Question 1

A company is evaluating three possible investments.Each uses the straight-line method of depreciation.The following information is provided by the company: $$\begin{array} { | l | r | r | r | } 
\hline & \text { Project A } & \text { Project B } & \text { Project C } \
\hline \text { Investment } & \$ 210,000 & \$ 54,000 & \$ 210,000 \
\hline \text { Residual value } & 0 & 30,000 & 28,000 \
\hline \text { Net cash flows: } & & & \
\hline \text { Year 1 } & 70,000 & 34,000 & 82,000 \
\hline \text { Year 2 } & 70,000 & 25,000 & 52,000 \
\hline \text { Year 3 } & 70,000 & 21,000 & 62,000 \
\hline \text { Year 4 } & 70,000 & 18,000 & 22,000 \
\hline \text { Year 5 } & 70,000 & 0 & 0 \
\hline
\end{array}$$ What is the accounting rate of return for Project C? (Round your answer to two decimal places.)

Accepted Answer

A)  14.29% 
B)  7.56% 
C)  33.33% 
D)  10.48%

Question 2

Discounted cash flow methods,such as net present value and internal rate of return,________.

Accepted Answer

A)  use simple interest calculations 
B)  use net income amounts rather than cash flows 
C)  focus on the payback period 
D)  consider discounted cash flows

Question 3

Capital rationing is a process adopted when a company has limited resources,and it must find ways to reduce operating expenses in all of its divisions and units.

Accepted Answer

A) True 
 B)False

Question 4

Many service,merchandising,and manufacturing firms use discounted cash flow methods to make capital investment decisions.

Accepted Answer

A) True 
 B)False

Question 5

When a company is evaluating an investment proposal with high risk,a low discount rate should be used.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following best describes a capital budgeting post-audit?

Accepted Answer

A)  an audit of an operating unit of a company 
B)  an audit performed only at the end of the project's life span 
C)  an analysis of an investment's cash flows prior to committing to the initial investment 
D)  a comparison of actual results of capital investments with projected results

Question 7

Landmark Prints is considering an investment in new equipment costing $520,000.The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $128,000 the first year,$160,000 the second year,and $154,000 every year thereafter until the fifth year.What is the payback period for this investment? The residual value is zero.(Round your answer to two decimal places.)

Accepted Answer

A)  4.50 years 
B)  3.51 years 
C)  2.86 years 
D)  3.06 years

Question 8

When the internal rate of return is the same as the required rate of return,the net present value of an investment will be positive.

Accepted Answer

A) True 
 B)False

Question 9

Management's minimum desired rate of return on a capital investment is known as the return on investment.

Accepted Answer

A) True 
 B)False

Question 10

The net present value of future cash inflows received in earlier years is higher than future cash inflows received in later years.

Accepted Answer

A) True 
 B)False

Question 11

Lora Corporation will receive $10,000 a year at the end of each of the next five years.Using a discount rate of 14%,the present value of the receipts can be stated as ________.

Accepted Answer

A)  PV = $10,000 (Ordinary Annuity FV factor, i = 14%, n = 5) 
B)  PV = $10,000 (PV factor, i = 14%, n = 5) 
C)  PV = $10,000 (Ordinary Annuity PV factor, i = 14%, n = 5) 
D)  PV = $10,000 (FV factor, i = 14%, n = 5)

Question 12

Zane Set Designs Company has received an award which entitles it to receive annual payments of $10,000 at the end of each year for the next ten years.Which of the following is used to calculate today's value of this award?

Accepted Answer

A)  Present Value of $1 
B)  Present Value of an Ordinary Annuity of $1 
C)  Future Value of $1 
D)  Future Value of an Ordinary Annuity of $1

Question 13

The internal rate of return (IRR)is the rate of return,based on discounted cash flows,of a capital investment.

Accepted Answer

A) True 
 B)False

Question 14

Compound interest assumes that all interest earned will remain invested and earn additional interest at the same interest rate.

Accepted Answer

A) True 
 B)False

Question 15

Discounted cash flow methods incorporate compound interest by assuming that companies will reinvest future cash flows when they are received.

Accepted Answer

A) True 
 B)False

Question 16

List the steps of the capital budgeting process and identify actions that relate to each step.

Accepted Answer

The answer of List the steps of the capital budgeting...

Question 17

Lloyd's Moving Company is considering purchasing new equipment that costs $728,000.Its management estimates that the equipment will generate cash flows as follows: $$\begin{array} { | r | c | } 
\hline \text { Year 1 } & \$ 206,000 \
\hline 2 & 206,000 \
\hline 3 & 254,000 \
\hline 4 & 254,000 \
\hline 5 & 156,000 \
\hline
\end{array}$$ Present value of $1:
$$\begin{array} { | l | r | r | r | r | r | } 
\hline & { 6 \% } &{ 7 \% } & { 8 \% } & { 9 \% } & 10 \% \
\hline 1 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \
\hline 2 & 0.890 & 0.873 & 0.857 & 0.842 & 0.826 \
\hline 3 & 0.840 & 0.816 & 0.794 & 0.772 & 0.751 \
\hline 4 & 0.792 & 0.763 & 0.735 & 0.708 & 0.683 \
\hline 5 & 0.747 & 0.713 & 0.681 & 0.650 & 0.621 \
\hline
\end{array}$$ The company's annual required rate of return is 9%.Using the factors in the table,calculate the present value of the cash flows.(Round all calculations to the nearest whole dollar.)

Accepted Answer

A)  $870,000 
B)  $839,674 
C)  $853,320 
D)  $872,000

Question 18

A company is considering an iron ore extraction project that requires an initial investment of $1,300,000 and will yield annual cash flows of $789,314 for two years.The company's discount rate is 9%.Calculate IRR. Present value of ordinary annuity of $1:
$$\begin{array} { r r r r r r r r } 
& 10 \% & 12 \% & 14 \% & 15 \% & 16 \% & 18 \% & 20 \% \
1 & 0.909 & 0.893 & 0.877 & 0.870 & 0.862 & 0.847 & 0.833 \
2 & 1.736 & 1.690 & 1.647 & 1.626 & 1.605 & 1.566 & 1.528 \
3 & 2.487 & 2.402 & 2.322 & 2.283 & 2.246 & 2.174 & 2.106 \
4 & 3.170 & 3.037 & 2.914 & 2.855 & 2.798 & 2.690 & 2.589
\end{array}$$

Accepted Answer

A)  14% 
B)  16% 
C)  13% 
D)  12%

Question 19

Provide responses to the following questions regarding the discount rate.
 $$\begin{array} {| l | l | } 
\hline \text { Question? } & \text { Your response } \
\hline \text { What does the discount rate } & \
\text { represent? } & \
\hline \text { What are other names for the } & \
\text { discount rate? } & \
\hline \text { Is the following statement true? } & \
\text { Discuss the reason for your } & \
\text { response. } \
\text { "The higher the risk, the lower the } \
\text { discount rate." }\
\hline 
\end{array}$$

Accepted Answer

The answer of Provide responses to the following questions regarding...

Question 20

The accounting rate of return method considers the time value of money.

Accepted Answer

A) True 
 B)False

Exam 26: Capital Investment Decisions

Discounted cash flow methods,such as net present value and internal rate of return,________.

Capital rationing is a process adopted when a company has limited resources,and it must find ways to reduce operating expenses in all of its divisions and units.

Many service,merchandising,and manufacturing firms use discounted cash flow methods to make capital investment decisions.

When a company is evaluating an investment proposal with high risk,a low discount rate should be used.

Which of the following best describes a capital budgeting post-audit?

When the internal rate of return is the same as the required rate of return,the net present value of an investment will be positive.

Management's minimum desired rate of return on a capital investment is known as the return on investment.

The net present value of future cash inflows received in earlier years is higher than future cash inflows received in later years.

Lora Corporation will receive $10,000 a year at the end of each of the next five years.Using a discount rate of 14%,the present value of the receipts can be stated as ________.

Zane Set Designs Company has received an award which entitles it to receive annual payments of $10,000 at the end of each year for the next ten years.Which of the following is used to calculate today's value of this award?

The internal rate of return (IRR)is the rate of return,based on discounted cash flows,of a capital investment.

Compound interest assumes that all interest earned will remain invested and earn additional interest at the same interest rate.

Discounted cash flow methods incorporate compound interest by assuming that companies will reinvest future cash flows when they are received.

List the steps of the capital budgeting process and identify actions that relate to each step.

The accounting rate of return method considers the time value of money.