Question 1

Which one of the following is an advantage of the accounting (book) rate of return (ARR) method for analyzing capital investment proposals?

Accepted Answer

A)  It is not affected by different accounting methods. 
B)  It is precise and objective. 
C)  Data for calculating the return are typically readily available. 
D)  The method explicitly adjusts for the time value of money. 
E)  ARR is generally approximately equal to a project's internal rate of return (IRR). 
A)  It is not affected by different accounting methods. 
B)  It is precise and objective. 
C)  Data for calculating the return are typically readily available. 
D)  The method explicitly adjusts for the time value of money. 
E)  ARR is generally approximately equal to a project's internal rate of return (IRR).

Question 2

Brandon Company is contemplating the purchase of a new piece of equipment for $45,000. Brandon is in the 30% income tax bracket. Predicted annual after-tax cash inflows from this investment are $18,000, $15,000, $9,000, $6,000 and $3,000 for years 1 through 5, respectively. The firm uses straight-line depreciation with no residual value at the end of five years.

Assume that the after-tax hurdle rate for accepting new capital investment projects by the company is 4%, after-tax. (Note: To answer this question, students will have to be provided with the Tables provided in Appendix C, Chapter 12. Alternatively, the instructor can provide students with the following PV $1 factors for 4%: for year 1 = 0.962, for year 2 = 0.925, for year 3 = 0.889, for year 4 = 0.855, for year 5 = 0.822; the PV annuity factor for 4%, 5 years = 4.452.) The estimated internal rate of return (IRR) on this investment is:

Accepted Answer

A)  Less than 4%. 
B)  4%. 
C)  Slightly above 4%. 
D)  Greater than 6%. 
E)  Undeterminable with only the given information. 
A)  Less than 4%. 
B)  4%. 
C)  Slightly above 4%. 
D)  Greater than 6%. 
E)  Undeterminable with only the given information.

Question 3

Which of the following would not be considered a benefit of conducting post-implementation audits of capital investment projects?

Accepted Answer

A)  Such audits ensure the realization of future after-tax cash flows. 
B)  Such audits should reduce disincentive effects associated with using one type of model for capital investment analysis (e.g., NPV) and a different model for evaluation of subsequent financial performance (e.g., ROI). 
C)  Knowledge that investments are subject to post-implementation audit can counter tendencies to inflate estimates of net cash benefits associated with proposed investment projects. 
D)  Such audits can help an organization achieve greater levels of goal congruence in terms of the capital budgeting process. 
A)  Such audits ensure the realization of future after-tax cash flows. 
B)  Such audits should reduce disincentive effects associated with using one type of model for capital investment analysis (e.g., NPV) and a different model for evaluation of subsequent financial performance (e.g., ROI). 
C)  Knowledge that investments are subject to post-implementation audit can counter tendencies to inflate estimates of net cash benefits associated with proposed investment projects. 
D)  Such audits can help an organization achieve greater levels of goal congruence in terms of the capital budgeting process.

Question 4

The capital budgeting method(s) that is(are) most likely to provide consistency between data for capital budgeting and data for subsequent performance evaluation is(are) the:

Accepted Answer

A)  Payback period method. 
B)  Discounted cash flow (DCF) methods. 
C)  Book (i.e., accounting) rate of return method. 
D)  Discounted payback period method. 
E)  Cash-flow proxy method. 
A)  Payback period method. 
B)  Discounted cash flow (DCF) methods. 
C)  Book (i.e., accounting) rate of return method. 
D)  Discounted payback period method. 
E)  Cash-flow proxy method.

Question 5

Pique Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique's combined income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments.

What is the net after-tax cash inflow in Year 1 from the investment?

Accepted Answer

A)  $72,000. 
B)  $96,000. 
C)  $108,000. 
D)  $112,000. 
E)  $120,000. 
A)  $72,000. 
B)  $96,000. 
C)  $108,000. 
D)  $112,000. 
E)  $120,000.

Question 6

Which of the following methods is potentially useful for helping an organization align its capital expenditures with its strategy?

Accepted Answer

A)  Multiproduct cost-volume-profit (CVP) analysis. 
B)  The analytic hierarchy process (AHP). 
C)  Multiple regression and correlation analysis. 
D)  Linear optimization (that is, linear programming models). 
E)  Six-Sigma techniques. 
A)  Multiproduct cost-volume-profit (CVP) analysis. 
B)  The analytic hierarchy process (AHP). 
C)  Multiple regression and correlation analysis. 
D)  Linear optimization (that is, linear programming models). 
E)  Six-Sigma techniques.

Question 7

The tax impact of a capital investment project (such as the replacement of a major piece of machinery) is present during:

Accepted Answer

A)  The project initiation stage (i.e., time period 0) and final disposal stage only. 
B)  All stages (initiation, operation, and final disposal) of the project. 
C)  Only the project initiation stage and the operation stage. 
D)  The project operation stage only. 
E)  The project disposal stage only. 
A)  The project initiation stage (i.e., time period 0) and final disposal stage only. 
B)  All stages (initiation, operation, and final disposal) of the project. 
C)  Only the project initiation stage and the operation stage. 
D)  The project operation stage only. 
E)  The project disposal stage only.

Question 8

Which of the following is not an important advantage of the net present value (NPV) method over the internal rate of return (IRR) method in evaluating capital investment proposals?

Accepted Answer

A)  NPV facilitates comparisons of mutually exclusive projects requiring different amounts of initial investments. 
B)  NPV facilitates comparisons among mutually exclusive projects that have the same useful life but different initial outlays. 
C)  NPV can be used to determine an optimum capital budget under conditions of capital rationing, while IRR cannot. 
D)  NPV is relatively intuitive (compared, for example, to IRR). 
E)  IRR relies on discounted cash-flow analysis, while NPV does not. 
A)  NPV facilitates comparisons of mutually exclusive projects requiring different amounts of initial investments. 
B)  NPV facilitates comparisons among mutually exclusive projects that have the same useful life but different initial outlays. 
C)  NPV can be used to determine an optimum capital budget under conditions of capital rationing, while IRR cannot. 
D)  NPV is relatively intuitive (compared, for example, to IRR). 
E)  IRR relies on discounted cash-flow analysis, while NPV does not.

Question 9

Pique Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique's combined income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments.

What is the approximate internal rate of return (IRR) of the investment? (NOTE: To answer this question, students must have access to Table 2 from Appendix C, Chapter 12.) Assume that annual after-tax cash flows occur at year-end.

Accepted Answer

A)  Less than 12%. 
B)  Somewhere between 12% and 14%. 
C)  Somewhere between 15% and 20%. 
D)  Somewhere between 20% and 25%. 
E)  Over 25%. 
A)  Less than 12%. 
B)  Somewhere between 12% and 14%. 
C)  Somewhere between 15% and 20%. 
D)  Somewhere between 20% and 25%. 
E)  Over 25%.

Question 10

Carmino Company is considering an investment in equipment that is expected to generate an after-tax income of $6,000 for each year of its four-year life. The asset has no salvage value. The firm is in the 40% tax bracket. The net book value (NBV) of the investment at the beginning of each year will be as follows:$\begin{array}{lr}
\text { Year 1 } & \$30,000 \
\text { Year 2 } & 15,000 \
\text { Year 3 } & 7,500 \
\text { Year 4 } & 3,750
\end{array}$The projected after-tax cash inflow generated by the asset in Year 3, rounded to nearest hundred dollars, is:

Accepted Answer

A)  $6,600. 
B)  $7,500. 
C)  $8,100. 
D)  $9,000. 
E)  $9,750. 
A)  $6,600. 
B)  $7,500. 
C)  $8,100. 
D)  $9,000. 
E)  $9,750.

Question 11

Said Company is considering the purchase of a new piece of equipment for $45,000. The projected after-tax net income associated with this investment is $3,000 for each of the next three years. The company uses straight-line depreciation. The machine has a useful life of 3 years and no salvage value. Management of the company considers a 12% return on investment to be satisfactory.
Required:
1. What is the discounted payback period (in years) for this investment (rounded to one decimal place)? (The appropriate discount factors for 12% are as follows: Year 1 = 0.893; Year 2 = 0.797; and Year 3 = 0.712.)
2. What is the estimated net present value (NPV) of this proposed investment, rounded to the nearest whole number?

Accepted Answer

1. As indicated by the following schedul

Question 12

Cash-flow analysis: If an existing asset is sold at a gain, and the gain is taxable, then the after-tax proceeds from this transaction would be equal to:

Accepted Answer

A)  Net proceeds from the sale plus the after-tax gain on the sale. 
B)  Net proceeds from the sale less the after-tax gain on the sale. 
C)  Net proceeds from the sale plus the taxes paid on the gain. 
D)  Net proceeds from the sale less the taxes paid on the gain. 
E)  The pre-tax proceeds plus taxes on the gain. 
A)  Net proceeds from the sale plus the after-tax gain on the sale. 
B)  Net proceeds from the sale less the after-tax gain on the sale. 
C)  Net proceeds from the sale plus the taxes paid on the gain. 
D)  Net proceeds from the sale less the taxes paid on the gain. 
E)  The pre-tax proceeds plus taxes on the gain.

Question 13

The process of identifying, evaluating, selecting, and controlling capital investments is referred to as:

Accepted Answer

A)  Investment discounting. 
B)  Capital rationing. 
C)  Capital investing. 
D)  Capital budgeting. 
E)  Post-audit analysis. 
A)  Investment discounting. 
B)  Capital rationing. 
C)  Capital investing. 
D)  Capital budgeting. 
E)  Post-audit analysis.

Question 14

Acorn Corporation designs and installs fire-suppression systems in commercial buildings. Over 90 percent of Acorn's business is in new construction, with the remainder in upgrade installations in remodeled buildings. For planning and control purposes, Acorn's controller (Jane Reid) is considering purchasing cost and financial accounting software from Constructor Solutions, Inc. Costs for the software modules are shown below:   Required:
1. Jane uses value-chain analysis in evaluation of capital investments. She asks you which method, internal rate of return (IRR) or net present value (NPV), would be best in selecting individual software modules, and your reason(s) for the choice of method.
2. Jane says, "If we buy the entire set of six modules, we will get the equivalent of Module 6 free." Why might this savings of almost $1,500 be illusory?
3. The present value of the cost savings generated by the set of six modules, based on a five-year life and discount rate of 18 percent, is estimated as $13,844.50. Should the set of six modules be purchased? Explain. How would your decision be affected if Acorn's minimum rate of return were 24 percent? (No calculations are necessary to answer this question.)

Accepted Answer

1. Jane should use net present value (NP

Question 15

The after-tax cost of debt for purposes of estimating a company's weighted-average cost of capital (WACC)

Accepted Answer

A)  Requires an estimate of the yield-to-maturity for long-term bonds. 
B)  Is equal to the pretax cost of debt times t, where t = income tax rate. 
C)  Is equal to the pretax cost of debt/(1 − t), where t = income tax rate. 
D)  Is approximated by the firm's short-term borrowing rate. 
E)  Is estimated using the Capital Asset Pricing Model (CAPM). 
A)  Requires an estimate of the yield-to-maturity for long-term bonds. 
B)  Is equal to the pretax cost of debt times t, where t = income tax rate. 
C)  Is equal to the pretax cost of debt/(1 − t), where t = income tax rate. 
D)  Is approximated by the firm's short-term borrowing rate. 
E)  Is estimated using the Capital Asset Pricing Model (CAPM).

Question 16

Two investments have the same total cash inflows and the same payback period. Therefore:

Accepted Answer

A)  These two investments are equally desirable. 
B)  These two investments must be identical in terms of the present value of the cash inflows. 
C)  The payback period method can help decision makers choose between these two investments. 
D)  One pattern of cash inflows may, in a present value sense, be preferable to the other investment's pattern of cash inflows. 
E)  Most likely, these two investments required approximately the same initial investment. 
A)  These two investments are equally desirable. 
B)  These two investments must be identical in terms of the present value of the cash inflows. 
C)  The payback period method can help decision makers choose between these two investments. 
D)  One pattern of cash inflows may, in a present value sense, be preferable to the other investment's pattern of cash inflows. 
E)  Most likely, these two investments required approximately the same initial investment.

Question 17

Durable Inc.is considering replacing an old drilling machine that cost $200,000 six years ago with a new one that costs $450,000.Shipping and installation cost an additional $60,000.The old machine has been depreciated using straight-line method with no salvage value over an estimated 8-year useful life.The old machine can be sold for $40,000 now or $10,000 in two years.Management expects increases in inventories of $10,000, accounts receivable of $32,000, and accounts payable of $12,000 if the new machine is acquired.Durable's income tax rate is expected to be 30 percent over the years affected by the investment.
Required: What is Durable's net initial investment (i.e., its after-tax initial cash outlay for the machine)?

Accepted Answer

The answer of Durable Inc.is considering replacing an old drilling...

Question 18

Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with an assumed residual (salvage) value of $50,000. Quip's combined income tax rate, t, is 40%.

What is the payback period for the new machine (rounded to the nearest one-tenth of a year)? Assume that the after-tax cash inflows occur evenly throughout the year.

Accepted Answer

A)  2.7 years. 
B)  3.0 years. 
C)  3.3 years. 
D)  3.6 years. 
E)  4.2 years. 
A)  2.7 years. 
B)  3.0 years. 
C)  3.3 years. 
D)  3.6 years. 
E)  4.2 years.

Question 19

________ is the recommended method for determining the optimal capital budget under conditions of capital rationing.

Accepted Answer

A)  The net present value (NPV) method 
B)  Monte Carlo simulation 
C)  The modified internal rate of return (MIRR) method 
D)  The profitability index (PI) method 
E)  The discounted payback method 
A)  The net present value (NPV) method 
B)  Monte Carlo simulation 
C)  The modified internal rate of return (MIRR) method 
D)  The profitability index (PI) method 
E)  The discounted payback method

Question 20

Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with an assumed residual (salvage) value of $50,000. Quip's combined income tax rate, t, is 40%.

What is the net after-tax cash inflow in Year 1 from the proposed investment, rounded to the nearest whole dollar?

Accepted Answer

A)  $72,000. 
B)  $92,000. 
C)  $96,000. 
D)  $102,000. 
E)  $120,000. 
A)  $72,000. 
B)  $92,000. 
C)  $96,000. 
D)  $102,000. 
E)  $120,000.

Which one of the following is an advantage of the accounting (book) rate of return (ARR) method for analyzing capital investment proposals?

Which of the following would not be considered a benefit of conducting post-implementation audits of capital investment projects?

The capital budgeting method(s) that is(are) most likely to provide consistency between data for capital budgeting and data for subsequent performance evaluation is(are) the:

Which of the following methods is potentially useful for helping an organization align its capital expenditures with its strategy?

The tax impact of a capital investment project (such as the replacement of a major piece of machinery) is present during:

Which of the following is not an important advantage of the net present value (NPV) method over the internal rate of return (IRR) method in evaluating capital investment proposals?

Cash-flow analysis: If an existing asset is sold at a gain, and the gain is taxable, then the after-tax proceeds from this transaction would be equal to:

The process of identifying, evaluating, selecting, and controlling capital investments is referred to as:

The after-tax cost of debt for purposes of estimating a company's weighted-average cost of capital (WACC)

Two investments have the same total cash inflows and the same payback period. Therefore:

________ is the recommended method for determining the optimal capital budget under conditions of capital rationing.

Cost Management and Strategy

Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map

Basic Cost Management Concepts

Job Costing

Activity-Based Costing and Customer Profitability Analysis

Process Costing

Cost Allocation: Departments, Joint Products, and By-Products

Cost Estimation

Short-Term Profit Planning: Cost-Volume-Profit CVP Analysis

Strategy and the Master Budget

Decision Making With a Strategic Emphasis

Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing

Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial Performance Measures

Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management

Operational Performance Measurement: Further Analysis of Productivity and Sales

The Management and Control of Quality

Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard

Strategic Performance Measurement: Investment Centers and Transfer Pricing

Management Compensation, Business Analysis, and Business Valuation

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Exam 12: Strategy and the Analysis of Capital Investments

Which one of the following is an advantage of the accounting (book) rate of return (ARR) method for analyzing capital investment proposals?

Which of the following would not be considered a benefit of conducting post-implementation audits of capital investment projects?

The capital budgeting method(s) that is(are) most likely to provide consistency between data for capital budgeting and data for subsequent performance evaluation is(are) the:

Which of the following methods is potentially useful for helping an organization align its capital expenditures with its strategy?

The tax impact of a capital investment project (such as the replacement of a major piece of machinery) is present during:

Which of the following is not an important advantage of the net present value (NPV) method over the internal rate of return (IRR) method in evaluating capital investment proposals?

Cash-flow analysis: If an existing asset is sold at a gain, and the gain is taxable, then the after-tax proceeds from this transaction would be equal to:

The process of identifying, evaluating, selecting, and controlling capital investments is referred to as:

The after-tax cost of debt for purposes of estimating a company's weighted-average cost of capital (WACC)

Two investments have the same total cash inflows and the same payback period. Therefore:

________ is the recommended method for determining the optimal capital budget under conditions of capital rationing.

Cost Management and Strategy

Implementing Strategy: The Value Chain, the Balanced Scorecard, and the Strategy Map

Basic Cost Management Concepts

Job Costing

Activity-Based Costing and Customer Profitability Analysis

Process Costing

Cost Allocation: Departments, Joint Products, and By-Products

Cost Estimation

Short-Term Profit Planning: Cost-Volume-Profit CVP Analysis

Strategy and the Master Budget

Decision Making With a Strategic Emphasis

Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing

Operational Performance Measurement: Sales, Direct-Cost Variances, and the Role of Nonfinancial Performance Measures

Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management

Operational Performance Measurement: Further Analysis of Productivity and Sales

The Management and Control of Quality

Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard

Strategic Performance Measurement: Investment Centers and Transfer Pricing

Management Compensation, Business Analysis, and Business Valuation

Filters