Deck 12: Capital Investment Decisions and the Time Value of Money

Question 1

The costs to develop a major website for a company would be considered to be a capital asset if those costs are significant and material (for example, the costs to develop the website exceed $100,000).

Answer 1

True

Question 2

The term ________ is best described as "the length of time required to recover the cost of an investment."

A)time value of money
B)payback period
C)capital budgeting
D)annuity

Answer 2

B

Question 3

The ________ capital budgeting method uses accrual accounting, rather than net cash flows, as a basis for calculations.

A)ARR
B)Payback
C)NPV
D)IRR

Answer 3

A

Question 4

Regarding capital rationing decisions for capital assets, which of the following is true?

A)Companies should always choose the investment with the shortest payback period.
B)Companies should always choose the investment with the highest NPV.
C)Companies should always choose the investment with the highest ARR.
D)None of the above are true.

Question 5

Which of the following is a characteristic of a capital asset?

A)The item will be used for a long period of time.
B)The item involves a significant sum of money.
C)None of these characteristics are correct.
D)Both A and B are correct.

Question 6

The term ________ is best described as "a stream of equal periodic payments."

A)time value of money
B)capital budgeting
C)annuity
D)payback period

Question 7

Which of the following items would be considered a capital asset?

A)Purchase of office supplies to be used internally over the next year
B)Payment for this year's advertising campaign
C)Construction of a new store building
D)Donation of money to United Way

Question 8

Self-check-in machines at airports are an example of capital assets.

Question 9

After a company invests in capital assets, it will perform a ________ in order to compare the actual to the projected net cash inflows.

A)cash flow analysis
B)pre and post analysis
C)post-audit
D)post-cash flow

Question 10

The term ________ is described as a "formal means of analyzing long-range investment alternatives."

A)annuity
B)time value of money
C)payback period
D)capital budgeting

Question 11

Post-audits of capital investments compare actual net cash inflows to projected net cash inflows.

Question 12

The process of making capital investment decisions is referred to as capital budgeting.

Question 13

The term ________ is best described as a "relationship among principal, interest rate, and time."

A)capital budgeting
B)time value of money
C)payback period
D)annuity

Question 14

Capital investments do not typically require large sums of money.

Question 15

Capital budgeting is done when common stock is issued.

Question 16

The cost associated with renovating a warehouse to be used as a restaurant would be considered to be a capital asset.

Question 17

The health care insurance cost of a company for its assembly-line workers would not be considered to be a capital asset.

Question 18

The process of choosing among different alternative investments due to limited resources is referred to as

A)capital investing.
B)capital rationing.
C)resource rationing.
D)resource allocation.

Question 19

Choosing among alternative capital investments is called a post-audit.

Question 20

The following are all methods of analyzing capital investments except

A)Payback Period.
B)Regression Analysis.
C)Net Present Value (NPV).
D)Accounting Rate of Return (ARR).

Question 21

Gomez Corporation is considering two alternative investment proposals with the following data: How long is the payback period for Proposal X?

A)10.90 years
B)6)00 years
C)6)80 years
D)21.25 years

Question 22

How does depreciation affect the calculation of a project's accounting rate of return (ARR)?

A)Depreciation is added to the annual cash inflows.
B)Depreciation is deducted from the annual cash inflows.
C)Depreciation does not affect ARR.
D)Depreciation is only deducted if the ARR is less than the minimum required rate of return.

Question 23

Gomez Corporation is considering two alternative investment proposals with the following data: What is the accounting rate of return for Proposal X?

A)2)88 %
B)14.71 %
C)26.62 %
D)2)79%

Question 24

The payback method can be used when the net cash inflows from a capital investment are unequal.

Question 25

One disadvantage of the payback method is that it does not consider the time value of money.

Question 26

The accounting rate of return is a measure of profitability computed by dividing the average annual operating income from an asset by the initial amount invested in the asset.

Question 27

The accounting rate of return method of analyzing capital budgeting decisions measures the average annual rate of return from using the asset over its entire life.

Question 28

One advantage of the internal rate of return is that it considers the time value of money.

Question 29

Which of the following is used as the equation's numerator when computing the payback period for a capital asset with equal annual net cash inflows?

A)Expected annual cash inflow
B)Total cash inflows
C)Amount invested
D)Net cash outflow

Question 30

The payback method primarily focuses on profitability and not time.

Question 31

If the accounting rate of return exceeds the required accounting rate of return,

A)invest in the capital asset.
B)do not invest in the capital asset.
C)only invest if the payback period is also greater than the required rate of return.
D)only invest if the payback period is also less than the required rate of return.

Question 32

All else being equal, a company would choose to invest in a capital asset if which of the following is true?

A)If the payback period equals the amount invested
B)If the expected accounting rate of return is less than the required rate of return
C)If the expected accounting rate of return is greater than the required rate of return
D)If the average amount invested is equal to the net cash inflows

Question 33

Which of the following is used as the equation's numerator when computing the accounting rate of return for a capital asset?

A)Average amount invested in the asset
B)Average annual operating income from the asset
C)Total amount invested in the asset
D)Average net cash flows from the asset

Question 34

Accrual-based accounting is not used in determining the accounting rate of return.

Question 35

Capital budgeting predictions must consider factors such as changing consumer preferences, competition, and government regulations.

Question 36

Investments with longer payback periods are more desirable, all else being equal.

Question 37

The accounting rate of return uses non-cash flow factors including depreciation in calculating the operating income of the asset.

Question 38

How does depreciation affect the calculation of a project's payback period?

A)Depreciation is deducted from the annual cash inflows.
B)Depreciation is added to the annual cash inflows.
C)Depreciation is only deducted if the payback period exceeds five years.
D)Depreciation does not affect the payback calculation.

Question 39

The formula for calculating the accounting rate of return for a capital asset is

A)average annual operating income from asset/amount invested in asset.
B)average annual net cash inflow from asset/amount invested in asset.
C)(average annual operating income + depreciation expense)/amount invested in asset.
D)(average annual cash inflows - depreciation expense)/(amount invested in asset + residual value of asset).

Question 40

Gomez Corporation is considering two alternative investment proposals with the following data: How long is the payback period for Proposal Y?

A)21.25 years
B)6)00 years
C)6)80 years
D)11.70 years

Question 41

O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,920,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,500,000. The following information is available: The accounting rate of return for the Kentucky proposal is closest to

A)10.32%.
B)11.09%.
C)10.00%.
D)20.00%.

Question 42

The Hanna Company uses straight-line depreciation and is considering a capital expenditure for which the following relevant cash flow data have been estimated: The total depreciation expense over the life of the asset is

A)$150,000.
B)$550,000.
C)$450,000.
D)$585,000.

Question 43

The Warren Company is considering investing in two alternative projects: What is the payback period for Project 2?

A)4)00 years
B)5)56 years
C)10.00 years
D)16.00 years

Question 44

Pitt Company is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available: How long is the payback period for Investment A?

A)4)50 years
B)4)10 years
C)11.25 years
D)2)49 years

Question 45

Suppose Whole Foods is considering investing in warehouse-management software that costs $600,000, has $60,000 residual value and should lead to cash cost savings of $130,000 per year for its five-year life. In calculating the ARR, which of the following figures should be used as the equation's denominator?

A)$60,000
B)$600,000
C)$130,000
D)$275,000

Question 46

O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,920,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,500,000. The following information is available: The accounting rate of return for the Indiana proposal is closest to

A)10.32%.
B)11.09%.
C)20.83%.
D)10.83%.

Question 47

O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,920,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,500,000. The following information is available: The payback period for the Kentucky proposal is closest to

A)4)5 years.
B)6)25 years.
C)5)00 years.
D)31.25 years.

Question 48

The Hanna Company uses straight-line depreciation and is considering a capital expenditure for which the following relevant cash flow data have been estimated: Total net inflows during the useful life of the asset are

A)$635,000.
B)$535,000.
C)$585,000.
D)$85,000.

Question 49

Cowell Corporation is considering an investment in new equipment costing $155,000. The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $45,000 the first year, $65,000 the second year, and $90,000 every year thereafter until the fifth year. What is the payback period for this investment? The equipment has no residual value.

A)2)04 years
B)3)44 years
C)1)72 years
D)2)50 years

Question 50

Ribelin Corporation is adding a new product line that will require an investment of $138,000. The product line is estimated to generate cash inflows of $25,000 the first year, $23,000 the second year, and $18,000 each year thereafter for ten more years. What is the payback period?

A)7)26 years
B)5)52 years
C)7)00 years
D)7)67 years

Question 51

The Hanna Company uses straight-line depreciation and is considering a capital expenditure for which the following relevant cash flow data have been estimated: Total operating income from the asset over the 3-year period is

A)$85,000.
B)$150,000.
C)$435,000.
D)$135,000.

Question 52

Gomez Corporation is considering two alternative investment proposals with the following data: What is the accounting rate of return for Proposal Y?

A)5)24%
B)4)17%
C)29.17%
D)16.67%

Question 53

Landrum Corporation is considering investing in specialized equipment costing $250,000. The equipment has a useful life of 5 years and a residual value of $20,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are: Landrum Corporation's required rate of return on investments is 14%.
What is the accounting rate of return on the investment?

A)7)60%
B)5)60%
C)18.40%
D)44.40%

Question 54

The Warren Company is considering investing in two alternative projects: What is the payback period for Project 1?

A)4)00 years
B)5)56 years
C)16.00 years
D)8)89 years

Question 55

Runnin' Wild Family Fun Center bought new go-karts for its recreation facility. The useful life is 6 years. The go-karts had a total cost of $5,100 and will generate $1,700 total cash inflows each year for the life of the go-karts. The residual value of the go-karts is $650. The payback period in years is closest to

A)3)38.
B)3)00.
C)2)62.
D)2)17.

Question 56

The Warren Company is considering investing in two alternative projects: What is the accounting rate of return for Project 1?

A)43.75%
B)6)25%
C)1)88%
D)25.00%

Question 57

O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,920,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,500,000. The following information is available: The payback period for the Indiana proposal is closest to

A)3)8 years.
B)5)0 years.
C)4)8 years.
D)38.4 years.

Question 58

The Warren Company is considering investing in two alternative projects: What is the accounting rate of return for Project 2?

A)33.67%
B)3)00%
C)18.00%
D)2)33%

Question 59

The Hanna Company uses straight-line depreciation and is considering a capital expenditure for which the following relevant cash flow data have been estimated: The accounting rate of return is closest to

A)39.00%.
B)9)00%.
C)30.00%.
D)7)69%.

Question 60

Pitt Company is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available: How long is the payback period for Investment B?

A)3)63 years
B)4)00 years
C)2)40 years
D)10.67 years

Question 61

Buller Manufacturing is considering acquiring another facility for a cost of $610,000. The required payback period is 4.5 years. Assume annual net cash inflows are $150,000 for the first two years and $125,000 for years 3 and 4. What must the inflow be in the fifth year to meet the 4.5 year payback period?

Question 62

Globe Enterprises purchased a new machine with a total cost of $30,450 and a useful life of 6 years. The machine will produce net cash inflows of $7,250 over its useful life and has a residual value of $2,125. What is the payback period for the new machine?

A)4)49 years
B)3)91 years
C)4)20 years
D)3)25 years

Question 63

The net present value method does not incorporate the time value of money.

Question 64

Speedy Print Shop bought a new high-speed photo copier for customers to be able to bring in their digital pictures to make high-quality copies. Its useful life is 6 years. The copier cost $7,740 and will generate annual cash inflows of $2,150. The residual value of the copier is $1,320. The payback period in years is closest to

A)4)21.
B)3)60.
C)2)99.
D)2)23.

Question 65

Abdul Corporation bought a new machine, which cost $90,000, has a useful life of 10 years, and will generate annual cash inflows of $25,000. The residual value of the machine is $5,500. What is the payback period?

Question 66

The Toth Company bought a new specialty machine that cost $100,000 with a 4-year life with no residual value. The company plans to generate annual cash inflows of $30,000 each year for 4 years. Calculate the accounting rate of return.

Question 67

Sicily, Inc.., is considering investing $250,000 in a machine that will last 4 years with no residual value. The new machine will generate annual operating income of $55,000 per year for 4 years. What is the accounting rate of return?

Question 68

The principal amount, the interest rate, and the number of periods are all factors needed to calculate the time value of money.

Question 69

Siesta Manufacturing has asked you to evaluate a capital investment project. The project will require an initial investment of $88,000. The life of the investment is 7 years with a residual value of $4,000. If the project produces net annual cash inflows of $16,000, what is the accounting rate of return?

A)3)90%
B)4)55%
C)550.00%
D)18.18%

Question 70

GlenGary Investment Corporation is analyzing a proposal to build condo units in southern Florida. The project will require an initial invest of $500,000. The building has a useful life of 20 years, a residual value of $200,000, and is depreciated on a straight-line basis. GlenGary uses the accounting rate of return model to evaluate investment projects. What is the minimum annual operating income that must be generated by this project to achieve the 9% accounting return required by GlenGary?

A)$18,000
B)$45,000
C)$25,000
D)$27,000

Question 71

When computing the present value of a future sum, the interest rate must always be expressed as an annual rate.

Question 72

Sparky the Electrician specializes in rewiring historic houses. Sparky recently purchased a new wire-pulling device that will decrease the time to complete each job and increase total revenues. The device will cost $4,375 and will increase net cash flows by $1,750 per year. The new device has a useful life of 7 years and a residual value of $250. What is the payback period for the new wire-pulling device?

A)2)64 years
B)2)50 years
C)2)36 years
D)2)19 years

Question 73

One dollar to be received in the future is worth more than one dollar today.

Question 74

Calculating interest on the principal and on all the interest earned to date is called compound interest.

Question 75

Buxton Corporation is evaluating a capital investment project which would require an initial investment of $240,000 to purchase new machinery. The annual revenues and expenses generated specifically by this project each year during the project's nine year life would be: The residual value of the machinery at the end of the nine years would be $15,000. The payback period of this potential project in years would be closest to

A)2)6.
B)3)6.
C)3)1.
D)1)4.

Question 76

Smith & Cramer, Computer Repair, is considering an investment in computer and network equipment costing $254,000. This equipment would allow them to offer new programming services to clients. The equipment will be depreciated on the straight-line basis over an eight-year period with an estimated residual value of $60,000. Using the accounting rate of return model, what is the minimum average annual operating income that must be generated from this investment in order to achieve an 11% accounting rate of return?

A)$6,600
B)$21,340
C)$31,750
D)$27,940

Question 77

Pro-Am Audio is a company that is contracted to DJ private events. Due to a recent increase in bookings, Pro-Am is considering the purchase of another mobile DJ unit. Pro-Am uses the payback method to evaluate its investments. The mobile DJ unit will cost $12,000, has a useful life of 10 years, and will generate $2,000 in net cash inflows per year. The residual value of the unit is $1,000. What is the payback period for the mobile DJ unit?

A)6)50 years
B)5)50 years
C)6)00 years
D)4)00 years

Question 78

Bonneville Manufacturing is considering an investment that would require an initial net investment of $650,000. The following revenues/expenses relate exclusively to the investment: The investment will have a residual value of $50,000 at the end of its 15 year useful life. What is the payback period for this investment?

A)1)86 years
B)3)07 years
C)2)93 years
D)2)48 years

Question 79

The Hawn Corporation bought a new machine that cost $150,000 with a 10-year life and a residual value of $20,000. The company plans to generate annual cash inflows of $40,000 over 10 years. Calculate the accounting rate of return.

Question 80

The Future Value of $1 table is used to calculate how much $100 in hand today would be worth in 5 years.