Question 1

Which of the following best describes the internal rate of return?

Accepted Answer

A)  The discount rate that makes the cost of the investment equal to the present value of the cash flows 
B)  The discount rate that is used to borrow funds from a lender 
C)  The ratio of average annual income to average amount invested 
D)  The rate at which an investment pays back 
A)  The discount rate that makes the cost of the investment equal to the present value of the cash flows 
B)  The discount rate that is used to borrow funds from a lender 
C)  The ratio of average annual income to average amount invested 
D)  The rate at which an investment pays back

Question 2

Amanda is ready to retire and as a retirement benefit, she can choose to take $380,000 now or $50,000 at the end of each year for a period of 10 years. To compare the two options, she must calculate the present value of both alternatives. She believes a discount rate of 5% would be the most appropriate rate to apply. How much is the present value if she takes the option of $50,000 a year for 10 years? Please refer to the following data, if needed:
$$\begin{array} { | r | r | r | r | r | r | r | } 
\hline \begin{array} { r } 
\text { Present Value of } \
\text { an Annuity of \$1 }
\end{array} & & & & & & \
\hline 1 & 5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \% \
\hline 2 & 1.952 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \
\hline 3 & 2.723 & 2.83 & 1.808 & 1.783 & 1.759 & 1.736 \
\hline 4 & 3.546 & 3.465 & 2.624 & 2.577 & 2.531 & 2.487 \
\hline 5 & 4.329 & 4.21 & 4.100 & 3.312 & 3.240 & 3.170 \
\hline 6 & 5.076 & 4.917 & 4.767 & 4.623 & 3.890 & 3.79 \
\hline 7 & 5.786 & 5.58 & 5.389 & 5.206 & 5.033 & 4.355 \
\hline 8 & 6.463 & 6.210 & 5.971 & 5.747 & 5.535 & 5.335 \
\hline 9 & 7.108 & 6.80 & 6.515 & 6.247 & 5.995 & 5.759 \
\hline 10 & 7.722 & 7.360 & 7.024 & 6.710 & 6.418 & 6.145 \
\hline
\end{array}$$

Accepted Answer

A)  $380,000 
B)  $386,100 
C)  $321,000 
D)  $399,000 
A)  $380,000 
B)  $386,100 
C)  $321,000 
D)  $399,000

Question 3

Please review the information on 4 potential investments:
$$\begin{array} { | r | r | r | r | r | } 
\hline & \text { Praject A } &  { \text { Praject B } } & { \text { Praject C } } &  { \text { Praject D } } \
\hline \text { Initial investment } & \$ 200,000 & \$ 250,000 & \$ 300,000 & \$ 90,000 \
\hline \text { PV of cash inflows } & \$ 285,000 & \$ 295,000 & \$ 420,000 & \$ 94,000 \
\hline \text { Payback period (years) } & 7.2 & 6.0 & 9.5 & 2.0 \
\hline \text { NPV of project } & \$ 85,000 & \$ 45,000 & \$ 120,000 & \$ 4,000 \
\hline \text { Profitability index } & 1.43 & 1.10 & 1.40 & 1.04 \
\hline
\end{array}$$
-
Based on the above data, which project carries the lowest level of risk?

Accepted Answer

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

Question 4

Which of the following is a common capital budgeting method?

Accepted Answer

A)  Return on assets 
B)  Acid test ratio 
C)  Internal rate of return 
D)  Debt-to-equity ratio 
A)  Return on assets 
B)  Acid test ratio 
C)  Internal rate of return 
D)  Debt-to-equity ratio

Question 5

When projecting future cash flows of an investment, which of the following is TRUE?

Accepted Answer

A)  Cash flow data must also include non-cash transactions like depreciation. 
B)  Cash inflows and cash outflows are treated separately, rather than being netted together. 
C)  Cash flows are typically projected by accounting personnel without input from other business functions. 
D)  The initial investment is always treated separately from all other cash flows. 
A)  Cash flow data must also include non-cash transactions like depreciation. 
B)  Cash inflows and cash outflows are treated separately, rather than being netted together. 
C)  Cash flows are typically projected by accounting personnel without input from other business functions. 
D)  The initial investment is always treated separately from all other cash flows.

Question 6

Jim wants to invest $5,000 a year for the next 25 years to prepare for his retirement. If he wants to calculate the value of his investment at the end of the 25 year period, which of the following tables would be the best for him to use?

Accepted Answer

A)  Present Value of $1 
B)  Present Value of an Annuity of $1 
C)  Future Value of $1 
D)  Future Value of an Annuity of $1 
A)  Present Value of $1 
B)  Present Value of an Annuity of $1 
C)  Future Value of $1 
D)  Future Value of an Annuity of $1

Question 7

After a company invests in capital assets, which of the following activities will it perform in order to compare the actual to the projected net cash inflows?

Accepted Answer

A)  Cash flow analysis 
B)  Post-audit 
C)  Pre and post analysis 
D)  Post-cash flow 
A)  Cash flow analysis 
B)  Post-audit 
C)  Pre and post analysis 
D)  Post-cash flow

Question 8

If $1,000 is invested in an account with 9% interest compounding yearly, approximately how many years will it take for the amount to double? Please refer to the following Future Value table:
$\begin{array}{|r|r|r|r|r|r|r|}
\hline \text {Future}\
\text {Value of}\
\$1\
\hline&4 \% & 5 \% & 6 \% & 7 \% & 8 \% & 9 \%\
\hline 1 & 1.040 & 1.050 & 1.069 & 1.07 & 1.080 & 1.090 \
\hline 2 & 1.082 & 1.103 & 1.124 & 1.14 & 1.160 & 1.188 \
\hline 3 & 1.125 & 1.158 & 1.191 & 1.22 & 1.260 & 1.295 \
\hline 4 & 1.170 & 1.216 & 1.26 & 1.311 & 1.360 & 1.412 \
\hline 5 & 1.217 & 1.276 & 1.33 & 1.40 & 1.469 & 1.539 \
\hline 6 & 1.265 & 1.340 & 1.419 & 1.501 & 1.587 & 1.677 \
\hline 7 & 1.316 & 1.407 & 1.504 & 1.606 & 1.714 & 1.828 \
\hline 8 & 1.369 & 1.477 & 1.594 & 1.719 & 1.851 & 1.993 \
\hline 9 & 1.423 & 1.551 & 1.689 & 1.839 & 1.999 & 2.172 \
\hline 10 & 1.480 & 1.629 & 1.791 & 1.967 & 2.159 & 2.367 \
\hline
\end{array}$

Accepted Answer

A)  Slightly more than 8 years 
B)  Exactly 9 years 
C)  5 years 
D)  Slightly less than 7 years 
A)  Slightly more than 8 years 
B)  Exactly 9 years 
C)  5 years 
D)  Slightly less than 7 years

Question 9

Petrus Company is looking at an energy-saving investment which will cost $500,000 and will save the company $300,000 in the first year, $200,000 in the second year, and $48,000 in the third year. They have a hurdle rate of 7%, and they believe this project will have a return somewhere close to the hurdle rate. Please refer to the tables below and calculate the IRR of the investment.
$\begin{array}{|c|c|c|c|c|c|c|}
\hline \text {Present Value of}\
 \text {an Annuity of }\
\$1\
\hline&5\%&6\%&7\%&8\%&9\%&10\%\
\hline1 & 0.952& 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \
\hline 2& 0.907 & 0.890 & 0.873 & 0.857 & 0.847 & 0.826 \
\hline 3& 0.864 & 0.840 & 0.816 & 0.794 & 0.771 & 0.751 \
\hline 4& 0.823 & 0.792 & 0.763 & 0.735 & 0.708 &0.683 \
\hline 5& 0.784 & 0.747 & 0.713 & 0.681 & 0.650 &0.621 \
 
\hline
\end{array}$

Choose the option that comes closest to describing the actual IRR.

Accepted Answer

A)  Less than 6% 
B)  Between 6% and 7% 
C)  Exactly 7% 
D)  More than 7% 
A)  Less than 6% 
B)  Between 6% and 7% 
C)  Exactly 7% 
D)  More than 7%

Question 10

A company is evaluating 3 possible investments. Each uses straight-line depreciation. See data below:
$\begin{array}{|c|c|c|c|}
\hline & \text { Project A } & \text { Project B } & \text { Project C } \
\hline \text { Investment } & \$ 400,000 & \$ 20,000 & \$ 100,000 \
\hline \text { Salvage value } & \$ 0 & \$ 2,000 & \$ 5,000 \
\hline\
\hline \text { Net cash flows: } & & & \
\hline \text { Year 1 } & \$ 100,000 & \$ 10,000 & \$ 40,000 \
\hline \text { Year 2 } & \$ 100,000 & \$ 8,000 & \$ 25,000 \
\hline \text { Year 3 } & \$ 100,000 & \$ 5,000 & \$ 30,000 \
\hline \text { Year 4 } & \$ 100,000 & \$ 3,000 & \$ 10,000 \
\hline \text { Year 5 } & \$ 100,00 & \$ 0 & \$ 0 \
\hline
\end{array}$

-
What is the rate of return for Project B?

Accepted Answer

A)  50% 
B)  4% 
C)  18% 
D)  10% 
A)  50% 
B)  4% 
C)  18% 
D)  10%

Question 11

Please refer to the following data concerning 4 investment alternatives:
$\begin{array}{|l|r|r|r|r}
\hline & \text { Praject A } &  { \text { Praject B } } & { \text { Praject C } } &  { \text { Praject D } } \ 
\hline \text { Initial investment } & \$ 210,000 & \$ 400,000 & \$ 550,000 & \$ 1,000,000 \
\hline \text { PV of cash } \
\text { Inflows } & \$ 285,000 & \$ 490,000 & \$ 800,000 & \$ 990,000 \
\hline \text { Payback period } &  \
\text { (years) } & 7.2 & 6.0 & 9.5 & 2.0 \
\hline \text { NPV of project } & \$ 75,000 & \$ 90,000 & \$ 250,000 & (\$ 10,000 \
\hline
\end{array}$

-
What is the profitability index for Project A?

Accepted Answer

A)  0.98 
B)  1.08 
C)  1.36 
D)  1.66 
A)  0.98 
B)  1.08 
C)  1.36 
D)  1.66

Question 12

Logan, Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:
$\begin{array}{|l|r|r|}
\hline& \text { Investment A } & \text { Investment B } \ 
\hline \text { Initial capital investment } & \$ 60,000 & \$ 90,000 \
\hline \text { Estimated useful life } & 3 \text { year } & 3 \text { years } \
\hline \text { Estimated residual value } & -0- & -0-\
\hline \text { Estimated annual net cash inflow for 3 years } & \$ 25,000 & \$ 40,000 \
\hline \text { Reguired rate of retum } & 10 \% & 12 \% \
\hline
\end{array}$

-
How long is the payback period for Investment B?

Accepted Answer

A)  0.44 years 
B)  2.25 years 
C)  2.35 years 
D)  3.00 years 
A)  0.44 years 
B)  2.25 years 
C)  2.35 years 
D)  3.00 years

Question 13

Which of the following is the ONLY capital budgeting method which uses accrual accounting information?

Accepted Answer

A)  Payback period 
B)  Rate of return (ROR) 
C)  Net present value (NPV) 
D)  Internal rate of return (IRR) 
A)  Payback period 
B)  Rate of return (ROR) 
C)  Net present value (NPV) 
D)  Internal rate of return (IRR)

Question 14

Alpha Company is considering an investment of $1,000,000 in a land development project. It will yield cash flows of $300,000 for 5 years. Alpha uses a discount rate of 7%. What is the net present value of the investment?
$\begin{array}{|l|l|l|l|l|l|l|}
\hline \text { Present}\
\text {Value of an}\
\text {Annuity of}\
 \$ 1 \ 
\hline &5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \%\ 
\hline 1& 0.95 & 0.943 & 0.93 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.859 & 1.833 & 1.809 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.729 & 2.673 & 2.624 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.546 & 3.465 & 3.387 & 3.312 & 3.240 & 3.170 \
\hline 5 & 4.329 & 4.212 & 4.10 d & 3.993 & 3.890 & 3.791 \
\hline
\end{array}$

Accepted Answer

A)  $230,000 
B)  $312,000 
C)  $330,000 
D)  $444,000 
A)  $230,000 
B)  $312,000 
C)  $330,000 
D)  $444,000

Question 15

Carte Blanco Company is evaluating an investment of $1,000,000 which will yield cash flows of $257,000 per year for 5 years with no residual value.
 $\begin{array}{|l|l|l|l|l|l|l|}
\hline \text { Present}\
\text {Value of an}\
\text {Annuity of}\
 \$ 1 \ 
\hline &5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \%\ 
\hline 1& 0.95 & 0.943 & 0.93 & 0.926 & 0.917 & 0.909 \
\hline 2 & 1.859 & 1.833 & 1.809 & 1.783 & 1.759 & 1.736 \
\hline 3 & 2.729 & 2.673 & 2.624 & 2.577 & 2.531 & 2.487 \
\hline 4 & 3.546 & 3.465 & 3.387 & 3.312 & 3.240 & 3.170 \
\hline 5 & 4.329 & 4.212 & 4.10 d & 3.993 & 3.890 & 3.791 \
\hline
\end{array}$

If Carte Blanco has a hurdle rate of 10%, they should accept the investment because its internal rate of return is higher than 10%.

Accepted Answer

A) True 
 B)False

Question 16

The payback method and the rate of return method are both conceptually better than the discounted cash flow models because they are based on cash flows.

Accepted Answer

A) True 
 B)False

Question 17

The rate of return and payback methods DO NOT take into consideration the time value of money. Discounted cash flow methods DO make use of the time value of money.

Accepted Answer

A) True 
 B)False

Question 18

Capital budgeting methods which do NOT incorporate time value of money are generally used for the initial stage of screening investment alternatives.

Accepted Answer

A) True 
 B)False

Question 19

If Billy Pierce invests $1,000 at the end of each year for 8 years, and he wants it to grow to at least $10,000, what interest rate would be needed?
$\begin{array}{|r|r|r|r|r|r|r|}
\hline\text { Future } \
\text { Value of an} \
\text { Annuity of }\
\$ 1\
\hline & 4 \% & 5 \% & 6 \% & 7 \% & 8 \% & 9 \% \
\hline 1 & 1.000 & 1.000 & 1.000 & 1.000 & 1.000 & 1.000 \
\hline 2 & 2.040 & 2.050 & 2.060 & 2.070 & 2.080 & 2.090 \ 
\hline 3 & 3.122 & 3.153 & 3.184 & 3.215 & 3.246 & 3.278 \
\hline 4 & 4.246 & 4.310 & 4.379 & 4.440 & 4.506 & 4.573 \
\hline 5 & 5.416 & 5.526 & 5.637 & 5.751 & 5.867 & 5.985 \
\hline 6 & 6.631 & 6.802 & 6.976 & 7.153 & 7.336 & 7.523 \
\hline 7 & 7.898 & 8.142 & 8.394 & 8.654 & 8.929 & 9.200 \
\hline 8 & 9.214 & 9.549 & 9.897 & 10.26 & 10.64 & 11.03 \
\hline 9 & 10.58 & 11.03 & 11.49 & 11.98 & 12.49 & 13.02 \
\hline 10 & 12.01 & 12.58 & 13.18 & 13.82 & 14.49 & 15.19 \
\hline
\end{array}$

Accepted Answer

A)  4% 
B)  5% 
C)  6% 
D)  7% 
A)  4% 
B)  5% 
C)  6% 
D)  7%

Question 20

If a company uses a higher discount rate to calculate NPV of an investment, it reflects a higher level of perceived risk for the investment.

Accepted Answer

A) True 
 B)False

Which of the following best describes the internal rate of return?

Which of the following is a common capital budgeting method?

When projecting future cash flows of an investment, which of the following is TRUE?

Jim wants to invest $5,000 a year for the next 25 years to prepare for his retirement. If he wants to calculate the value of his investment at the end of the 25 year period, which of the following tables would be the best for him to use?

After a company invests in capital assets, which of the following activities will it perform in order to compare the actual to the projected net cash inflows?

Which of the following is the ONLY capital budgeting method which uses accrual accounting information?

The payback method and the rate of return method are both conceptually better than the discounted cash flow models because they are based on cash flows.

The rate of return and payback methods DO NOT take into consideration the time value of money. Discounted cash flow methods DO make use of the time value of money.

Capital budgeting methods which do NOT incorporate time value of money are generally used for the initial stage of screening investment alternatives.

If a company uses a higher discount rate to calculate NPV of an investment, it reflects a higher level of perceived risk for the investment.

Corporations: Paid-In Capital and the Balance Sheet

Corporations: Effects on Retained Earnings and the Income Statement

The Statement of Cash Flows

Financial Statement Analysis

Introduction to Management Accounting

Job Order and Process Costing

Activity-Based Costing and Other Cost Management Tools

Cost-Volume-Profit Analysis

Short-Term Business Decisions

The Master Budget and Responsibility Accounting

Flexible Budgets and Standard Costs

Performance Evaluation and the Balanced Scorecard

Filters

Exam 21: Capital Investment Decisions and the Time Value of Money

Which of the following best describes the internal rate of return?

Which of the following is a common capital budgeting method?

When projecting future cash flows of an investment, which of the following is TRUE?

Jim wants to invest $5,000 a year for the next 25 years to prepare for his retirement. If he wants to calculate the value of his investment at the end of the 25 year period, which of the following tables would be the best for him to use?

After a company invests in capital assets, which of the following activities will it perform in order to compare the actual to the projected net cash inflows?

Which of the following is the ONLY capital budgeting method which uses accrual accounting information?

The payback method and the rate of return method are both conceptually better than the discounted cash flow models because they are based on cash flows.

The rate of return and payback methods DO NOT take into consideration the time value of money. Discounted cash flow methods DO make use of the time value of money.

Capital budgeting methods which do NOT incorporate time value of money are generally used for the initial stage of screening investment alternatives.

If a company uses a higher discount rate to calculate NPV of an investment, it reflects a higher level of perceived risk for the investment.

Corporations: Paid-In Capital and the Balance Sheet

Corporations: Effects on Retained Earnings and the Income Statement

The Statement of Cash Flows

Financial Statement Analysis

Introduction to Management Accounting

Job Order and Process Costing

Activity-Based Costing and Other Cost Management Tools

Cost-Volume-Profit Analysis

Short-Term Business Decisions

The Master Budget and Responsibility Accounting

Flexible Budgets and Standard Costs

Performance Evaluation and the Balanced Scorecard

Filters