Question 1

The method of project selection that brings the time value of money into capital investment analysis is the:

Accepted Answer

A)  accounting rate of return method. 
B)  net present value method. 
C)  payback method. 
D)  return on average investment method. 
A)  accounting rate of return method. 
B)  net present value method. 
C)  payback method. 
D)  return on average investment method. B

Question 2

The time value of money concept is given consideration in long-range investment decisions by:

Accepted Answer

A)  using the payback method and at least one other method to make an evaluation. 
B)  assuming equal annual cash flow patterns. 
C)  investing only in short term projects. 
D)  assigning greater value to more immediate cash flows. 
A)  using the payback method and at least one other method to make an evaluation. 
B)  assuming equal annual cash flow patterns. 
C)  investing only in short term projects. 
D)  assigning greater value to more immediate cash flows. D

Question 3

Which of the following is irrelevant to capital investment analysis?

Accepted Answer

A)  Net cash flows 
B)  Investment cost 
C)  Carrying value 
D)  Residual value 
A)  Net cash flows 
B)  Investment cost 
C)  Carrying value 
D)  Residual value C

Question 4

Which of the following statements concerning the internal rate of return method of capital budgeting is correct?

Accepted Answer

A)  When the internal rate of return method is employed a direct relationship will exist between the interest rate chosen and the present value of future cash flows. 
B)  The interest rate that will discount future cash flows so that their present value is exactly equal to the cost of the investment is the cost of capital. 
C)  The internal rate of return is the discount rate that will produce a positive net present value for the investment. 
D)  When the net present value is equal to zero, the cost of capital (discount rate) and the internal rate of return are equal. 
A)  When the internal rate of return method is employed a direct relationship will exist between the interest rate chosen and the present value of future cash flows. 
B)  The interest rate that will discount future cash flows so that their present value is exactly equal to the cost of the investment is the cost of capital. 
C)  The internal rate of return is the discount rate that will produce a positive net present value for the investment. 
D)  When the net present value is equal to zero, the cost of capital (discount rate) and the internal rate of return are equal.

Question 5

Figures for Clear Waters Company are:
$$\begin{array} { l c c } 
& \text { Product A } & \text { Product B } \
\text { Selling price per unit } & \$ 132 & \$ 156 \
\text { Variable cost per unit } & \underline { 108 } & \underline { \$ 4 } \
\text { Contribution margin } & \underline { \$ 24 } & \$ \underline { 72 }
\end{array}$$
It requires one labour hour to produce one unit of Product A and four labour hours to produce one unit of Product B. Assume overall demand is greater than the company's capacity to produce. If labour is the constraining factor the company should concentrate production on:

Accepted Answer

A)  Product B, since it has the lowest variable costs. 
B)  Product B, since it has the highest selling price. 
C)  Product B, since it has the highest contribution margin per unit. 
D)  Product A, since it has the highest contribution margin per labour hour. 
A)  Product B, since it has the lowest variable costs. 
B)  Product B, since it has the highest selling price. 
C)  Product B, since it has the highest contribution margin per unit. 
D)  Product A, since it has the highest contribution margin per labour hour.

Question 6

What amount must be deposited today at 6% p.a. to grow to $15 000 in five years?

Accepted Answer

A)  $2 830.20 
B)  $3 560.92 
C)  $11 209.50 
D)  $15 000.00 
A)  $2 830.20 
B)  $3 560.92 
C)  $11 209.50 
D)  $15 000.00

Question 7

The purpose of incremental analysis is to find the alternative:

Accepted Answer

A)  that contributes the most to profit. 
B)  that brings in the most income. 
C)  with the lowest fixed costs. 
D)  with the least direct costs. 
A)  that contributes the most to profit. 
B)  that brings in the most income. 
C)  with the lowest fixed costs. 
D)  with the least direct costs.

Question 8

How often are sunk costs omitted from decision analysis?

Accepted Answer

A)  Never. 
B)  Sometimes. 
C)  Always. 
D)  Only if immaterial. 
A)  Never. 
B)  Sometimes. 
C)  Always. 
D)  Only if immaterial.

Question 9

An increase in the discount rate:

Accepted Answer

A)  will reduce present values. 
B)  will increase present values. 
C)  will have no effect on net present value. 
D)  may either increase or decrease present values, depending on the state of the economy. 
A)  will reduce present values. 
B)  will increase present values. 
C)  will have no effect on net present value. 
D)  may either increase or decrease present values, depending on the state of the economy.

Question 10

Capital investment proposals should be ranked in decreasing order of:

Accepted Answer

A)  dollar amount required. 
B)  salvage value. 
C)  rate of return. 
D)  residual value expected. 
A)  dollar amount required. 
B)  salvage value. 
C)  rate of return. 
D)  residual value expected.

Question 11

A cost which differs between alternative courses of action is a:

Accepted Answer

A)  controllable cost. 
B)  relevant cost. 
C)  non-joint cost. 
D)  sunk cost. 
A)  controllable cost. 
B)  relevant cost. 
C)  non-joint cost. 
D)  sunk cost.

Question 12

The decision to further process a joint product is influenced by the:

Accepted Answer

A)  increased costs of further processing. 
B)  amount of fixed overhead which has been absorbed by the product. 
C)  method used to allocate joint costs. 
D)  amount of costs already incurred for the product. 
A)  increased costs of further processing. 
B)  amount of fixed overhead which has been absorbed by the product. 
C)  method used to allocate joint costs. 
D)  amount of costs already incurred for the product.

Question 13

Flash Sales provided the following information. Calculate the return on investment.
$$\begin{array} { l r } 
\text { Sales } & \$ 800000 \
\text { Operating profit } & \$ 46800 \
\text { Average operating assets } & \$ 520000 \
\text { Shareholders' equity } & \$ 50000 \
\text { Minimum required rate of return } & 12 \%
\end{array}$$

Accepted Answer

A)  4% 
B)  6% 
C)  9% 
D)  12% 
A)  4% 
B)  6% 
C)  9% 
D)  12%

Question 14

If $10 000 is invested at 8%, which calculation will provide the answer to how much will it grow to at the end of four years?

Accepted Answer

A)  $10 000 / 0.7350 
B)  $10 000 x 3.3121 
C)  $10 000 x 0.9259 x 4 
D)  ($10 000 / 3.3121) x 4 
A)  $10 000 / 0.7350 
B)  $10 000 x 3.3121 
C)  $10 000 x 0.9259 x 4 
D)  ($10 000 / 3.3121) x 4

Question 15

An investment will return net after-tax cash inflows of $8 000 per year for 6 years. The desired rate of return is 14%. What is the total present value of the future cash flows?

Accepted Answer

A)  $27 464.80 
B)  $31 109.60 
C)  $21 868.80 
D)  $48 000.00 
A)  $27 464.80 
B)  $31 109.60 
C)  $21 868.80 
D)  $48 000.00

Question 16

If a firm has limited production capacity in one part of a sequential production operation, it can maximise profits by producing those items having the highest:

Accepted Answer

A)  contribution margin per unit of the scarce resource. 
B)  selling price. 
C)  gross profit. 
D)  profit. 
A)  contribution margin per unit of the scarce resource. 
B)  selling price. 
C)  gross profit. 
D)  profit.

Question 17

A manager can improve return on assets by implementing which of the following actions?
I. Increasing sales
II. Decreasing costs
III. Decreasing assets

Accepted Answer

A)  I and II only 
B)  II and III only 
C)  I and III only 
D)  I, II and III 
A)  I and II only 
B)  II and III only 
C)  I and III only 
D)  I, II and III

Question 18

Data for Van Guard Designs are:
Investment in new equipment $90 000
Net annual cash inflows 12 500
Salvage value of the new equipment 8 000
Life of the new equipment 10 years
Calculate the net present value of the machine assuming the cost of capital is 6% (ignore taxes and round answer to nearest whole dollar).

Accepted Answer

A)  $(15 733) 
B)  $(2 466) 
C)  $2 001 
D)  $6 468 
A)  $(15 733) 
B)  $(2 466) 
C)  $2 001 
D)  $6 468

Question 19

The term 'incremental cost' refers to:

Accepted Answer

A)  a cost that is directly traceable to a specific cost object. 
B)  the difference in total costs between alternatives. 
C)  a cost that continues to be incurred even though there is no activity. 
D)  the operating profit forgone by selecting one choice instead of another. 
A)  a cost that is directly traceable to a specific cost object. 
B)  the difference in total costs between alternatives. 
C)  a cost that continues to be incurred even though there is no activity. 
D)  the operating profit forgone by selecting one choice instead of another.

Question 20

___________represents the number of sales dollars generated by each dollar invested in assets.

Accepted Answer

A)  Assets invested 
B)  Asset turnover 
C)  Profit margin 
D)  Number of sales 
A)  Assets invested 
B)  Asset turnover 
C)  Profit margin 
D)  Number of sales

Exam 25: Differential Analysis, Profitability Analysis and Capital Budgeting

The method of project selection that brings the time value of money into capital investment analysis is the:

The time value of money concept is given consideration in long-range investment decisions by:

Which of the following is irrelevant to capital investment analysis?

Which of the following statements concerning the internal rate of return method of capital budgeting is correct?

What amount must be deposited today at 6% p.a. to grow to $15 000 in five years?

The purpose of incremental analysis is to find the alternative:

How often are sunk costs omitted from decision analysis?

An increase in the discount rate:

Capital investment proposals should be ranked in decreasing order of:

A cost which differs between alternative courses of action is a:

The decision to further process a joint product is influenced by the:

Flash Sales provided the following information. Calculate the return on investment. Sales \ 800000 Operating profit \ 46800 Average operating assets \ 520000 Shareholders' equity \ 50000 Minimum required rate of return 12\%

If $10 000 is invested at 8%, which calculation will provide the answer to how much will it grow to at the end of four years?

An investment will return net after-tax cash inflows of $8 000 per year for 6 years. The desired rate of return is 14%. What is the total present value of the future cash flows?

If a firm has limited production capacity in one part of a sequential production operation, it can maximise profits by producing those items having the highest:

A manager can improve return on assets by implementing which of the following actions? I. Increasing sales II. Decreasing costs III. Decreasing assets

The term 'incremental cost' refers to:

___________represents the number of sales dollars generated by each dollar invested in assets.

Decision Making and the Role of Accounting

Financial Statements for Decision Making

Recording Transactions

Adjusting the Accounts and Preparing Financial Statements

Completing the Accounting Cycle Closing and Reversing Entries

Accounting for Retailing

Accounting for Systems

Partnerships: Formation, Operation and Reporting

Companies: Formation and Operations

Regulation and the Conceptual Framework

Cash Management and Control

Receivables

Inventories

Non-Current Assets: Acquisition and Depreciation

Non-Current Assets: Revaluation, Disposal and Other Aspects

Liabilities

Presentation of Financial Statements

Statement of Cash Flows

Analysis and Interpretation of Financial Statements

Accounting for Manufacturing

Cost Accounting Systems

Cost-Volume-Profit Analysis for Decision Making

Budgeting for Planning and Control

Performance Evaluation for Managers

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