Question 1

The accounting rate of return is calculated as:

Accepted Answer

A)  The after-tax income divided by the total investment. 
B)  The after-tax income divided by the annual average investment. 
C)  The cash flows divided by the annual average investment. 
D)  The cash flows divided by the total investment. 
E)  The annual average investment divided by the after-tax income.

Question 2

If a company has the capacity to produce either 10,000 units of Product X or 10,000 units of Product Y; assuming fixed costs remain constant, production restrictions are the same for both products, and the markets for both products are unlimited; the company should commit 100% of its capacity to the product that has the higher contribution margin.

Accepted Answer

A) True 
 B)False

Question 3

The payback method of evaluating an investment fails to consider how long the investment will generate cash inflows beyond the payback period.

Accepted Answer

A) True 
 B)False

Question 4

Use of the internal rate of return method cannot be used with uneven cash flows.

Accepted Answer

A) True 
 B)False

Question 5

A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.

Accepted Answer

A) True 
 B)False

Question 6

A sunk cost will change with a future course of action.

Accepted Answer

A) True 
 B)False

Question 7

A capital budgeting method that considers how quickly a project recovers costs is known as _____________________. An enhancement to this method that considers the time value of money is called ________________.

Accepted Answer

The answer of A capital budgeting method that considers how...

Question 8

A company has the choice of either selling 1,000 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $4.00 per unit. Alternatively, it could rebuild them with incremental costs of $1.00 per unit for materials, $2.00 per unit for labor, and $1.50 per unit for overhead, and then sell the rebuilt units for $8.00 each. What should the company do?

Accepted Answer

A)  Sell the units as scrap. 
B)  Rebuild the units. 
C)  It does not matter because both alternatives have the same result. 
D)  Neither sell nor rebuild because both alternatives produce a loss. Instead, the company should store the units permanently. 
E)  Throw the units away.

Question 9

A company inadvertently produced 6,000 defective portable CD players. The CD players cost $20 each to be manufactured. A salvage company will purchase the defective units as they are for $16 each. The production manager reports that the defects can be corrected for $9 per unit, enabling the company to sell them at the regular price of $30.00. The repair operations would not affect other production operations. Prepare an analysis that shows which action should be taken.

Accepted Answer

The answer of A company inadvertently produced 6,000 defective portable...

Question 10

A company puts four products through a common production process. This process costs $100,000 each year. The four products can be sold when they emerge from this process at the "split-off point", or processed further and then sold. Data about the four products for the coming period are:  Determine which products should be sold at the split-off point and which should be processed further.

Accepted Answer

The answer of A company puts four products through a...

Question 11

The process of restating future cash flows in today's dollars is known as:

Accepted Answer

A)  Budgeting. 
B)  Annualization. 
C)  Discounting. 
D)  Payback period. 
E)  Capitalizing.

Question 12

Part of the decision to accept additional business should be based on a comparison of the incremental (differential) costs of the added production with the additional revenues to be received.

Accepted Answer

A) True 
 B)False

Question 13

The process of analyzing alternative investments and deciding which assets to acquire or sell is known as:

Accepted Answer

A)  Planning and control. 
B)  Capital budgeting. 
C)  Variance analysis. 
D)  Master budgeting. 
E)  Managerial accounting.

Question 14

Capital budgeting is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

Accepted Answer

A) True 
 B)False

Question 15

A company is evaluating the purchase of a machine for $900,000 with a six-year useful life and no salvage value. The company uses straight-line depreciation and it assumes that the annual net cash flow from using the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is the company's average investment?

Accepted Answer

The answer of A company is evaluating the purchase of...

Question 16

Identify the five steps involved in managerial decision making.

Accepted Answer

The answer of Identify the five steps involved in managerial...

Question 17

The __________________________ is the rate that yields a net present value of zero for an investment.

Accepted Answer

The answer of The __________________________ is the rate that yields...

Question 18

When making capital budgeting decisions, companies usually prefer shorter payback periods. Explain why shorter payback periods are desirable.

Accepted Answer

The answer of When making capital budgeting decisions, companies usually...

Question 19

The net present value decision rule requires that when an asset's expected cash flows are discounted at the required rate and yield a positive net present value, the project should be ___________________.

Accepted Answer

The answer of The net present value decision rule requires...

Question 20

_____________________ is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

Accepted Answer

The answer of _____________________ is the process of analyzing alternative...

Exam 25: Capital Budgeting and Managerial Decisions

The accounting rate of return is calculated as:

The payback method of evaluating an investment fails to consider how long the investment will generate cash inflows beyond the payback period.

Use of the internal rate of return method cannot be used with uneven cash flows.

A disadvantage of an investment with a short payback period is that it will produce revenue for only a short period of time.

A sunk cost will change with a future course of action.

A capital budgeting method that considers how quickly a project recovers costs is known as _____. An enhancement to this method that considers the time value of money is called .

The process of restating future cash flows in today's dollars is known as:

Part of the decision to accept additional business should be based on a comparison of the incremental (differential) costs of the added production with the additional revenues to be received.

The process of analyzing alternative investments and deciding which assets to acquire or sell is known as:

Capital budgeting is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

Identify the five steps involved in managerial decision making.

The __________________________ is the rate that yields a net present value of zero for an investment.

When making capital budgeting decisions, companies usually prefer shorter payback periods. Explain why shorter payback periods are desirable.

The net present value decision rule requires that when an asset's expected cash flows are discounted at the required rate and yield a positive net present value, the project should be ___________________.

_____________________ is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.