be considered in capital budgeting decisions generally fall into three major groups: initial investment, incremental operating cash flows, and terminal cash flows.

Which of the following is the best example of a capital budgeting decision?

Sebastian is presenting a capital budgeting project to Viola, his division manager. Which one of the following is likely to have the least amount of bias when evaluating this project?

Because of its complex calculation, few managers rely on the payback period as a capital budgeting analysis tool.

The cost of disposing of an old asset is considered irrelevant in capital budgeting decisions.

Qualitative factors often influence strategic investment decisions. Which of the following is the best example of such a factor?

The net present value method is:

Rams, Inc. has invested in a machine with a cost of $37,164 and annual cost savings of $6,000. The discount rate is 8%, and the machine's internal rate of return is 12%. Ignore income taxes. The estimated life of the machine is:

Capital budgeting decisions typically fall into which of the following major categories? I. Developing or expanding products or services II. Allocating costs to products or services III. Replacing or reorganizing assets or services

The risk premium for a particular project is: