Question 1

Which of the following is an advantage of internal rate of return method?

Accepted Answer

A)  Sum of IRRs of individual projects gives an IRR of a combination or portfolio of projects. 
B)  The percentage returns computed under the IRR method are easy to understand and compare. 
C)  It can be expressed as a unique number. 
D)  It can be used when the required rate of return varies over the life of a project. 
A)  Sum of IRRs of individual projects gives an IRR of a combination or portfolio of projects. 
B)  The percentage returns computed under the IRR method are easy to understand and compare. 
C)  It can be expressed as a unique number. 
D)  It can be used when the required rate of return varies over the life of a project. B

Question 2

Retail Outlet is looking for a new location near a shopping mall. It is considering purchasing a building rather than leasing, as it has done in the past. Three retail buildings near a new mall are available but each has its own advantages and disadvantages. The owner of the company has completed an analysis of each location that includes considerations for the time value of money. The information is as follows:
   
The owner does not understand how the location with the highest percentage return has the lowest net present value.
Required:
Explain to the owner what is (are) the probable cause(s) of the comparable differences.

Accepted Answer

The highest probability is that location C has a much lower initial investment than the other two. Therefore, it can show a higher rate of return with fewer dollars of inflow. Unfortunately, this may cause it to have the lowest net present value since this model is presented in dollar terms. Location C could also have a shorter life which could give it a higher percentage return during its life but fewer dollars overall.

Question 3

Which of the following is a stage of the capital-budgeting process that tracks realized cash flows and compares those against estimated numbers?

Accepted Answer

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

Question 4

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 
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 5

Ambinu Flower Company provides flowers and other nursery products for decorative purposes in medium to large sized restaurants and businesses. The company has been investigating the purchase of a new specially equipped van for deliveries. The van has a value of $133,750 with a six-year life. The expected additional cash inflows are $52,500 per year. What is the payback period for this investment?

Accepted Answer

A)  1.5 years 
B)  2.5 years 
C)  6 years 
D)  3.5 years 
A)  1.5 years 
B)  2.5 years 
C)  6 years 
D)  3.5 years

Question 6

The nominal approach to incorporating inflation into the net present value method predicts cash inflows in real monetary units and uses a real rate as the required rate of return.

Accepted Answer

A) True 
 B)False

Question 7

A capital budget spans only a one-year period.

Accepted Answer

A) True 
 B)False

Question 8

Unlike the net present value method and the internal rate-of-return method, the payback method does NOT distinguish between the origins of the cash flows.

Accepted Answer

A) True 
 B)False

Question 9

Supply the missing data for each of the following proposals:

Accepted Answer

a.
 @#IMG-DLM& 
b.Payback period = $339,000/$60,00

Question 10

As a discounted cash flow method does not report good operating income results in the project's early years, managers are tempted to not use discounted cash flow methods even though the decisions based on them would be in the best interests of the company as a whole over the long run.

Accepted Answer

A) True 
 B)False

Question 11

Malive Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $179,000. The annual cost savings if the new machine is acquired will be $35,000. The machine will have a 10-year life, at which time the terminal disposal value is expected to be zero. Malive Park is assuming no tax consequences. Malive Park has a 14% required rate of return. What is the payback period for the investment?

Accepted Answer

A)  4.1 years 
B)  5.1 years 
C)  10.0 years 
D)  10.2 years 
A)  4.1 years 
B)  5.1 years 
C)  10.0 years 
D)  10.2 years

Question 12

The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the ________.

Accepted Answer

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

Question 13

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. 
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 14

Capital budgeting is both a decision making and control tool. Which of the following is an example of capital budgeting as a control tool?

Accepted Answer

A)  A company uses capital budgeting techniques to evaluate a group of prospective alternative projects. 
B)  A large manufacturer sets up a "capital relief" fund to help supplement sustainability projects that would not meet targeted rates of returns without the capital relief fund assistance. 
C)  When considering capital expenditures, a company looks at a minimum of six potential (alternative) projects. 
D)  A company's capital project is not meeting the level of profitability expected, will not meet the targeted NPV, and is abandoned. 
A)  A company uses capital budgeting techniques to evaluate a group of prospective alternative projects. 
B)  A large manufacturer sets up a "capital relief" fund to help supplement sustainability projects that would not meet targeted rates of returns without the capital relief fund assistance. 
C)  When considering capital expenditures, a company looks at a minimum of six potential (alternative) projects. 
D)  A company's capital project is not meeting the level of profitability expected, will not meet the targeted NPV, and is abandoned.

Question 15

Cedile Trailer Supply has received three proposals for its new trailer assembly line. Information on each proposal is as follows:
   
Required:
Determine each proposal's payback.

Accepted Answer

Proposal X payback = $180,000/

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

Question 17

In nominal rate of return, the inflation element is the premium above the real rate.

Accepted Answer

A) True 
 B)False

Question 18

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 
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 19

In determining whether to keep a machine or replace it, the original cost of the machine is a sunk cost and is NOT a relevant factor.

Accepted Answer

A) True 
 B)False

Question 20

The use of an accelerated method of depreciation for tax purposes would usually decrease the present value of the investment.

Accepted Answer

A) True 
 B)False

Which of the following is an advantage of internal rate of return method?

Which of the following is a stage of the capital-budgeting process that tracks realized cash flows and compares those against estimated numbers?

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

The nominal approach to incorporating inflation into the net present value method predicts cash inflows in real monetary units and uses a real rate as the required rate of return.

A capital budget spans only a one-year period.

Unlike the net present value method and the internal rate-of-return method, the payback method does NOT distinguish between the origins of the cash flows.

Supply the missing data for each of the following proposals:

As a discounted cash flow method does not report good operating income results in the project's early years, managers are tempted to not use discounted cash flow methods even though the decisions based on them would be in the best interests of the company as a whole over the long run.

The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the ________.

An annuity is ________.

Capital budgeting is both a decision making and control tool. Which of the following is an example of capital budgeting as a control tool?

Cedile Trailer Supply has received three proposals for its new trailer assembly line. Information on each proposal is as follows: Required: Determine each proposal's payback.

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

In nominal rate of return, the inflation element is the premium above the real rate.

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

In determining whether to keep a machine or replace it, the original cost of the machine is a sunk cost and is NOT a relevant factor.

The use of an accelerated method of depreciation for tax purposes would usually decrease the present value of the investment.

The Manager and Management Accounting

An Introduction to Cost Terms and Purposes

Cost-Volume-Profit Analysis

Job Costing

Activity-Based Costing and Activity-Based Management

Master Budget and Responsibility Accounting

Flexible Budgets, Direct-Cost Variances, and Management Control

Flexible Budgets, Overhead Cost Variances, and Management Control

Inventory Costing and Capacity Analysis

Determining How Costs Behave

Decision Making and Relevant Information

Strategy, Balanced Scorecard, and Strategic Profitability Analysis

Pricing Decisions and Cost Management

Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis

Allocation of Support-Department Costs, Common Costs, and Revenues

Cost Allocation: Joint Products and Byproducts

Process Costing

Spoilage, Rework, and Scrap

Balanced Scorecard: Quality and Time

Inventory Management, Just-in-Time, and Simplified Costing Methods

Management Control Systems, Transfer Pricing, and Multinational Considerations

Performance Measurement, Compensation, and Multinational Considerations

Filters

Exam 21: Capital Budgeting and Cost Analysis

Which of the following is an advantage of internal rate of return method?

Which of the following is a stage of the capital-budgeting process that tracks realized cash flows and compares those against estimated numbers?

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

The nominal approach to incorporating inflation into the net present value method predicts cash inflows in real monetary units and uses a real rate as the required rate of return.

A capital budget spans only a one-year period.

Unlike the net present value method and the internal rate-of-return method, the payback method does NOT distinguish between the origins of the cash flows.

Supply the missing data for each of the following proposals:

As a discounted cash flow method does not report good operating income results in the project's early years, managers are tempted to not use discounted cash flow methods even though the decisions based on them would be in the best interests of the company as a whole over the long run.

The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the ________.

An annuity is ________.

Capital budgeting is both a decision making and control tool. Which of the following is an example of capital budgeting as a control tool?

Cedile Trailer Supply has received three proposals for its new trailer assembly line. Information on each proposal is as follows: Required: Determine each proposal's payback.

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

In nominal rate of return, the inflation element is the premium above the real rate.

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

In determining whether to keep a machine or replace it, the original cost of the machine is a sunk cost and is NOT a relevant factor.

The use of an accelerated method of depreciation for tax purposes would usually decrease the present value of the investment.

The Manager and Management Accounting

An Introduction to Cost Terms and Purposes

Cost-Volume-Profit Analysis

Job Costing

Activity-Based Costing and Activity-Based Management

Master Budget and Responsibility Accounting

Flexible Budgets, Direct-Cost Variances, and Management Control

Flexible Budgets, Overhead Cost Variances, and Management Control

Inventory Costing and Capacity Analysis

Determining How Costs Behave

Decision Making and Relevant Information

Strategy, Balanced Scorecard, and Strategic Profitability Analysis

Pricing Decisions and Cost Management

Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis

Allocation of Support-Department Costs, Common Costs, and Revenues

Cost Allocation: Joint Products and Byproducts

Process Costing

Spoilage, Rework, and Scrap

Balanced Scorecard: Quality and Time

Inventory Management, Just-in-Time, and Simplified Costing Methods

Management Control Systems, Transfer Pricing, and Multinational Considerations

Performance Measurement, Compensation, and Multinational Considerations

Filters