ACC/560 Week 9 Quiz – Strayer NEW

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Week 9 Quiz 8: Chapter 12

TRUE-FALSE STATEMENTS

1. Capital budgeting decisions usually involve large investments and often have a significant impact on a company’s future profitability.

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

2. The capital budgeting committee ultimately approves the capital expenditure budget for the year.

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

3. For purposes of capital budgeting, estimated cash inflows and outflows are preferred for inputs into the capital budgeting decision tools.

Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

4. The cash payback technique is a quick way to calculate a project’s net present value.

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

5. The cash payback period is computed by dividing the cost of the capital investment by the net annual cash inflow.

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Decision Analysis

6. The cash payback method is frequently used as a screening tool but it does not take into consideration the profitability of a project.

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Decision Analysis

7. The cost of capital is a weighted average of the rates paid on borrowed funds, as well as on funds provided by investors in the company’s stock.

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

8. Using the net present value method, a net present value of zero indicates that the project would not be acceptable.

Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

9. The net present value method can only be used in capital budgeting if the expected cash flows from a project are an equal amount each year.

Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

10. By ignoring intangible benefits, capital budgeting techniques might incorrectly eliminate projects that could be financially beneficial to the company.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

11. To avoid accepting projects that actually should be rejected, a company should ignore intangible benefits in calculating net present value.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Decision Analysis

12. One way of incorporating intangible benefits into the capital budgeting decision is to project conservative estimates of the value of the intangible benefits and include them in the NPV calculation.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Decision Analysis

13. The profitability index is calculated by dividing the total cash flows by the initial investment.

Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

14. The profitability index allows comparison of the relative desirability of projects that require differing initial investments.

Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

15. Sensitivity analysis uses a number of outcome estimates to get a sense of the variability among potential returns.

Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Decision Analysis

16. A well-run organization should perform an evaluation, called a post-audit, of its investment projects before their completion.

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

17. Post-audits create an incentive for managers to make accurate estimates, since managers know that their results will be evaluated.

Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

18. A post-audit is an evaluation of how well a project’s actual performance matches the projections made when the project was proposed.

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

19. The internal rate of return method is, like the NPV method, a discounted cash flow technique.

Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Applications

20. The interest yield of a project is a rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected annual cash inflows.

Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

21. Using the internal rate of return method, a project is rejected when the rate of return is greater than or equal to the required rate of return.

Ans: LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

22. Using the annual rate of return method, a project is acceptable if its rate of return is greater than management’s minimum rate of return.

Ans: LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

23. The annual rate of return method requires dividing a project’s annual cash inflows by the economic life of the project.

Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

24. A major advantage of the annual rate of return method is that it considers the time value of money.

Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

25. An advantage of the annual rate of return method is that it relies on accrual accounting numbers rather than actual cash flows.

Ans: LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

MULTIPLE CHOICE QUESTIONS

26. The capital budget for the year is approved by a company’s

a. board of directors.

b. capital budgeting committee.

c. officers.

d. stockholders.

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

27. All of the following are involved in the capital budgeting evaluation process except a company’s

a. board of directors.

b. capital budgeting committee.

c. officers.

d. stockholders.

28. Most of the capital budgeting methods use

a. accrual accounting numbers.

b. cash flow numbers.

c. net income.

d. accrual accounting revenues.

29. The first step in the capital budgeting evaluation process is to

a. request proposals for projects.

b. screen proposals by a capital budgeting committee.

c. determine which projects are worthy of funding.

d. approve the capital budget.

30. The capital budgeting decision depends in part on the

a. availability of funds.

b. relationships among proposed projects.

c. risk associated with a particular project.

d. all of these.

31. Capital budgeting is the process

a. used in sell or process further decisions.

b. of determining how much capital stock to issue.

c. of making capital expenditure decisions.

d. of eliminating unprofitable product lines.

32. Net annual cash flow can be estimated by

a. deducting credit sales from net income.

b. adding depreciation expense to net income.

c. deducting credit purchases from net income.

d. adding advertising expense to net income.

Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

33. Which of the following is not a typical cash flow related to equipment purchase and replacement decisions?

a. Increased operating costs

b. Overhaul of equipment

c. Salvage value of equipment when project is complete

d. Depreciation expense

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

34. Capital expenditure proposals are initially screened by the

a. board of directors.

b. executive committee.

c. capital budgeting committee.

d. stockholders.

35. Capital budgeting decisions depend in part on all of the following except the

a. relationships among proposed projects.

b. profitability of the company.

c. company’s basic decision making approach.

d. risks associated with a particular project.

36. The corporate capital budget authorization process consists of how many steps?

a. 4

b. 3

c. 2

d. 1

37. Which of the following is not a capital budgeting decision?

a. Constructing new studios

b. Replacing old equipment

c. Scrapping obsolete inventory

d. Remodeling an office building

Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

38. Which of the following is a disadvantage of the cash payback technique?

a. It is difficult to calculate

b. It relies on the time value of money

c. It can only be calculated when there are equal annual net cash flows

d. It ignores the expected profitability of a project

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

39. The payback period is often compared to an asset’s

a. estimated useful life.

b. warranty period.

c. net present value.

d. internal rate of return.

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

40. Which of the following ignores the time value of money?

a. Internal rate of return

b. Profitability index

c. Net present value

d. Cash payback

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

41. Brady Corp. is considering the purchase of a piece of equipment that costs $20,000. Projected net annual cash flows over the project’s life are:

Year Net Annual Cash Flow

1 $ 3,000

2 8,000

3 15,000

4 9,000

The cash payback period is

a. 2.29 years.

b. 2.60 years.

c. 2.40 years.

d. 2.31 years.

Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

42. Bradshaw Inc. is contemplating a capital investment of $88,000. The cash flows over the project’s four years are:

Expected Annual Expected Annual

Year Cash Inflows Cash Outflows

1 $30,000 $12,000

2 45,000 20,000

3 60,000 25,000

4 50,000 30,000

The cash payback period is

a. 3.59 years.

b. 3.50 years.

c. 2.37 years.

d. 3.20 years.

Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

43. Jordan Company is considering the purchase of a machine with the following data:

Initial cost $150,000

One-time training cost 12,000

Annual maintenance costs 15,000

Annual cost savings 75,000

Salvage value 20,000

The cash payback period is

a. 2.70 years.

b. 2.50 years.

c. 2.37 years.

d. 2.17 years.

Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

44. If project A has a lower payback period than project B, this may indicate that project A may have a

a. lower NPV and be less profitable.

b. higher NPV and be less profitable.

c. higher NPV and be more profitable.

d. lower NPV and be more profitable.

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

45. Which of the following does not consider a company’s required rate of return?

a. Net present value

b. Internal rate of return

c. Annual rate of return

d. Cash payback

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

46. The cash payback technique

a. considers cash flows over the life of a project.

b. cannot be used with uneven cash flows.

c. is superior to the net present value method.

d. may be useful as an initial screening device.

47. If an asset costs $240,000 and is expected to have a $40,000 salvage value at the end of its ten-year life, and generates annual net cash inflows of $40,000 each year, the cash payback period is

a. 7 years.

b. 6 years.

c. 5 years.

d. 4 years.

Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

48. If a payback period for a project is greater than its expected useful life, the

a. project will always be profitable.

b. entire initial investment will not be recovered.

c. project would only be acceptable if the company’s cost of capital was low.

d. project’s return will always exceed the company’s cost of capital.

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

49. The cash payback technique

a. should be used as a final screening tool.

b. can be the only basis for the capital budgeting decision.

c. is relatively easy to compute and understand.

d. considers the expected profitability of a project.

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

50. The cash payback period is computed by dividing the cost of the capital investment by the

a. annual net income.

b. net annual cash inflow.

c. present value of the cash inflow.

d. present value of the net income.

51. When using the cash payback technique, the payback period is expressed in terms of

a. a percent.

b. dollars.

c. years.

d. months.

52. A disadvantage of the cash payback technique is that it

a. ignores obsolescence factors.

b. ignores the cost of an investment.

c. is complicated to use.

d. ignores the time value of money.

53. Bark Company is considering buying a machine for $240,000 with an estimated life of ten years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate net income of $6,000 each year. The cash payback period on this investment is

a. 20 years.

b. 10 years.

c. 8 years.

d. 4 years.

Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

54. A company is considering purchasing a machine that costs $400,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used. The cash payback period on the machine is

a. 8.0 years.

b. 7.5 years.

c. 6.5 years.

d. 3.2 years.

Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

55. Nance Company is considering buying a machine for $90,000 with an estimated life of ten years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate net income of $3,000 each year. The cash payback on this investment is

a. 15 years.

b. 10 years.

c. 7.5 years.

d. 6 years.

Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

56. Giraldi Company has identified that the cost of a new computer will be $48,000, but with the use of the new computer, net income will increase by $5,000 a year. If depreciation expense is $3,000 a year, the cash payback period is:

a. 24.0 years.

b. 16.0 years.

c. 9.6 years.

d. 6.0 years.

57. Richman Co. purchased some equipment 3 years ago. The company’s required rate of return is 12%, and the net present value of the project was $(900). Annual cost savings were: $10,000 for year 1; $8,000 for year 2; and $6,000 for year 3. The amount of the initial investment was

Present Value PV of an Annuity

Year of 1 at 12% of 1 at 12%

1 .893 .893

2 .797 1.690

3 .712 2.402

a. $20,478.

b. $18,316.

c. $20,116.

d. $18,678.

Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

58. Use the following table,

Present Value of an Annuity of 1

Period 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 9%. It is considering investing in a project which costs $350,000 and is expected to generate cash inflows of $140,000 at the end of each year for three years. The net present value of this project is

a. $354,340.

b. $70,000.

c. $35,436.

d. $4,340.

Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

59. The discount rate is referred to by all of the following alternative names except the

a. accounting rate of return.

b. cutoff rate.

c. hurdle rate.

d. required rate of return.

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

60. The rate that a company must pay to obtain funds from creditors and stockholders is known as the

a. hurdle rate.

b. cost of capital.

c. cutoff rate.

d. all of these.

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

61. The higher the risk element in a project, the

a. more attractive the investment.

b. higher the net present value.

c. higher the cost of capital.

d. higher the discount rate.

Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

62. If a company’s required rate of return is 10% and, in using the net present value method, a project’s net present value is zero, this indicates that the

a. project’s rate of return exceeds 10%.

b. project’s rate of return is less than the minimum rate required.

c. project earns a rate of return of 10%.

d. project earns a rate of return of 0%.

Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

63. Using the profitability index method, the present value of cash inflows for Project Flower is $88,000 and the present value of cash inflows of Project Plant is $48,000. If Project Flower and Project Plant require initial investments of $90,000 and $40,000, respectively, and have the same useful life, the project that should be accepted is

a. Project Flower.

b. Project Plant.

c. Either project may be accepted.

d. Neither project should be accepted.

Ans: LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

64. The primary capital budgeting method that uses discounted cash flow techniques is the

a. net present value method.

b. cash payback technique.

c. annual rate of return method.

d. profitability index method.

65. When the annual cash flows from an investment are unequal, the appropriate table to use is the

a. future value of 1 table.

b. future value of annuity table.

c. present value of 1 table.

d. present value of annuity table.

Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

66. A company’s cost of capital refers to the

a. rate the company must pay to obtain funds from creditors and stockholders.

b. total cost of a capital project.

c. cost of printing and registering common stock shares.

d. rate of return earned on common stock.

67. When a capital budgeting project generates a positive net present value, this means that the project earns a return higher than the

a. internal rate of return.

b. annual rate of return.

c. required rate of return.

d. profitability index.

68. A negative net present value indicates that the

a. project is acceptable.

b. wrong discount rate was used.

c. project’s annual rate of return exceeds the discount rate.

d. present value of the cash inflows was less than the present value of the cash out flows.

69. A company’s discount rate is based on the

a. cost of capital and the internal rate of return.

b. cost of capital and the risk element.

c. cut-off rate and the risk element.

d. cut-off rate and the internal rate of return.

70. The discount rate that will result in the lowest net present value for a project is

a. any rate lower that the cost of capital.

b. any rate higher than the cost of capital.

c. the lowest rate used to evaluate the project.

d. the highest rate used to evaluate the project.

71. The discount rate that will result in the highest net present value for a project is

a. any rate lower that the cost of capital.

b. any rate higher than the cost of capital.

c. the lowest rate used to evaluate the project.

d. the highest rate used to evaluate the project.

72. Which of the following will increase the net present value of a project?

a. An increase in the initial investment

b. A decrease in annual cash inflows

c. An increase in the discount rate

d. A decrease in the discount rate

73. A project with a zero net present value indicates that it is

a. unacceptable.

b. profitable.

c. acceptable.

d. going to have an acceptable cash payback period.

74. Companies often assume that the risk element in the discount rate is

a. zero.

b. greater that zero.

c. less than zero.

d. known with certainty.

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

75. If a project has a salvage value greater than zero, the salvage value will

a. have no effect on the net present value.

b. increase the net present value.

c. increase the payback period.

d. decrease the net present value.

76. Sloan Inc. recently invested in a project with a 3-year life span. The net present value was $9,000 and annual cash inflows were $21,000 for year 1; $24,000 for year 2; and $27,000 for year 3. The initial investment for the project, assuming a 15% required rate of return, was

Present Value PV of an Annuity

Year of 1 at 15% of 1 at 15%

1 .870 .870

2 .756 1.626

3 .658 2.283

a. $45,792.

b. $45,180.

c. $29,232.

d. $38,376.

Ans: LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

77. Mini Inc. is contemplating a capital project costing $47,019. The project will provide annual cost savings of $18,000 for 3 years and have a salvage value of $3,000. The company’s required rate of return is 10%. The company uses straight-line depreciation.

Present Value PV of an Annuity

Year of 1 at 10% of 1 at 10%

1 .909 .909

2 .826 1.736

3 .751 2.487

This project is

a. unacceptable because it earns a rate less than 10%.

b. acceptable because it has a positive NPV.

c. unacceptable because it has a negative NPV.

d. acceptable because it has a zero NPV.

Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

78. Johnson Corp. has an 8% required rate of return. It’s considering a project that would provide annual cost savings of $50,000 for 5 years. The most that Johnson would be willing to spend on this project is

Present Value PV of an Annuity

Year of 1 at 8% of 1 at 8%

1 .926 .926

2 .857 1.783

3 .794 2.577

4 .735 3.312

5 .681 3.993

a. $125,910.

b. $165,600.

c. $199,650.

d. $34,050.

79. Benaflek Co. purchased some equipment 3 years ago. The company’s required rate of return is 12%, and the net present value of the project was $(1,800). Annual cost savings were: $20,000 for year 1; $16,000 for year 2; and $12,000 for year 3. The amount of the initial investment was

Present Value PV of an Annuity

Year of 1 at 12% of 1 at 12%

1 .893 .893

2 .797 1.690

3 .712 2.402

a. $40,956.

b. $36,632.

c. $40,232.

d. $37,356.

Ans: LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

80. In capital budgeting, intangible benefits should be

a. excluded entirely.

b. included using optimistic estimated values.

c. included using conservative estimated values.

d. included only when benefits are known with certainty.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

81. Miles, Inc. is considering the purchase of a new machine for $600,000 that has an estimated useful life of 5 years and no salvage value. The machine will generate net annual cash flows of $105,000. It is believed that the new machine will reduce downtime because of its reliability. Assume the discount rate is 8%. In order to make the project acceptable, the reduction in downtime must be worth

Present Value PV of an Annuity

Year of 1 at 8% of 1 at 8%

1 .926 .926

2 .857 1.783

3 .794 2.577

4 .735 3.312

5 .681 3.993

a. $23,958 per year.

b. $49,662 per year.

c. $18,264 per year.

d. $45,263 per year.

Ans: LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

82. Intangible benefits in capital budgeting would include all of the following except increased

a. product quality.

b. employee loyalty.

c. salvage value.

d. product safety.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

83. Intangible benefits in capital budgeting

a. should be ignored because they are difficult to determine.

b. include increased quality or employee loyalty.

c. are not considered because they are usually not relevant to the decision.

d. have a rate of return in excess of the company’s cost of capital.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

84. To avoid rejecting projects that actually should be accepted,

1. intangible benefits should be ignored.

2. conservative estimates of the intangible benefits’ value should be incorporated into the NPV calculation.

3. calculate net present value ignoring intangible benefits and then, if the NPV is negative, estimate whether the intangible benefits are worth at least the amount of the negative NPV.

a. 1

b. 2

c. 3

d. both 2 and 3 are correct.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

85. All of the following statements about intangible benefits in capital budgeting are correct except that they

a. include increased quality and employee loyalty.

b. are difficult to quantify.

c. are often ignored in capital budgeting decisions.

d. cannot be incorporated into the NPV calculation.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

86. In evaluating high-tech projects,

a. only tangible benefits should be considered.

b. only intangible benefits should be considered.

c. both tangible and intangible benefits should be considered.

d. neither tangible nor intangible benefits should be considered.

87. Using a number of outcome estimates to get a sense of the variability among potential returns is

a. financial analysis.

b. post-audit analysis.

c. sensitivity analysis.

d. outcome analysis.

Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

88. If a company’s required rate of return is 9%, and in using the profitability index method, a project’s index is greater than 1, this indicates that the project’s rate of return is

a. equal to 9%.

b. greater than 9%.

c. less than 9%.

d. unacceptable for investment purposes.

Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

89. The profitability index is computed by dividing the

a. total cash flows by the initial investment.

b. present value of cash flows by the initial investment.

c. initial investment by the total cash flows.

d. initial investment by the present value of cash flows.

Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

90. The capital budgeting method that takes into account both the size of the original investment and the discounted cash flows is the

a. cash payback method.

b. internal rate of return method.

c. net present value method.

d. profitability index.

Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

91. The profitability index

a. does not take into account the discounted cash flows.

b. is calculated by dividing total cash flows by the initial investment.

c. allows comparison of the relative desirability of projects that require differing initial investments.

d. will never be greater than 1.

Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

92. The capital budgeting method that allows comparison of the relative desirability of projects that require differing initial investments is the

a. cash payback method.

b. internal rate of return method.

c. net present value method.

d. profitability index.

Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

93. The following information is available for a potential investment for Panda Company:

Initial investment $95,000

Net annual cash inflow 20,000

Net present value 36,224

Salvage value 10,000

Useful life 10 yrs.

The potential investment’s profitability index is

a. 4.75.

b. 3.22.

c. 2.62.

d. 1.38.

Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

94. An approach that uses a number of outcome estimates to get a sense of the variability among potential returns is

a. the discounted cash flow technique.

b. the net present value method.

c. risk analysis.

d. sensitivity analysis.

Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

95. If a project’s profitability index is greater than 1, then the

a. project should always be accepted.

b. project’s net present value is negative.

c. project’s internal rate of return is less than the discount rate.

d. project should be accepted if funds are available.

Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

96. If a project’s profitability index is less than 1, then

a. its net present value is zero.

b. its net present value is positive.

c. it should be rejected.

d. its internal rate of return is greater than the discount rate.

97. If a project’s profitability index is equal to 1, then

a. its net present value is zero.

b. its net present value is positive.

c. it should be rejected.

d. its internal rate of return is greater than the discount rate.

Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

98. A project with an initial investment of $70,000 and a profitability index of 1.239 also has an internal rate of return of 12%. The present value of net cash flows is

a. $78,400.

b. $86,730.

c. $56,497.

d. $70,000.

Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

99. A project with a profitability index of 1.156 also has net cash flows with a present value of $69,360. The project’s internal rate of return was 10%. The initial investment was

a. $66,000.

b. $80,180.

c. $60,000.

d. $62,424.

Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Use the following information for questions 100 and 101.

Selma Inc. is comparing several alternative capital budgeting projects as shown below:

Projects

A B C

Initial investment $80,000 $120,000 $160,000

Present value of net cash flows 90,000 110,000 200,000

100. Using the profitability index, the projects rank as

a. A, C, B.

b. A, B, C.

c. C, A, B.

d. C, B, A.

Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

101. Using the profitability index, how many of the projects are acceptable?

a. 3

b. 2

c. 1

d. 0

Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

102. If a project has a negative net present value, its profitability index will be

a. one.

b. greater than one.

c. less than one.

d. undeterminable.

103. If a project has a positive net present value, its profitability index will be

a. one.

b. greater than one.

c. less than one.

d. undeterminable.

104. If a project has a zero net present value, its profitability index will be

a. one.

b. greater than one.

c. less than one.

d. undeterminable.

105. If a project has a profitability index of 1.20, then the project’s internal rate of return is

a. equal to the discount rate.

b. less than the discount rate.

c. greater than the discount rate.

d. equal to 20%.

Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

106.

Cleaners, Inc. is considering purchasing equipment costing $60,000 with a 6-year useful life. The equipment will provide cost savings of $14,600 and will be depreciated straight-line over its useful life with no salvage value. Cleaners requires a 10% rate of return.

Present Value of an Annuity of 1

Period 8% 9% 10% 11% 12% 15%

6 4.623 4.486 4.355 4.231 4.111 3.784

What is the approximate net present value of this investment?

a. $27,600

b. $3,583

c. $1,772

d. $5,496

Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

107.

Cleaners, Inc. is considering purchasing equipment costing $60,000 with a 6-year useful life. The equipment will provide cost savings of $14,600 and will be depreciated straight-line over its useful life with no salvage value. Cleaners requires a 10% rate of return.

Present Value of an Annuity of 1

Period 8% 9% 10% 11% 12% 15%

6 4.623 4.486 4.355 4.231 4.111 3.784

What is the approximate profitability index associated with this equipment?

a. 1.23

b. 1.03

c. 1.06

d. .73

Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

108.

Cleaners, Inc. is considering purchasing equipment costing $60,000 with a 6-year useful life. The equipment will provide cost savings of $14,600 and will be depreciated straight-line over its useful life with no salvage value. Cleaners requires a 10% rate of return.

Present Value of an Annuity of 1

Period 8% 9% 10% 11% 12% 15%

6 4.623 4.486 4.355 4.231 4.111 3.784

What is the approximate internal rate of return for this investment?

a. 9%

b. 10%

c. 11%

d. 12%

Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

109.

Present Value of an Annuity of 1

Periods 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 9%. It is considering investing in a project that costs $210,000 and is expected to generate cash inflows of $84,000 at the end of each year for three years. The net present value of this project is

a. $212,604.

b. $42,000.

c. $21,261.

d. $2,604.

Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

110.

Present Value of an Annuity of 1

Periods 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 10%. It is considering investing in a project that costs $50,000 and is expected to generate cash inflows of $25,000 at the end of each year for three years. The profitability index for this project is

a. .80.

b. 1.00.

c. 1.24.

d. 1.27.

Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

111.

Present Value of an Annuity of 1

Periods 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 8%. It is considering investing in a project that costs $91,116 and is expected to generate cash inflows of $36,000 each year for three years. The approximate internal rate of return on this project is

a. 8%.

b. 9%.

c. 10%.

d. less than the required 8%.

Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

112.

Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below:

Project Soup Project Nuts

Initial investment $400,000 $600,000

Annual net income 30,000 46,000

Net annual cash inflow 110,000 146,000

Estimated useful life 5 years 6 years

Salvage value -0- -0-

The company requires a 10% rate of return on all new investments.

Present Value of an Annuity of 1

Periods 9% 10% 11% 12%

5 3.890 3.791 3.696 3.605

6 4.486 4.355 4.231 4.111

The cash payback period for Project Soup is

a. 13.3 years.

b. 6.7 years.

c. 5.0 years.

d. 4.1 years.

Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

113.

Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below:

Project Soup Project Nuts

Initial investment $400,000 $600,000

Annual net income 30,000 46,000

Net annual cash inflow 110,000 146,000

Estimated useful life 5 years 6 years

Salvage value -0- -0-

The company requires a 10% rate of return on all new investments.

Present Value of an Annuity of 1

Periods 9% 10% 11% 12%

5 3.890 3.791 3.696 3.605

6 4.486 4.355 4.231 4.111

The net present value for Project Nuts is

a. $635,830.

b. $200,330.

c. $100,000.

d. $35,830.

Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

114.

Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below:

Project Soup Project Nuts

Initial investment $400,000 $600,000

Annual net income 30,000 46,000

Net annual cash inflow 110,000 146,000

Estimated useful life 5 years 6 years

Salvage value -0- -0-

The company requires a 10% rate of return on all new investments.

Present Value of an Annuity of 1

Periods 9% 10% 11% 12%

5 3.890 3.791 3.696 3.605

6 4.486 4.355 4.231 4.111

The internal rate of return for Project Nuts is approximately

a. 11%.

b. 12%.

c. 10%.

d. 9%.

Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

115.

Carr Company is considering two capital investment proposals. Estimates regarding each project are provided below:

Project Soup Project Nuts

Initial investment $400,000 $600,000

Annual net income 30,000 46,000

Net annual cash inflow 110,000 146,000

Estimated useful life 5 years 6 years

Salvage value -0- -0-

Present Value of an Annuity of 1

Periods 9% 10% 11% 12%

5 3.890 3.791 3.696 3.605

6 4.486 4.355 4.231 4.111

The annual rate of return for Project Soup is

a. 7.5%.

b. 15.0%.

c. 27.5%.

d. 55%.

Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

116. A post-audit should be performed using

a. a different evaluation technique than that used in making the original decision.

b. the same evaluation technique used in making the original decision.

c. estimated amounts instead of actual figures.

d. an independent CPA.

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

117. A thorough evaluation of how well a project’s actual performance matches the projections made when the project was proposed is called a

a. pre-audit.

b. post-audit.

c. risk analysis.

d. sensitivity analysis.

118. Performing a post-audit is important because

a. managers will be more likely to submit reasonable data when they make investment proposals if they know their estimates will be compared to actual results.

b. it provides a formal mechanism by which the company can determine whether existing projects should be terminated.

c. it improves the development of future investment proposals because managers improve their estimation techniques by evaluating their past successes and failures.

d. all of these.

Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

119. A capital budgeting method that takes into consideration the time value of money is the

a. annual rate of return method.

b. return on stockholders’ equity method.

c. cash payback technique.

d. internal rate of return method.

Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

120. The internal rate of return is the interest rate that results in a

a. positive NPV.

b. negative NPV.

c. zero NPV.

d. positive or negative NPV.

Ans: LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

121. In using the internal rate of return method, the internal rate of return factor was 4.0 and the equal annual cash inflows were $18,000. The initial investment in the project must have been

a. $18,000.

b. $4,500.

c. $72,000.

d. $36,000.

Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

122. The capital budgeting technique that finds the interest yield of the potential investment is the

a. annual rate of return method.

b. internal rate of return method.

c. net present value method.

d. profitability index method.

Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Budget Preparation

123. All of the following statements about the internal rate of return method are correct except that it

a. recognizes the time value of money.

b. is widely used in practice.

c. is easy to interpret.

d. can be used only when the cash inflows are equal.

Ans: LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

124. If the internal rate of return is used as the discount rate in the net present value calcula-tion, the net present value will be

a. zero.

b. positive.

c. negative.

d. undeterminable.

Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

125. If a project costing $80,000 has a profitability index of 1.00 and the discount rate was 12%, then the present value of the net cash flows was

a. $80,000.

b. less than $80,000.

c. greater than $80,000.

d. undeterminable.

Ans: LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

126. If a project costing $40,000 has a profitability index of 1.00 and the discount rate was 8%, then the project’s internal rate of return was

a. less than 8%.

b. equal to 8%.

c. greater than 8%.

d. undeterminable.

Ans: LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

127. The internal rate of return factor is equal to the

a. capital investment divided by the net cash flows.

b. present value of net cash flows divided by the capital investment.

c. present value of net cash flows divided by the profitability index.

d. capital investment divided by the present value of the net cash flows.

Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

128. If a 2-year capital project has an internal rate of return factor equal to 1.690 and net annual cash flows of $60,000, the initial capital investment was

a. $101,400.

b. $35,503.

c. $50,700.

d. $71,007.

Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

129. If a 3-year capital project costing $77,310 has an internal rate of return factor equal to 2.577, the net annual cash flows assuming straight-line depreciation are

a. $25,770.

b. $30,000.

c. $10,000.

d. $38,655.

Ans: LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

130. If the internal rate of return exceeds the discount rate, then the net present value of a project is

a. positive.

b. negative.

c. zero.

d. one.

Ans: LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

131. If the internal rate of return is less than the discount rate, then the net present value of a project is

a. positive.

b. negative.

c. zero.

d. one.

132. If a project has a negative net present value, the internal rate of return will be

a. less than the discount rate.

b. greater than the discount rate.

c. equal to the discount rate.

d. a negative rate of return.

133. If a project has a zero net present value, then the internal rate of return will be

a. less than the discount rate.

b. greater than the discount rate.

c. equal to the discount rate.

d. a negative rate of return.

134. Which of the following will cause the internal rate of return to increase?

a. An increase in the annual cash inflows

b. A decrease in the annual cash inflows

c. An increase in the discount rate

d. A decrease in the discount rate

Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

135. If project A has a lower internal rate of return than project B, then project A will have a

a. lower NPV and a shorter payback period.

b. higher NPV and a longer payback period.

c. lower NPV and a longer payback period.

d. higher NPV and a shorter payback period.

136. The internal rate of return factor is also the

a. annual rate of return.

b. profitability index.

c. cash payback period.

d. present value factor for a single amount.

137. Use the following table,

Present Value of an Annuity of 1

Period 8% 9% 10%

1 .926 .917 .909

2 1.783 1.759 1.736

3 2.577 2.531 2.487

A company has a minimum required rate of return of 8%. It is considering investing in a project that costs $379,650 and is expected to generate cash inflows of $150,000 each year for three years. The approximate internal rate of return on this project is

a. 8%.

b. 9%.

c. 10%.

d. The IRR on this project cannot be approximated.

138. A company is considering purchasing a machine that costs $280,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used.

If the machine is purchased, the annual rate of return expected on this machine is

a. 22.1%.

b. 44.3%.

c. 9.6%.

d. 19.3%.

Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

139. A company projects an increase in net income of $135,000 each year for the next five years if it invests $900,000 in new equipment. The equipment has a five-year life and an estimated salvage value of $300,000. What is the annual rate of return on this investment?

a. 15.0%

b. 22.5%

c. 30.0%

d. 34.5%

Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

140. Garza Company is considering buying equipment for $320,000 with a useful life of five years and an estimated salvage value of $16,000. If annual expected income is $28,000, the denominator in computing the annual rate of return is

a. $320,000.

b. $160,000.

c. $168,000.

d. $336,000.

Ans: LO: 8, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

141. Mussina Company had an investment which cost $250,000 and had a salvage value at the end of its useful life of zero. If Mussina’s expected annual net income is $15,000, the annual rate of return is:

a. 6.0%.

b. 10.2%.

c. 12.0%.

d. 15.0%.

142. Discounted cash flow techniques include all of the following except

a. profitability index.

b. annual rate of return.

c. internal rate of return.

d. net present value.

Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

143. Which of the following is based directly on accrual accounting data rather than cash flows?

a. Profitability index

b. Internal rate of return

c. Net present value

d. Annual rate of return

Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

144. When calculating the annual rate of return, the average investment is equal to

a. (initial investment plus $0) divided by 2.

b. initial investment divided by life of project.

c. initial investment divided by 2.

d. (initial investment plus salvage value) divided by 2.

Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

145. A project has an annual rate of return of 15%. The project cost $120,000, has a 5-year useful life, and no salvage value. Straight-line depreciation is used. The annual net income, exclusive of depreciation, was

a. $42,000.

b. $33,000.

c. $47,700.

d. $18,000.

Ans: LO: 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

146. A project that cost $75,000 has a useful life of 5 years and a salvage value of $3,000. The internal rate of return is 12% and the annual rate of return is 18%. The amount of the annual net income was

a. $7,020.

b. $6,480.

c. $4,680.

d. $4,320.

Ans: LO: 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

147. A project has annual income exclusive of depreciation of $80,000. The annual rate of return is 15% and annual depreciation is $20,000. There is no salvage value. The internal rate of return is 12%. The initial cost of the project was

a. $400,000.

b. $500,000.

c. $1,000,000.

d. $800,000.

Ans: LO: 8, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

148. A project that cost $80,000 with a useful life of 5 years is being considered. Straight-line depreciation is being used and salvage value is $5,000. The project will generate annual cash flows of $21,375. The annual rate of return is

a. 15%.

b. 50.3%.

c. 16%.

d. 17%.

Use the following information for questions 149 and 150.

A company is considering purchasing factory equipment that costs $480,000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual revenues are expected to be $135,000 and annual operating expenses exclusive of depreciation expense are expected to be $39,000. The straight-line method of depreciation would be used.

149. If the equipment is purchased, the annual rate of return expected on this equipment is

a. 40.0%.

b. 7.5%.

c. 15.0%.

d. 20.0%.

Ans: LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

150. The cash payback period on the equipment is

a. 13.3 years.

b. 8.0 years.

c. 5.0 years.

d. 2.5 years.

Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

151. The capital budgeting technique that indicates the profitability of a capital expenditure is the

a. profitability index method.

b. net present value method.

c. internal rate of return method.

d. annual rate of return method.

Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

152. The annual rate of return method is based on

a. accounting data.

b. the time value of money data.

c. market values.

d. cash flow data.

153. Disadvantages of the annual rate of return method include all of the following except that

a. it relies on accrual accounting numbers instead of actual cash flows.

b. it does not consider the time value of money.

c. no consideration is given as to when the cash inflows occur.

d. management is unfamiliar with the information used in the computation.

Ans: LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

154. A company projects an increase in net income of $30,000 each year for the next five years if it invests $300,000 in new equipment. The equipment has a five-year life and an estimated salvage value of $100,000. What is the annual rate of return on this investment?

a. 10%

b. 15%

c. 20%

d. 25%

155. Colaw Company is considering buying equipment for $240,000 with a useful life of five years and an estimated salvage value of $12,000. If annual expected income is $21,000, the denominator in computing the annual rate of return is

a. $240,000.

b. $120,000.

c. $126,000.

d. $252,000.

Ans: LO: 8, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

156. The annual rate of return is computed by dividing expected annual

a. cash inflows by average investment.

b. net income by average investment.

c. cash inflows by original investment.

d. net income by original investment.

Ans: LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods

157. All of the following statements about the annual rate of return method are correct except that it

a. indicates the profitability of a capital expenditure.

b. ignores the salvage value of an investment.

c. does not consider the time value of money.

d. compares the annual rate of return to management’s minimum rate of return.

Ans: LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods