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

Question 1

Capital budgeting is based on job costing.

Answer 1

False

Question 2

Which of the following is true regarding capital rationing decisions for capital assets?

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) Companies may have to choose a subset of available capital investments.

Answer 2

D

Question 3

The payback method can only be used when the net cash inflows from a capital investment are the same for each period.

Answer 3

False

Question 4

Which of the following items would be considered to be 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) Donation of money to United Way
D) Construction of new store building

Question 5

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

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

Question 6

Self-scan check-out machines are an example of capital assets.

Question 7

Post-audits of capital investments help determine the net cash flows generated by capital investments.

Question 8

The accounting rate of return is a measure of liquidity computed by dividing the average annual cash flows from an asset by the average amount invested in the asset.

Question 9

The costs to develop a major website for a company would be considered to be a capital asset if those costs are significant.

Question 10

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

Question 11

What is the name given to choosing among different alternative investments due to limited resources?

A) Capital rationing
B) Capital investing
C) Resource rationing
D) Resource allocation

Question 12

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 13

Which term below is best described as a "formal means of analyzing long-range investment alternatives"?

A) Time value of money
B) Capital budgeting
C) Payback period
D) Annuity

Question 14

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

Question 15

Choosing among alternative capital investments is called capital rationing.

Question 16

Capital investment analysis in sustainability should consider future cost savings such as fewer lawsuits and regulatory fines.

Question 17

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

Question 18

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

Question 19

The health care insurance cost of a company for its assembly-line workers would be considered to be a capital asset.

Question 20

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 21

Use the information below to answer the following question(s).
Latimer Corporation is considering two alternative investment proposals with the following data:


-What is the accounting rate of return for Proposal Y at Latimer Corporation?

A) 7.50%
B) 8.78%
C) 20.00%
D) 32.50%

Question 22

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

A) Depreciation is deducted from the annual cash inflows.
B) Depreciation is added to 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

Use the information below to answer the following question(s).
Latimer Corporation is considering two alternative investment proposals with the following data:


-What is the accounting rate of return for Proposal X at Latimer Corporation?

A) 3.50%
B) 4.22%
C) 15.38%
D) 27.27%

Question 24

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

Question 25

Use the information below to answer the following question(s).
Latimer Corporation is considering two alternative investment proposals with the following data:


-Brackett Corporation is adding a new product line that will require an investment of $120,000. 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) 4.80 years
B) 6.00 years
C) 6.32 years
D) 6.67 years

Question 26

Use the information below to answer the following question(s).
Latimer Corporation is considering two alternative investment proposals with the following data:


-How long is the payback period for Proposal X at Latimer Corporation?

A) 5.00 years
B) 6.50 years
C) 10.42 years
D) 20.31 years

Question 27

Which of the following is the formula for calculating the accounting rate of return for a capital asset?

A) Average annual net cash inflow from asset/amount invested in asset
B) Average annual operating income 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 28

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 average amount invested is equal to the net cash inflows
D) If the expected accounting rate of return is greater than the required rate of return

Question 29

Use the information below to answer the following question(s).
Boyle 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 at Boyle Company?

A) 2.49 years
B) 3.60 years
C) 4.00 years
D) 10.00 years

Question 30

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

Question 31

When computing the accounting rate of return for a capital asset, which of the following is used as the equation's numerator?

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

Question 32

Which capital budgeting method uses accrual accounting, rather than net cash flows, as a basis for calculations?

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

Question 33

Accrual-based accounting is used in determining the accounting rate of return.

Question 34

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 does not affect the payback calculation.
D) Depreciation is only deducted if the payback period exceeds five years.

Question 35

The payback method primarily focuses on time and not profitability.

Question 36

The payback method is widely considered to be the best capital budgeting method because it considers the time it take to recoup the cost of the capital asset.

Question 37

Use the information below to answer the following question(s).
Boyle 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 at Boyle Company?

A) 2.40 years
B) 3.38 years
C) 3.75 years
D) 10.00 years

Question 38

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

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

Question 39

Use the information below to answer the following question(s).
Latimer Corporation is considering two alternative investment proposals with the following data:


-How long is the payback period for Proposal Y at Latimer Corporation?

A) 20.31 years
B) 9.75 years
C) 6.50 years
D) 5.00 years

Question 40

Which term below is best described as "the length of time required to recover the cost of an investment"?

A) Time value of money
B) Capital budgeting
C) Payback period
D) Annuity

Question 41

Sawyer & Cecil, Computer Consultants, 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 a 12% accounting rate of return?

A) $7,200
B) $23,280
C) $30,480
D) $31,750

Question 42

Use the information below to answer the following question(s).
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 43

Use the information below to answer the following question(s).
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 44

Use the information below to answer the following question(s).
Williams Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,800,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,400,000. The following information is available:


-The payback period for the Kentucky proposal is closest to

A) 4.5 years.
B) 4.8 years.
C) 6.0 years.
D) 7.0 years.

Question 45

Buster Corporation is evaluating a capital investment project which would require an initial investment of $285,000 to purchase machinery. The annual revenues and expenses generated solely 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) 1.6.
B) 3.1.
C) 3.7.
D) 4.6.

Question 46

Use the information below to answer the following question(s).
Dazzle 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 from savings at Dazzle Company DURING the useful life of the asset are

A) $595,000.
B) $575,000.
C) $555,000.
D) $75,000.

Question 47

Use the information below to answer the following question(s).
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 48

Use the information below to answer the following question(s).
Dazzle 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 at Dazzle Company is closest to

A) 38.33%.
B) 32.00%.
C) 6.33%.
D) 5.51%.

Question 49

Use the information below to answer the following question(s).
Dazzle 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 at Dazzle Company over the life of the asset is

A) $160,000.
B) $480,000.
C) $520,000.
D) $575,000.

Question 50

Rinky Dink Family Fun Centre bought new bumper boats for its recreation facility. The useful life is 6 years. The bumper boats had a total cost $5,338 and will generate $1,570 total cash inflows each year for the life of the boats. The residual value of the bumper boats is $650. The payback period in years is closest to

A) 2.40.
B) 2.99.
C) 3.40.
D) 3.81.

Question 51

Use the information below to answer the following question(s).
Williams Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,800,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,400,000. The following information is available:

The accounting rate of return for the Kentucky proposal is closest to

A) 10.83%.
B) 11.17%.
C) 12.50%.
D) 20.83%.

Question 52

Sierra Discount Drugstore bought a new high-speed photo printer for customers to be able to bring in their digital pictures to make high-quality prints. Its useful life is 6 years. The printer cost $8,170 and will generate annual cash inflows of $2,150. The residual value of the printer is $1,320. The payback period in years is closest to

A) 2.35.
B) 3.19.
C) 3.80.
D) 4.41.

Question 53

Use the information below to answer the following question(s).
Boyle Company is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:


-Suppose Barnes & Noble Booksellers is considering investing in warehouse-management software that costs $500,000, has $50,000 residual value and should lead to cash cost savings of $120,000 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) $225,000
B) $500,000
C) $250,000
D) $275,000

Question 54

Use the information below to answer the following question(s).
Boyle Company is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:


-Mahtomedi Corporation is considering investing in specialized equipment costing $240,000. 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:
Mahtomedi Corporation's required rate of return on investments is 14%.
What is the accounting rate of return on the investment?

A) 6.67%
B) 8.75%
C) 9.25%
D) 16.40%

Question 55

Use the information below to answer the following question(s).
Williams Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,800,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,400,000. The following information is available:


-The payback period for the Indiana proposal is closest to

A) 3.6 years.
B) 4.5 years.
C) 4.8 years.
D) 36.0 years.

Question 56

Use the information below to answer the following question(s).
Dazzle 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 at Dazzle Company from the asset over the 3-year period is

A) $75,000.
B) $95,000.
C) $160,000.
D) $415,000.

Question 57

Use the information below to answer the following question(s).
Williams Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,800,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,400,000. The following information is available:


-The accounting rate of return for the Indiana proposal is closest to

A) 11.17%.
B) 12.22%.
C) 12.50%.
D) 22.22%.

Question 58

Use the information below to answer the following question(s).
Boyle Company is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:


-Richol Corporation is considering an investment in new equipment costing $180,000. 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) 2.00 years
B) 2.37 years
C) 2.78 years
D) 4.00 years

Question 59

Use the information below to answer the following question(s).
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 60

Use the information below to answer the following question(s).
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 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

Use the information below to answer the following question(s).
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 63

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 64

The Jones Company bought a new specialty machine that cost $120,000 with a 6-year life with no residual value. The company plans to generate annual cash inflows of $32,000 each year for 6 years. Calculate the accounting rate of return.

Question 65

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 66

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre. The project would require a capital investment of $300,000; have a 5 year useful life with no residual value and generate net cash flows as follow:
Lincoln uses the straight line method of amortization on all capital assets.
Compute the accounting rate of return for this proposal.

Question 67

The Harris Corporation bought a new machine that cost $170,000 with a 15-year life and a residual value of $20,000. They plan to generate annual cash inflows of $40,000 over 15 years. Calculate the accounting rate of return.

Question 68

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre. The project would require a capital investment of $240,000; have a 10 year useful life with no residual value and generate net cash flows of $60,000 per year Lincoln uses the straight line method of amortization on all capital assets.
Compute the payback period for this proposal.

Question 69

Ryan 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 $160,000 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 70

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre. The project would require a capital investment of $240,000; have a 10 year useful life with no residual value and generate net cash flows of $60,000 per year Lincoln uses the straight line method of amortization on all capital assets.
Compute the accounting rate of return for this proposal

Question 71

Meccah, 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 $60,000 per year for 4 years. What is the accounting rate of return?

Question 72

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre. The project would require a capital investment of $228,000; have a 6 year useful life with no residual value and generate net cash flows of $70,000 per year Lincoln uses the straight line method of amortization on all capital assets.
Compute the accounting rate of return for this proposal

Question 73

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre. The project would require a capital investment of $300,000; have a 5 year useful life with no residual value and generate net cash flows as follow:
Lincoln uses the straight line method of amortization on all capital assets.
Compute the payback period for this proposal

Question 74

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre. The project would require a capital investment of $252,000; have a 6 year useful life with no residual value and generate net cash flows as follow:
Lincoln uses the straight line method of amortization on all capital assets.
Compute the accounting rate of return for this proposal.

Question 75

The net present value method incorporates the time value of money.

Question 76

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre. The project would require a capital investment of $228,000; have a 6 year useful life with no residual value and generate net cash flows as follow:
Lincoln uses the straight line method of amortization on all capital assets.
Compute the accounting rate of return for this proposal

Question 77

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre. The project would require a capital investment of $252,000; have a 5 year useful life with no residual value and generate net cash flows as follow:
Lincoln uses the straight line method of amortization on all capital assets.
Compute the payback period for this proposal.

Question 78

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre. The project would require a capital investment of $228,000; have a 6 year useful life with no residual value and generate net cash flows of $40,000 per year Lincoln uses the straight line method of amortization on all capital assets.
Compute the payback period for this proposal.

Question 79

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre. The project would require a capital investment of $228,000; have a 6 year useful life with no residual value and generate net cash flows as follow:
Lincoln uses the straight line method of amortization on all capital assets.
Compute the payback period for this proposal

Question 80

Simone Corporation bought a new machine which cost $87,500, 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?