Question 1

Suppose Whole Foods is considering investing in warehouse-management software that costs $600,000,has $60,000 residual value and should lead to cash cost savings of $130,000 per year for its five-year life.In calculating the ARR,which of the following figures should be used as the equation's denominator?

Accepted Answer

A) $60,000 
B) $600,000 
C) $130,000 
D) $275,000

Question 2

After a company invests in capital assets,it will perform a ________ in order to compare the actual to the projected net cash inflows.

Accepted Answer

A) cash flow analysis 
B) pre and post analysis 
C) post-audit 
D) post-cash flow

Question 3

The Warren Company is considering investing in two alternative projects:

What is the accounting rate of return for Project 2?

Accepted Answer

A) 33.67% 
B) 3.00% 
C) 18.00% 
D) 2.33%

Question 4

Silver Creations is evaluating a project that would require an initial investment of $36,000.The present value of the net cash inflows associated with this project would be $43,200.The profitability index for this project would be closest to

Accepted Answer

A) 0.83. 
B) 1.20. 
C) 0.20. 
D) 5.00.

Question 5

Capital budgeting predictions must consider factors such as changing consumer preferences,competition,and government regulations.

Accepted Answer

A) True 
 B)False

Question 6

The Warren Company is considering investing in two alternative projects:

What is the accounting rate of return for Project 1?

Accepted Answer

A) 43.75% 
B) 6.25% 
C) 1.88% 
D) 25.00%

Question 7

The ________ capital budgeting method uses accrual accounting,rather than net cash flows,as a basis for calculations.

Accepted Answer

A) ARR 
B) Payback 
C) NPV 
D) IRR

Question 8

Self-check-in machines at airports are an example of capital assets.

Accepted Answer

A) True 
 B)False

Question 9

(Present value tables are required. )Vino Winery is considering the purchase of a state-of-the-art bottling machine.The new machine will cost $28,250 and will have a useful life of 10 years.The new machine will provide net cash savings of $5,000 per year.What is the internal rate of return (IRR)for the new bottling machine?

Accepted Answer

A) 8% 
B) 10% 
C) 12% 
D) 14%

Question 10

The costs to develop a major website for a company would be considered to be a capital asset if those costs are significant and material (for example,the costs to develop the website exceed $100,000).

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is a weakness of the internal rate of return (IRR)?

Accepted Answer

A) IRR assumes that the cash inflows from the project are immediately reinvested at the minimum required rate of return. 
B) IRR ignores the time value of money. 
C) IRR assumes that the cash inflows from the project are immediately reinvested at the internal rate of return. 
D) IRR is not a percentage rate,but is expressed in dollars.

Question 12

Which of the following is used as the equation's numerator when computing the accounting rate of return for a capital asset?

Accepted Answer

A) Average amount invested in the asset 
B) Average annual operating income from the asset 
C) Total amount invested in the asset 
D) Average net cash flows from the asset

Question 13

The residual value is considered in a net present value computation.

Accepted Answer

A) True 
 B)False

Question 14

(Present value tables are needed. )Family Fun Park is evaluating the purchase of a new game to be located on its Midway.Family Fun has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game.Financial data about the two choices follows.

What is the net present value of the Whack-A-Mole game?

Accepted Answer

A) $1,367 
B) ($56) 
C) $56 
D) ($1,367)

Question 15

Capital budgeting is done when common stock is issued.

Accepted Answer

A) True 
 B)False

Question 16

Another name for the minimum desired rate of return is

Accepted Answer

A) discount rate. 
B) required rate of return. 
C) hurdle rate. 
D) All of the above

Question 17

Sparky the Electrician specializes in rewiring historic houses.Sparky recently purchased a new wire-pulling device that will decrease the time to complete each job and increase total revenues.The device will cost $4,375 and will increase net cash flows by $1,750 per year.The new device has a useful life of 7 years and a residual value of $250.What is the payback period for the new wire-pulling device?

Accepted Answer

A) 2.64 years 
B) 2.50 years 
C) 2.36 years 
D) 2.19 years

Question 18

A manager wants to know which investment decision will affect the bottom line of the financial statements according to Generally Accepted Accounting Principles.Which capital budgeting method would he choose?

Accepted Answer

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

Question 19

Gomez Corporation is considering two alternative investment proposals with the following data:

What is the accounting rate of return for Proposal X?

Accepted Answer

A) 2.88 % 
B) 14.71 % 
C) 26.62 % 
D) 2.79%

Question 20

The process of choosing among different alternative investments due to limited resources is referred to as

Accepted Answer

A) capital investing. 
B) capital rationing. 
C) resource rationing. 
D) resource allocation.

Exam 12: Capital Investment Decisions and the Time Value of Money

After a company invests in capital assets,it will perform a ________ in order to compare the actual to the projected net cash inflows.

The Warren Company is considering investing in two alternative projects: What is the accounting rate of return for Project 2?

Silver Creations is evaluating a project that would require an initial investment of $36,000.The present value of the net cash inflows associated with this project would be $43,200.The profitability index for this project would be closest to

Capital budgeting predictions must consider factors such as changing consumer preferences,competition,and government regulations.

The Warren Company is considering investing in two alternative projects: What is the accounting rate of return for Project 1?

The ________ capital budgeting method uses accrual accounting,rather than net cash flows,as a basis for calculations.

Self-check-in machines at airports are an example of capital assets.

The costs to develop a major website for a company would be considered to be a capital asset if those costs are significant and material (for example,the costs to develop the website exceed $100,000).

Which of the following is a weakness of the internal rate of return (IRR) ?

Which of the following is used as the equation's numerator when computing the accounting rate of return for a capital asset?

The residual value is considered in a net present value computation.

Capital budgeting is done when common stock is issued.

Another name for the minimum desired rate of return is

A manager wants to know which investment decision will affect the bottom line of the financial statements according to Generally Accepted Accounting Principles.Which capital budgeting method would he choose?

Gomez Corporation is considering two alternative investment proposals with the following data: What is the accounting rate of return for Proposal X?

The process of choosing among different alternative investments due to limited resources is referred to as