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

Capital investments do not typically require large sums of money.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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 5

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

Question 6

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 7

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

Question 8

All four of the methods for analyzing capital investments use accrual basis accounting.

Question 9

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 10

Accounting Rate of Return is the only method used for analyzing capital investments that uses accrual basis accounting.

Question 11

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

Question 12

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

Question 13

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 14

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 15

Capital budgeting is done when common stock is issued.

Question 16

Accounting Rate of Return and Payback Period are methods better used for capital investments that have a relatively short lifespan such as computer equipment and software.

Question 17

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

Question 18

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

Question 19

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

Question 20

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 21

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

Question 22

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

Question 23

Which method of capital budgeting is best used for longer term capital investments?

A)Net Present Value
B)Internal Rate of Return
C)None of these methods
D)Both A & B

Question 24

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

Question 25

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 26

A major criticism of the payback method is that it focuses only on time, not on profitability.

Question 27

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 28

The payback method primarily focuses on profitability and not time.

Question 29

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 30

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

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

Question 31

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

Question 32

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

Question 33

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 34

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 35

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

Question 36

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

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

Question 37

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 38

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 39

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 40

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 41

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 42

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

A)10.00 years
B)6)14 years
C)6)15 years
D)12.00 years

Question 43

The Crystal 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)$450,000.
B)$350,000.
C)$630,000.
D)$230,000.

Question 44

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

A)13.27 years
B)7)59 years
C)6)67 years
D)7)68 years

Question 45

Redwood Corporation is considering two alternative investment proposals with the following data: What is the accounting rate of return for Proposal X? (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.)

A)2)62%
B)15.12%
C)1)57%
D)3)23%

Question 46

Matthew Corporation is adding a new product line that will require an investment of $218,000. The product line is estimated to generate cash inflows of $32,000 the first year, $18,000 the second year, and $21,000 each year thereafter for ten more years. What is the payback period?

A)11.17 years
B)8)56 years
C)10.00 years
D)10.42 years

Question 47

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

A)1)54 years
B)3)69 years
C)12.00 years
D)10.00 years

Question 48

Landrum Corporation is considering investing in specialized equipment costing $260,000. The equipment has a useful life of 5 years and a residual value of $15,000. 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 20%.
What is the accounting rate of return on the investment?

A)6)54%
B)5)15%
C)18.85%
D)25.38%

Question 49

The Crystal 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)15.00%.
B)2)50%.
C)37.50%.
D)0)53%.

Question 50

The Silverside Company is considering investing in two alternative projects: What is the accounting rate of return for Project 2? (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.)

A)54.17%
B)4)17%
C)16.67%
D)2)98%

Question 51

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

A)$210,000.
B)$130,000.
C)$260,000.
D)$250,000.

Question 52

Suppose Whole Foods is considering investing in warehouse-management software that costs $900,000, has $40,000 residual value and should lead to cash cost savings of $170,000 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)$40,000
B)$900,000
C)$170,000
D)$210,000

Question 53

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

A)33.70%
B)10.30%
C)15.60%
D)22.00%

Question 54

Osprey 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)5)00 years
B)5)50 years
C)9)29 years
D)1)86 years

Question 55

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

A)$190,000.
B)$540,000.
C)$460,000.
D)$20,000.

Question 56

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

A)4)44 years
B)4)31 years
C)16.00 years
D)5)33 years

Question 57

All else being equal, when using the payback period method to compare the capital investment between several options, a company would choose to invest in the 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)The payback period is the longest of all of the options.
D)The payback period is the shortest of all of the options.

Question 58

Osprey 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)4)53 years
B)5)00 years
C)2)14 years
D)10.71 years

Question 59

Redwood Corporation is considering two alternative investment proposals with the following data: What is the accounting rate of return for Proposal Y? (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.)

A)11.11%
B)6)10%
C)4)06%
D)17.21%

Question 60

Cowell Corporation is considering an investment in new equipment costing $160,000. The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $40,000 the first year, $35,000 the second year, and $82,000 every year thereafter until the fifth year. What is the payback period for this investment? The equipment has no residual value.

A)3)25 years
B)4)04 years
C)2)51 years
D)3)04 years

Question 61

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 $2608 and will increase net cash flows by $1630 per year. The new device has a useful life of 7 years and a residual value of $230. What is the payback period for the new wire-pulling device?

A)1)74 years
B)1)60 years
C)1)46 years
D)1)40 years

Question 62

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 $18,000, has a useful life of 14 years, and will generate $6000 in net cash inflows per year. The residual value of the unit is $800. What is the payback period for the mobile DJ unit?

A)3)13 years
B)2)87 years
C)3)00 years
D)2)65 years

Question 63

Fast Foto bought a new high-speed photo copier to offer customers the opportunity to make high-quality copies out of their digital pictures. Its useful life is 7 years. The copier cost $7710 and will generate annual cash inflows of $2110. The residual value of the copier is $1250. The payback period in years is closest to

A)6)17.
B)3)65.
C)3)06.
D)2)65.

Question 64

Siesta Manufacturing has asked you to evaluate a capital investment project. The project will require an initial investment of $54,000. The life of the investment is 6 years with a residual value of $6,000. If the project produces net annual cash inflows of $20,000, what is the accounting rate of return? (Round any intermediary calculations to the nearest dollar and your final answer to two decimal places, X.XX%.)

A)20.37%
B)22.22%
C)2)70%
D)37.04%

Question 65

Perry Enterprises purchased a new machine with a total cost of $31,600 and a useful life of 4 years. The machine will produce net cash inflows of $7600 over its useful life and has a residual value of $1510. What is the payback period for the new machine?

A)5)19 years
B)3)96 years
C)4)16 years
D)3)16 years

Question 66

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 67

Dandy's Family Fun Center bought new go-karts for its recreation facility. The useful life is 7 years. The go-karts had a total cost of $4400 and will generate $1100 total cash inflows each year for the life of the go-karts. The residual value of the go-karts is $550. The payback period in years is closest to

A)4)50.
B)4)00.
C)3)50.
D)2)67.

Question 68

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 69

Sicily, Inc., is considering investing $160,000 in a machine that may last 4 years with no residual value. The new machine will generate annual operating income of $60,000 per year for 4 years. What is the accounting rate of return?

Question 70

GlenGary Investment Corporation is analyzing a proposal to build condo units in southern Florida. The project will require an initial investment of $300,000. The building has a useful life of 25 years, a residual value of $100,000, 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)$9000
B)$27,000
C)$12,000
D)$18,000

Question 71

O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,810,000. 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)4)11 years.
B)3)13 years.
C)3)62 years.
D)30.17 years.

Question 72

Tinker Toy 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 73

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 $3,000,000. The following information is available: The accounting rate of return for the Kentucky proposal is closest to (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.)

A)16.14%.
B)13.86%.
C)6)00%.
D)30.00%.

Question 74

O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,890,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,900,000 .The following information is available: The payback period for the Kentucky proposal is closest to

A)3)97 years.
B)3)54 years.
C)3)63 years.
D)41.43 years.

Question 75

Oceanview Manufacturing is considering an investment that would require an initial net investment of $660,000. The following revenues/expenses relate exclusively to the investment: The investment will have a residual value of $50,000 at the end of its 12 year useful life. What is the payback period for this investment?

A)1)78 years
B)3)07 years
C)2)59 years
D)2)24 years

Question 76

Smith & Cramer, Computer Repair, is considering an investment in computer and network equipment costing $240,000. 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 $50,000. 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)$5500
B)$20,900
C)$31,900
D)$26,400

Question 77

The managerial accountant at New Jewelry considers an investment in a gem cleaning piece of equipment that may increase the value of gems because it fills in the fractures of lower-value gems. The initial cost of the equipment is $1,480,000; whereas the annual net cash inflow is $425,000. The managerial accountant projects a useful life of 13 years. The resale value of the equipment is forecasted at $450,000. Calculate the annual depreciation expense. What is the expected payback period of this investment?

Question 78

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 79

Sunnyside Corporation is evaluating a capital investment project which would require an initial investment of $200,000 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 $18,000. The payback period of this potential project in years would be closest to

A)1)8.
B)2)3.
C)3)2.
D)1)20.

Question 80

O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,810,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,000,000. The following information is available: The accounting rate of return for the Indiana proposal is closest to (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.)

A)23.67%.
B)22.74%.
C)38.67%.
D)34.25%.