Question 1

When using the accounting rate of return,what is the basis for making the decision to make the investment?

Accepted Answer

The answer of When using the accounting rate of return,what...

Question 2

Which of the following most accurately describes an annuity?

Accepted Answer

A)  an investment which produces increasing cash flows over time 
B)  a series of unequal cash payments made at equal time intervals 
C)  a stream of equal cash payments made at equal time intervals 
D)  a term that does not apply to mortgage payable or bond payable

Question 3

When evaluating a potential investment,managers should use only one measure for making a sound investment decision.

Accepted Answer

A) True 
 B)False

Question 4

A company seeking investment opportunities has collected the following information: $$\begin{array} { | l | r | r | r | r | } 
\hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \
\hline \text { Initial investment } & \$ 400,000 & \$ 250,000 & \$ 150,000 & \$ 270,000 \
\hline \text { PV of cash inflows } & \$ 570,000 & \$ 295,000 & \$ 210,000 & \$ 282,000 \
\hline \text { Payback period (years) } & 3.6 & 3.0 & 4.75 & 3.5 \
\hline \text { NPV of project } & \$ 170,000 & \$ 45,000 & \$ 60,000 & \$ 12,000 \
\hline \text { Profitability index } & 1.43 & 1.18 & 1.40 & 1.04 \
\hline
\end{array}$$ If the company makes a decision based on the net present value,which project will be selected?

Accepted Answer

A)  Project A 
B)  Project B 
C)  Project C 
D)  Project D

Question 5

A company is evaluating three possible investments.The following information is provided by the company: $$\begin{array} { | l | r | r | r | } 
\hline & \text { Project A } & \text { Project B } & \text { Project C } \
\hline \text { Investment } & \$ 200,000 & \$ 54,000 & \$ 200,000 \
\hline \text { Residual value } & 0 & 20,000 & 24,000 \
\hline \text { Net cash flows: } & & & \
\hline \text { Year 1 } & 52,000 & 36,000 & 94,000 \
\hline \text { Year 2 } & 52,000 & 27,000 & 64,000 \
\hline \text { Year 3 } & 52,000 & 23,000 & 74,000 \
\hline \text { Year 4 } & 52,000 & 20,000 & 34,000 \
\hline \text { Year 5 } & 52,000 & 0 & 0 \
\hline
\end{array}$$ What is the payback period for Project A? (Assume that the company uses the straight-line depreciation method.)(Round your answer to two decimal places.)

Accepted Answer

A)  2.85 years 
B)  1.50 years 
C)  3.85 years 
D)  5.00 years

Question 6

Capital budgeting involves ________.

Accepted Answer

A)  budgeting for yearly operational expenses 
B)  preparing the sales budget for the coming year 
C)  deciding among various long-term investments 
D)  analyzing various alternatives of financing available to a company

Question 7

Which of the following two methods are typically used for initial screening of investments,rather than for detailed,in-depth analysis?

Accepted Answer

A)  payback and accounting rate of return 
B)  net present value and payback 
C)  internal rate of return and net present value 
D)  accounting rate of return and net present value

Question 8

Which of the following best describes the term capital rationing?

Accepted Answer

A)  a method of determining the period within which the cash invested is recouped 
B)  a process of ranking and choosing among alternative capital investments based on the availability of funds 
C)  a method which shows the effect of an investment on a company's accrual-based income 
D)  a process of controlling operating costs when adequate funds are not available

Question 9

Safe Driving School is considering purchasing new autos costing $235,000.The company's management has estimated that the autos will generate cash flows as follows:
 $$\begin{array} { l l } 
\text { Year 1 } & \$ 80,000 \
\text { Year 2 } & \$ 85,000 \
\text { Year 3 } & \$ 95,000 \
\text { Year 4 } & \$ 45,000
\end{array}$$ Considering the residual value is zero,calculate the payback period.Round to one decimal place

Accepted Answer

The answer of Safe Driving School is considering purchasing new...

Question 10

Which of the following is the rate of return,based on discounted cash flows,a company can expect to earn by investing in a capital asset?

Accepted Answer

A)  accounting rate of return 
B)  bank interest rate 
C)  internal rate of return 
D)  return on investment

Question 11

What are the strengths of the net present value capital budgeting method?

Accepted Answer

The answer of What are the strengths of the net...

Question 12

Two methods of analyzing potential capital investments-payback and accounting rate of return-ignore the time value of money.

Accepted Answer

A) True 
 B)False

Question 13

The payback method considers cash flows that occur both during and after the payback period.

Accepted Answer

A) True 
 B)False

Question 14

If the expected accounting rate of return meets or exceeds the required rate of return,the decision rule is to not make the investment.

Accepted Answer

A) True 
 B)False

Question 15

Joanne,Inc.is evaluating two possible investments in depreciable plant assets.The company uses the straight-line method of depreciation.The following information is available: $$\begin{array} { | l | r | r | } 
\hline & \text { Investment A } & \text { Investment B } \
\hline \text { Initial capital investment } & \$ 110,000 & \$ 153,000 \
\hline \text { Estimated useful life } & 10 \text { years } & 10 \text { years } \
\hline \text { Estimated residual value } & 0 & \$ 30,000 \
\hline \text { Estimated annual net cash inflow for 10 years } & \$ 21,000 & \$ 46,000 \
\hline \text { Required rate of return } & 12 \% & 14 \% \
\hline
\end{array}$$ Calculate the payback period for Investment B.(Round your answer to two decimal places.)

Accepted Answer

A)  3.33 years 
B)  1.83 years 
C)  3.81 years 
D)  5.24 years

Question 16

Peter Smith has just won the state lottery and has the following three payout options for after-tax prize money: 1.$50,000 per year at the end of each of the next six years
2)$300,000 (lump sum)now
3)$510,000 (lump sum)six years from now
The annual discount rate is 9%.Compute the present value of the third option.(Round to nearest whole dollar.)
Present value of $1:
$$\begin{array} { | l | r | r | r | } 
\hline & 8 \% & 9 \% & 10 \% \
\hline 1 & 0.926 & 0.917 & 0.909 \
\hline 2 & 0.857 & 0.842 & 0.826 \
\hline 3 & 0.794 & 0.772 & 0.751 \
\hline 4 & 0.735 & 0.708 & 0.683 \
\hline 5 & 0.681 & 0.650 & 0.621 \
\hline 6 & 0.630 & 0.596 & 0.564 \
\hline 7 & 0.583 & 0.547 & 0.513 \
\hline
\end{array}$$

Accepted Answer

A)  $250,000 
B)  $76,667 
C)  $79,467 
D)  $303,960

Question 17

The payback method uses discounted cash flows to make investment decisions.

Accepted Answer

A) True 
 B)False

Question 18

An annuity is a stream of equal cash payments made at equal time intervals.

Accepted Answer

A) True 
 B)False

Question 19

An operational asset used for a long period of time is known as a capital asset.

Accepted Answer

A) True 
 B)False

Question 20

The following details are provided by Volvox Foundry Company: $$\begin{array} { | c | r | } 
\hline \text { Initial investment } & \$ 5,000,000 \
\hline \text { Discount rate } & 15 \% \
\hline \text { Yearly cash flows } & \
\hline 1 & \$ 1,256,000 \
\hline 2 & \$ 1,362,000 \
\hline 3 & \$ 2,420,000 \
\hline 4 & \$ 1,150,000 \
\hline
\end{array}$$ PV of $1:
$$\begin{array} { | c | c | c | c | } 
\hline & 13 \% & 14 \% & 15 \% \
\hline 1 & 0.885 & 0.877 & 0.87 \
\hline 2 & 0.783 & 0.769 & 0.756 \
\hline 3 & 0.693 & 0.675 & 0.658 \
\hline 4 & 0.613 & 0.592 & 0.572 \
\hline
\end{array}$$ What is the NPV of the project?

Accepted Answer

A)  $(627,448) 
B)  $590,000 
C)  $618,409 
D)  $(594,941)

Exam 26: Capital Investment Decisions

When using the accounting rate of return,what is the basis for making the decision to make the investment?

Which of the following most accurately describes an annuity?

When evaluating a potential investment,managers should use only one measure for making a sound investment decision.

Capital budgeting involves ________.

Which of the following two methods are typically used for initial screening of investments,rather than for detailed,in-depth analysis?

Which of the following best describes the term capital rationing?

Which of the following is the rate of return,based on discounted cash flows,a company can expect to earn by investing in a capital asset?

What are the strengths of the net present value capital budgeting method?

Two methods of analyzing potential capital investments-payback and accounting rate of return-ignore the time value of money.

The payback method considers cash flows that occur both during and after the payback period.

If the expected accounting rate of return meets or exceeds the required rate of return,the decision rule is to not make the investment.

The payback method uses discounted cash flows to make investment decisions.

An annuity is a stream of equal cash payments made at equal time intervals.

An operational asset used for a long period of time is known as a capital asset.