Question 1

Forise Water Company drills small commercial water wells.The company is in the process of analyzing the purchase of a new drill.Information on the proposal is provided below.

What is the net present value of the investment? Assume there is no recovery of working capital.

Accepted Answer

A) -$188,000 
B) $12,100 
C) $290,000 
D) $200,100

Question 2

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 3

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 4

Accrual accounting rate of return is calculated by dividing an increase in expected average annual after-tax operating income by the net initial or average investment.

Accepted Answer

A) True 
 B)False

Question 5

The Golden Shades Corporation disposes a capital asset with an original cost of $320,000 and accumulated depreciation of $140,000 for a salvage price of $42,000.Golden Shades's tax rate is 35%.Calculate the after-tax cash inflow from the disposal of the capital asset.

Accepted Answer

A) $48,300 
B) $138,000 
C) $42,000 
D) $90,300

Question 6

In the net present value (NPV)method,pre-tax cash flows should be used instead of after-tax cash flows.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

The Enor Machine Company is evaluating a capital expenditure proposal that requires an initial investment of $99,360 and has predicted cash inflows of $20,000 per year for 8 years.It will have no salvage value.
Required:
a.Using a required rate of return of 10%,determine the net present value of the investment proposal.
b.Determine the proposal's internal rate of return.

Accepted Answer

The answer of The Enor Machine Company is evaluating a...

Question 9

Which of the following is the first stage to the capital budgeting process?

Accepted Answer

A) forecast all potential cash flows attributable to the alternative projects 
B) determine which investment yields the greatest benefit and the least cost to the organization 
C) obtain funding and make the investments selected 
D) identify potential capital investments that agree with the organization's strategy

Question 10

The NPV method is the preferred method over IRR for selecting projects because ________.

Accepted Answer

A) its result is expressed in dollars and management can make an assessment as to its financial impact on the value of the business 
B) it accounts for the time value of money better than IRR 
C) it assumes that cash flows are reinvested at the internal rate of return for each and every year of the useful life 
D) it gives a project ranking consistent with that of IRR

Question 11

The relevant terminal disposal price of a machine equals the ________.

Accepted Answer

A) difference between the salvage value of the old machine and the ultimate salvage value of the new machine 
B) total of the salvage values of the old machine and the new machine 
C) salvage value of the old machine 
D) salvage value of the new machine

Question 12

An annuity is ________.

Accepted Answer

A) a noncash expense 
B) a series of equal cash flows at equal time intervals 
C) an investment product whose funds are invested in the stock market 
D) a rate at which an investment's present value of all expected cash inflows equals the present value of project's expected cash outflows.

Question 13

The accrual accounting rate-of-return method is a discounted cash flow approach to analyzing possible capital budget expenditures.

Accepted Answer

A) True 
 B)False

Question 14

A "what-if" technique that examines how a result will change if the original predicted data are NOT achieved or if an underlying assumption changes is called ________.

Accepted Answer

A) sensitivity analysis 
B) net present value analysis 
C) internal rate-of-return analysis 
D) adjusted rate-of-return analysis

Question 15

Which of the following methods is described as follows: "It calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the required rate of return"?

Accepted Answer

A) payback method 
B) accrual accounting rate-of-return method 
C) internal rate of return 
D) net present value method

Question 16

Which of the following is another term for required rate of return?

Accepted Answer

A) hurdle rate 
B) total cost rate 
C) variance rate 
D) predetermined overhead rate

Question 17

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 18

Which of the following is a stage of the capital budgeting process during which a plant manager is queried for assembly time?

Accepted Answer

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

Question 19

If internal rate of return is less than required rate of return,the net present value is positive.

Accepted Answer

A) True 
 B)False

Question 20

If the net present value for a project is positive,which of the following is true?

Accepted Answer

A) the project should be accepted because its expected rate of return is greater than the cost of capital 
B) its internal rate of return is more than its cost of capital 
C) its expected rate of return is below the required rate of return 
D) its internal rate of return is less than its cost of capital

Exam 21: Capital Budgeting and Cost Analysis

Forise Water Company drills small commercial water wells.The company is in the process of analyzing the purchase of a new drill.Information on the proposal is provided below. What is the net present value of the investment? Assume there is no recovery of working capital.

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

Accrual accounting rate of return is calculated by dividing an increase in expected average annual after-tax operating income by the net initial or average investment.

The Golden Shades Corporation disposes a capital asset with an original cost of $320,000 and accumulated depreciation of $140,000 for a salvage price of $42,000.Golden Shades's tax rate is 35%.Calculate the after-tax cash inflow from the disposal of the capital asset.

In the net present value (NPV)method,pre-tax cash flows should be used instead of after-tax cash flows.

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

Which of the following is the first stage to the capital budgeting process?

The NPV method is the preferred method over IRR for selecting projects because ________.

The relevant terminal disposal price of a machine equals the ________.

An annuity is ________.

The accrual accounting rate-of-return method is a discounted cash flow approach to analyzing possible capital budget expenditures.

A "what-if" technique that examines how a result will change if the original predicted data are NOT achieved or if an underlying assumption changes is called ________.

Which of the following methods is described as follows: "It calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the required rate of return"?

Which of the following is another term for required rate of return?

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?

Which of the following is a stage of the capital budgeting process during which a plant manager is queried for assembly time?

If internal rate of return is less than required rate of return,the net present value is positive.

If the net present value for a project is positive,which of the following is true?