Question 1

A general rule in capital budgeting is that a project is accepted only if the internal rate of return equals or ________.

Accepted Answer

A)  exceeds the required rate of return 
B)  exceeds the inflation rate 
C)  exceeds the risk-free rate 
D)  exceeds the accrual accounting rate of return

Question 2

Assume your goal in life is to retire with $2,800,000. How much would you need to save at the end of each year if interest rates average 10% and you have a 30-year work life? (Round the final answer to the nearest whole dollar.)

Accepted Answer

A)  $9333 
B)  $17,022 
C)  $186,667 
D)  $160,464

Question 3

The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $380,000. The investment is expected to generate $225,000 in annual cash flows for a period of four years. The required rate of return is 10%. The old machine can be sold for $30,000. The machine is expected to have zero value at the end of the four-year period. What is the net present value of the investment? Would the company want to purchase the new machine? Income taxes are not considered.

Accepted Answer

A)  $363,025; yes 
B)  $22,500; no 
C)  $350,000; yes 
D)  $375,650; no

Question 4

The focus in capital budgeting should be on ________.

Accepted Answer

A)  favorable and unfavorable variance 
B)  expenses under accrual accounting 
C)  expected future cash flows that differ between alternatives 
D)  allocation of overheads

Question 5

Which of the following statements is true of a post-investment audit?

Accepted Answer

A)  It encourages managers to overstate the expected cash inflows from projects and accept projects they should reject. 
B)  It helps managers avoid optimistic estimate errors. 
C)  It does not help senior management to recognize problems in the implementation of the project. 
D)  It provides managers with feedback about the performance of a project to determine if any variance from expectations were the result of the overly optimistic estimates of because of implementation issues.

Question 6

In calculating the net initial investment cash flows, any increase in working capital required for the project should be included.

Accepted Answer

A) True 
 B)False

Question 7

What are the relevant cash inflows and outflows for capital budgeting decisions?

Accepted Answer

The answer of What are the relevant cash inflows and...

Question 8

Accrual accounting rate of return is calculated by dividing ________.

Accepted Answer

A)  net initial investment by an increase in expected average annual after-tax operating income 
B)  an increase in expected average annual after-tax operating income by the net initial investment 
C)  an increase in expected average annual cash flow by the net initial investment 
D)  net initial investment by an increase in expected average annual cash flow

Question 9

The net initial investment for a piece of construction equipment is $2,900,000. Annual cash inflows are expected to increase by $500,000 per year. The equipment has an 10-year useful life. What is the payback period?

Accepted Answer

A)  10.00 years 
B)  7.40 years 
C)  5.80 years 
D)  4.80 years

Question 10

The internal rate of return method assumes that project cash flows can be reinvested at the project's ________.

Accepted Answer

A)  internal rate of return 
B)  required rate of return 
C)  growth rate 
D)  accounting rate of return

Question 11

The Venoid Corporation has an annual cash inflow from operations from its investment in a capital asset of $23,000 (excluding depreciation) each year for five years. The corporation's income tax rate is 30%. Calculate the total after-tax cash inflow from operations for five years.

Accepted Answer

A)  $115,000 
B)  $80,500 
C)  $34,500 
D)  $23,000

Question 12

Which of the following methods utilizes discounted cash flows when analyzing potential capital expenditures?
Methods:
1) Accrual accounting rate-of-return
2) Internal Rate of Return (IRR)
3) Payback Period
4) Net Present Value (NPV)

Accepted Answer

A)  1 only 
B)  1 and 2 
C)  1 and 3 
D)  2 and 4

Question 13

The Required Rate of Return (RRR) is set externally by creditors as the interest rate on long term liabilities.

Accepted Answer

A) True 
 B)False

Question 14

What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and accrual accounting for performance evaluation? How can these conflicts be reduced?

Accepted Answer

The answer of What conflicts can arise between using discounted...

Question 15

Which of the following is a stage of the capital budgeting process that determines which investment
Yields the greatest benefit and the least cost to an organization?

Accepted Answer

A)  make decisions by choosing among alternatives stage 
B)  make predictions stage 
C)  identify projects stage 
D)  implement the decision, evaluate performance, and learn stage

Question 16

The higher the probability of customer churn, the higher the NPV of a customer.

Accepted Answer

A) True 
 B)False

Question 17

AARR indicates the average rate at which ________.

Accepted Answer

A)  a dollar of investment generates after-tax operating income 
B)  a dollar of after-tax cash flow generates net income 
C)  a dollar of investment generates a positive cash flow 
D)  a dollar of after-tax non-operating income generates net income

Question 18

Midize Flower Company provides flowers and other nursery products for decorative purposes in medium to large sized restaurants and businesses. The company has been investigating the purchase of a new specially equipped van for deliveries. The van will cost $61,392 with a eight-year life. The expected additional cash inflows are $16,000 per year. What is the internal rate of return?

Accepted Answer

A)  17% 
B)  20% 
C)  22% 
D)  27%

Question 19

ABC Boat Company is interested in replacing a molding machine with a new improved model. The old machine has a salvage value of $10,000 now and a predicted salvage value of $4,000 in six years, if rebuilt. If the old machine is kept, it must be rebuilt in one year at a predicted cost of $20,000.
The new machine costs $80,000 and has a predicted salvage value of $12,000 at the end of six years. If purchased, the new machine will allow cash savings of $20,000 for each of the first three years, and $10,000 for each year of its remaining six-year life.
Required:
What is the net present value of purchasing the new machine if the company has a required rate of return of 14%?

Accepted Answer

The answer of ABC Boat Company is interested in replacing...

Question 20

Soda Manufacturing Company provides vending machines for soft-drink manufacturers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of five years and the new equipment will cost $99,825 with a five-year life. The expected additional cash inflows are $25,000 per year. What is the internal rate of return?

Accepted Answer

A)  8% 
B)  12% 
C)  6% 
D)  4%

Exam 21: Capital Budgeting and Cost Analysis

A general rule in capital budgeting is that a project is accepted only if the internal rate of return equals or ________.

Assume your goal in life is to retire with $2,800,000. How much would you need to save at the end of each year if interest rates average 10% and you have a 30-year work life? (Round the final answer to the nearest whole dollar.)

The focus in capital budgeting should be on ________.

Which of the following statements is true of a post-investment audit?

In calculating the net initial investment cash flows, any increase in working capital required for the project should be included.

What are the relevant cash inflows and outflows for capital budgeting decisions?

Accrual accounting rate of return is calculated by dividing ________.

The net initial investment for a piece of construction equipment is $2,900,000. Annual cash inflows are expected to increase by $500,000 per year. The equipment has an 10-year useful life. What is the payback period?

The internal rate of return method assumes that project cash flows can be reinvested at the project's ________.

The Venoid Corporation has an annual cash inflow from operations from its investment in a capital asset of $23,000 (excluding depreciation) each year for five years. The corporation's income tax rate is 30%. Calculate the total after-tax cash inflow from operations for five years.

Which of the following methods utilizes discounted cash flows when analyzing potential capital expenditures? Methods: 1) Accrual accounting rate-of-return 2) Internal Rate of Return (IRR) 3) Payback Period 4) Net Present Value (NPV)

The Required Rate of Return (RRR) is set externally by creditors as the interest rate on long term liabilities.

What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and accrual accounting for performance evaluation? How can these conflicts be reduced?

Which of the following is a stage of the capital budgeting process that determines which investment Yields the greatest benefit and the least cost to an organization?

The higher the probability of customer churn, the higher the NPV of a customer.

AARR indicates the average rate at which ________.