Deck 9: Using Accounting Information to Make Managerial Decisions

Question 1

Capital budgeting decisions involve both outflows of cash at one or more times and inflows of cash at other times.

Answer 1

True

Question 2

The present value of a future amount may be smaller or larger than the future value.

Answer 2

False
The present value of the future amount is always smaller than the future amount,

Question 3

To calculate the present value of an annuity, divide the amount to be received each year by the present value of an annuity factor.

Answer 3

False
To calculate the present value of an annuity, multiple the amount to be received each year by the present value factor,

Question 4

Those assets that are expected to provide economic benefits for several years are called capital assets.

Question 5

The process of determining how much an amount of money to be received in the future is worth today is called future value.

Question 6

A stream of equal cash flows received at set time intervals is called an annuity.

Question 7

The process of evaluating an organization's investment in long-term assets is called investment control.

Question 8

Any return a company receives over and above the original investment in a capital asset is called return on investment.

Question 9

Capital assets are also referred to as long-lived assets.

Question 10

In a predictable decision, a proposed project is compared to a performance benchmark to determine whether the project should be considered further.

Question 11

All capital assets are depreciable assets.

Question 12

Once the cash flows and discount rate have been determined, calculate the present value of each cash flow by multiplying each cash flow by the appropriate present value factor.

Question 13

The original purchase price of an old machine that is being replaced must be considered in capital budgeting decisions.

Question 14

The first step in calculating the net present value of a product is to determine the appropriate discount rate.

Question 15

Assets used by an organization to build products or deliver services are called investment assets.

Question 16

When a company invests in a capital asset, recouping the original investment is called return on investment.

Question 17

In calculating the net present value of a project, the appropriate discount rate should be similar across companies.

Question 18

The goal of the screening decision is to narrow the list of capital proposals to include only those that are expected to bring the desired level of return.

Question 19

Capital budgeting differs from cash budgeting in terms of its time horizon.

Question 20

The net present value approach to capital budgeting requires you to calculate the present value of each cash flow and then add those present values to arrive at the capital project's net present value.

Question 21

When the annual cash flows are uneven, you must use the annuity table method to calculate the internal rate of return.

Question 22

The process of evaluating an organization's investment in long-term assets is called

A)activity-based evaluation.
B)capital budgeting.
C)investment control.
D)A preference decision.

Question 23

The accounting rate of return differs from the internal rate of return and the payback period in that, the accounting rate of return does not focus on cash flows.

Question 24

Like net present value, the internal rate of return considers the amount and timing of future cash flows.

Question 25

Capital assets are

A)used to promote the company.
B)used to produce products or deliver services.
C)depreciable.
D)investments in stock.

Question 26

Two types of return can be expected from investment in long-term assets.There are

A)positive contribution margin and positive segment margin.
B)interest and dividends.
C)return of investment and return on investment.
D)return of investment and a positive contribution margin.

Question 27

If the net present value of a project is greater than or equal to zero, the project has achieved the required rate of return and should be accepted.

Question 28

Capital budgeting differs from cash budgeting in that

A)Cash budgeting focuses on short-term results while capital budgeting focuses on five, ten, or even twenty years in the future.
B)Cash budgeting focuses on the balance sheet while capital budgeting focuses on the income statement.
C)A cash budget contains only expected cash outflows for capital assets while capital budgeting includes both cash inflows and outflows.
D)Cash budgeting is based on cash-basis accounting while capital budgeting is based on accrual-basis.

Question 29

Which of the following capital assets is not a depreciable asset?

A)Building
B)Equipment
C)Automobiles
D)Land

Question 30

The decision to replace an old automobile with a new one must be analyzed using incremental analysis.

Question 31

Assets that are expected to provide economic benefits for several years are referred to as

A)cash assets.
B)short-term assets.
C)capital assets.
D)balance sheet assets.

Question 32

The payback period is a simple technique using the time value of money as its basis.

Question 33

A capital asset is

A)a variable cost.
B)an item on the income statement.
C)a long-term asset.
D)a return of investment.

Question 34

The payback period is the time it takes, in years, for a company to recover the original amount of invested capital.

Question 35

Any return a company receives over and above the original investment is referred to as

A)return on investment.
B)return of investment.
C)return of contribution.
D)return for profit.

Question 36

The accounting rate of return is also known as the unadjusted rate of return.

Question 37

Capital assets are also referred to as

A)long-lived assets.
B)balance sheet asset.
C)cash assets.
D)investment assets.

Question 38

Which of the following is a reason that organizations invest in capital assets?

A)Expectation that they will generate a future return
B)Expectation that they will be sold to customers
C)Expectation that they can be depreciated
D)Expectation that the capital asset can be held for resale

Question 39

Two major weaknesses of the accounting rate of return are that it does not consider cash flows and it is the least accurate capital budgeting technique.

Question 40

The payback period is used most often as a screening tool, by companies that have established a maximum acceptable payback period.

Question 41

While most accounting decisions focus on income, most capital budgeting decisions focus on

A)expenses.
B)costs.
C)income.
D)cash flows.

Question 42

In which of the following decisions do managers determine which projects will actually receive funds by rank-ordering them based on selected criteria?

A)Hurdle
B)Screening
C)Capital
D)Preference

Question 43

Bend Manufacturers is considering investing in a new truck that will be used to deliver its custom-made furniture.The truck currently used by Bend cost the company $72,000 eight years ago.Two years from now, the company anticipates spending $20,000 to overhaul the old truck, at which time the truck could be used for an additional 10 years.The old truck costs $8,000 per month in gas, insurance, and other costs to operate.Ron Shop, Controller of Bend Manufacturers, is considering the purchase of a new truck which will cost $100,000 and which has a useful life of 10 years.The new truck will only cost $4,800 per month to operate but will require an overhaul 8 years from now that is expected to cost $8,000.Ron believes the old truck can be sold for $16,000.If the new truck is purchased, he estimates that the new truck could be sold for $28,000 at the end of its useful life.Which of the following is not a relevant cash flow in the decision to replace the truck?

A)$3,200 per month in operating cost savings
B)$20,000 overhaul avoided on old truck
C)$72,000 purchase price of old truck
D)$16,000 salvage value of old truck

Question 44

Managers use capital budgeting techniques to make which of the following two types of capital budgeting decisions?

A)Screening decisions and preference decisions
B)Screening decisions and pricing decisions
C)Preference decisions and pricing decisions
D)Preference decisions and investment decisions

Question 45

The goal of the screening decision process is to

A)Narrow the list of capital proposals to those expected to bring the desired level of return.
B)Select the project with the best level of return.
C)Arrange for the completion of the proposed project.
D)Perform a post-implementation audit.

Question 46

Why is the original purchase price of an old machine that is being replaced never included in capital budgeting decisions?

A)It is an opportunity cost, and thus not relevant.
B)No future cash flows are associated with its purchase.
C)It will affect future costs.
D)It is a cost expensed when the new machine is acquired.

Question 47

When a company compares a proposed project to a performance benchmark, which of the following benchmarks might the company use?

A)Minimum required return of investment
B)Minimum number of years in which the project must return the original investment
C)A post-implementation audit target
D)Total future cash flows

Question 48

Which of the following is a cash flow that might occur when new equipment is purchased?

A)Cash outflow for depreciation
B)Cash inflow in the form of cost savings
C)Cash outflow to pay the salvage value of the old equipment
D)Cash inflow for interest paid

Question 49

The minimum required rate of return is often referred to as the

A)benchmark rate.
B)hurdle rate.
C)project rate.
D)future value rate.

Question 50

Mauldin Welding Shop is considering the purchase of new high-tech welding equipment.If the equipment is purchased, Mauldin will incur $2,000 to install the equipment and pay a technician to adjust the computer settings.In determining the cash flows associated with the new equipment, the $2,000 is

A)a cash outflow.
B)a cash inflow.
C)an opportunity cost.
D)not relevant.

Question 51

Which of the following is a reason capital budget requests should be reviewed and approved by executive management?

A)These investments are made for the short-term on a non-routine basis.
B)These investments will likely have a significant impact on the company's future financial health.
C)They must be aborted if future losses are occurring.
D)They often require significant maintenance costs each year.

Question 52

When a company recoups its original investment, the company has received a

A)return on investment.
B)return of investment.
C)return of contribution.
D)hurdle rate.

Question 53

In a preference decision, which of the following criteria might be used to rank-order the projects?

A)Rate of return
B)Return on investment
C)Expected opportunities in a new market niche
D)All of these answer choices are correct.

Question 54

Mauldin Welding Shop is considering the purchase of new high-tech welding equipment.If the equipment is purchased, Mauldin will incur an additional $8,000 in annual depreciation expense for the next five years.In determining the cash flows associated with the new equipment, the $8,000 of annual depreciation expense is

A)a cash outflow.
B)a cash inflow.
C)a sunk cost.
D)ignored in the cash flow analysis.

Question 55

Which of the following items is not included as a cash flow in the decision to purchase a new capital asset to replace an old one?

A)Depreciation on the new machine
B)Sales tax
C)Installation cost of the new machine
D)Salvage value of the old machine

Question 56

In which of the following decisions is a proposed project compared to a performance benchmark to determine whether the project should be considered further?

A)Hurdle
B)Screening
C)Performance
D)Benchmark

Question 57

Which of the following items is not included in the decision to purchase a new capital asset to replace an old one?

A)The price of the new machine
B)Shipping on the new machine
C)The original purchase price of the old machine
D)Installation costs

Question 58

Mauldin Welding Shop is considering the purchase of new high-tech welding equipment.If the equipment is purchased, Mauldin can avoid the cost of updating the old equipment estimated to be $3,000.In determining the cash flows associated with the new equipment, the cost of updating the old equipment is

A)a cash outflow.
B)a cash inflow.
C)a sunk cost.
D)not relevant.

Question 59

Within the organization, which of the following groups reviews capital project requests?

A)Capital asset committee
B)Financial expenditures committee
C)Capital budgeting committee
D)Investment committee

Question 60

When a new piece of equipment is purchased, which of the following is considered a cash inflow?

A)Cost savings
B)Salvage value of the new equipment
C)Additional revenue generated
D)All of these answer choices are correct.

Question 61

The interest rate used in present value calculations is called the

A)discount rate.
B)preference rate.
C)compound rate.
D)screening rate.

Question 62

To calculate the present value of an annuity, multiply the

A)total dollars to be received by the present value factor.
B)total dollars to be received by the discounted interest rate.
C)amount to be received each year by the present value factor.
D)amount to be received each year by the discounted interest rate.

Question 63

A stream of equal cash flows received at set time intervals is called

A)an annuity.
B)the present value cash flow.
C)discounted cash flows.
D)continuing cash flows.

Question 64

In making a capital budgeting decision, one needs to compare cash flows in terms of

A)their costs and revenues.
B)when they occur and their costs and revenues.
C)their amounts and when they occur.
D)past and future expectations.

Question 65

Compounding interest more frequently than annually causes a change in

A)the time period during which the asset is to be used in operations.
B)the annual discount rate.
C)the number of periods to be used.
D)required rate of return.

Question 66

To calculate the present value of a future amount, which of the following tables do you use?

A)Present value of $1 received in n periods
B)Future value of $1 received in n periods
C)Present value of an annuity
D)Future value of an annuity

Question 67

Capital budgeting decisions involve all of the following except

A)Outflows of cash at one or more times
B)Inflows of cash at one or more times
C)Consideration of depreciation expense
D)A review and approval process

Question 68

The process of determining how much an amount of money to be received in the future is worth today is called

A)the present value.
B)hurdling
C)discounting.
D)screening.

Question 69

To calculate the present value of an annuity, multiply the

A)principal amount by the present value factor.
B)amount to be received each year by the present value factor.
C)principal by the discounted interest rate.
D)amount to be received each year by the discounted interest rate.

Question 70

In looking at the table for "Present Value of $1 Received in n Periods," the columns represent

A)possible hurdle rates.
B)number of periods in the future.
C)discount factors.
D)the cash flow amounts.

Question 71

To determine the present value of any future amount, you need to know

A)the future amount to be received, the interest rate, and the hurdle rate.
B)the interest rate, the cash flows to purchase the asset, and the future amount to be received.
C)when the future amount will be received, the future amount to be received, and the interest rate.
D)when the future amount will be received, the hurdle rate, and the cost of acquiring the asset.

Question 72

To determine the present value of any future amount, you need to know all of the following except?

A)the interest rate.
B)the future amount to be received.
C)the preference decision.
D)when the future amount will be received.

Question 73

In making a capital budgeting decision, one needs to compare cash flows in terms of their amounts and when they occur.One way to do so is to determine their

A)future value.
B)present value.
C)average cash outflows.
D)opportunity costs.

Question 74

In looking at the table for "Present Value of $1 Received in n Periods," the rows represent

A)possible hurdle rates.
B)number of periods in the future.
C)discount factors.
D)cash flow amounts.

Question 75

Given a present value factor of 0.7921, assuming a 6% discount rate, the present value of $16,000 payment received in 4 years is

A)$3,168.
B)$12,674.
C)$20,199.
D)None of these answer choices are correct.

Question 76

To determine the present value of any future amount, you need to know

A)the opportunity cost.
B)the stated maximum rate of return.
C)the future amount to be received.
D)the depreciation expense on the asset to be acquired.

Question 77

The relationship between the discount rate and the present value is

A)inverse.
B)proportional.
C)constant.
D)sporadic.

Question 78

The value today of the dollars to be paid or received in the future is referred to as

A)present value.
B)future value.
C)present and past values.
D)net cash flows.

Question 79

A dollar received today is worth

A)less than a dollar received in the future discounted at 12% interest.
B)more than a dollar received at any time in the future.
C)less than a dollar received in the future if the current interest rate is lower than the anticipated future interest rate.
D)a dollar times the future value interest rate.

Question 80

When the interest from year one is built into the principal balance, the interest is referred to as

A)differential interest.
B)discounted interest.
C)compound interest.
D)future interest accrued.