Question_DOC1_Dec11_2nd
41. Barney's Bagels invested in a new oven for $12,000. The oven reduced the amount of time for baking which increased production and
sales for five years by the following amounts of cash inflows:
Using the averaging method, the payback period for the investment in the oven would be:
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A. 5.0 years.
B. 2.4 years.
C. 2.0 years.
D. 1.7 years.
42. Which of the following statements concerning payback analysis is true?
A. An investment with a longer payback is preferable to an investment with a shorter payback.
B. The payback method ignores the time value of money concept.
C. The payback method and the unadjusted rate of return are different approaches that will consistently lead to the same conclusion.
D. All of the other answers are correct.
43. Which of the following doesnotrepresent an advantage of the unadjusted rate of return over the payback method for evaluating capital
projects?
A. The unadjusted rate of return method considers the investment's profitability.
B. The unadjusted rate of return method measures the recovery of the initial investment in the project.
C. The unadjusted rate of return is a percentage that can be compared to a stated hurdle rate.
D. None of the above represents an advantage.
44. Cash outflows generated by capital investments include all of the following except:
A. purchase discounts
B. transportation costs
C. increased operating expenses
D. increase in the required amount of working capital
45. Which capital budgeting technique defines returns in terms of income instead of cash flows?
A. The unadjusted rate of return method
B. The internal rate of return technique
C. The net present value technique
D. The payback period
46. Eddy Company has an opportunity to purchase an asset that will cost the company $25,000. The asset is expected to add $7,500 per year
to the company's net income. Assuming the asset has a fiveyear useful life and zero salvage value, the unadjusted rate of return based on
the average investment will be:
A. 60%.
B. 30%.
C. 15%.
D. none of the above answers are correct.
47. Finebaum Company plans to invest in a new operating plant that is expected to cost $600,000. The projected incremental income from the
investment is as follows:
The unadjusted rate of return on the initial investment would be approximately:
A. 5.0%.
B. 6.7%.
C. 13.3%.
D. 15.0%.
48. Select theincorrectstatement regarding postaudits of capital investment decisions.
A. A postaudit should be conducted at the end of the project.
B. The postaudit helps management determine whether a project that had been accepted should have been rejected.
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C. A postaudit is not necessary for a capital investment selected using a technique that considers the time value of money.
D. The goal of a postaudit is to provide feedback that can be used to improve the accuracy of future capital investment decisions.
49. The purposes of the postaudit for capital investments include all of the followingexcept:
A. continuous improvement.
B. punishment for poor capital investment decisions.
C. determining whether the project generated the results expected.
D. ensuring that managers closely scrutinize capital investment decisions.
50. The review of a capital budgeting decision to determine whether a project was accepted that should have been rejected is referred to as:
A. an audit.
B. a preaudit.
C. a postaudit.
D. a capital review.
51. Six years ago, Torrence Hardware paid a contractor $45,000 to expand the store. At that time, the company calculated a net present value
of about $6,000 for the expansion. Now, the company believes that the investment increased annual cash inflows by $8,000 per year for
each of the six years. Torrence has a desired rate of return of 10%. What was the net present value actually achieved for this capital
investment? (Do not round your PV factors and intermediate calculations. Round to the nearest dollar.)
A. ($10,158)
B. ($3,000)
C. $34,842
D. $(9,207)
52. Lane Company is considering purchasing a capital investment that is expected to provide annual cash inflows of $10,000 per year for 3
years. Assuming that Lane's required rate of return is 8%, what is the present value of these cash inflows? (Do not round PV factors and
intermediate calculations. Round your final answer to the nearest dollar.)
A. $25,771
B. $24,869
C. $33,121
D. $24,018
53. Phoenix Company is considering purchasing a capital investment that is expected to provide annual cash inflows of $15,000 per year for 3
years. Assuming that the required rate of return is 10%, what is the present value of these cash inflows? (Do not round PV factors and
intermediate calculations. Round your final answer to the nearest dollar.)
A. $38,656
B. $37,303
C. $36,027
D. $23,665
54. Santa Fe Company is considering the purchase of equipment that would cost $40,000 and offer annual cash inflows of $10,500 over its
useful life of 5 years. Assuming a required rate of return of 8%, what is the net present value of this investment opportunity?
A. $(1,923)
B. $40,000
C. $1,923
D. $41,923
55. George Company is considering the purchase of equipment that would cost $40,000 and offer annual cash inflows of $10,500 over its
useful life of 5 years. Assuming a desired rate of return of 10%, is the project acceptable?
A. No, since the negative net present value indicates the investment will yield a rate of return below the desired rate of return.
B. Yes, since the positive net present value indicates the investment will earn a rate of return lower than the desired rate of return.
C. Yes, since the positive net present value indicates the investment will earn a rate of return in deficit of 10%.
D. The answer cannot be determined.
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56. Crown Company is considering purchase of equipment that costs $60,000. If the useful life is expected to be 5 years and Crown's required
rate of return is 10%, what is the minimum annual cash inflow that the equipment must offer for the investment to be acceptable? (Do not
round your PV factors and intermediate calculations. Round your final answer to the nearest dollar.)
A. $15,027
B. $15,828
C. $16,644
D. $18,928
57. Graves Company is considering purchase of equipment that costs $60,000 and is expected to offer annual cash inflows of $19,000.
Graves' minimum required rate of return is 10%. How many years must the cash flows last, for the investment to be acceptable? (Do not
round your PV factors and intermediate calculations. Round to nearest whole year.)
A. 1
B. 2
C. 3
D. 4
58. Forrest Company is considering purchase of equipment that costs $60,000 and is expected to offer annual cash inflows of $17,000 for 5
years. Forrest Company's required rate of return is 10%. What is the internal rate of return of this investment project?
A. 13.79%
B. 5.2%
C. 17.65%
D. 12.86%
59. Bern Corporation is considering an investment in equipment that would cost $50,000 and provide annual cash inflows of $14,000. The
company's required rate of return is 12%; the internal rate of return for the investment is 10.5%. Should the company make this
investment?
A. Yes, since the internal rate of return is more than the company's required rate of return.
B. Yes, since the internal rate of return is less than the company's required rate of return.
C. No, since the internal rate of return is less than the company's required rate of return.
D. The answer cannot be determined.
60. Frisco Corporation is considering two projects, A and B, and it has gathered the following estimates for the projects:
What is the net present value for project A?
A. $7,360
B. $6,100
C. $1,260
D. None of the above answers are correct.
61. Frisco Corporation is considering two projects, A and B, and it has gathered the following estimates for the project
What is the present value index for project B?
A. 1.096
B. 1.124
C. 0.889
D. 0.913
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62. York Corporation is considering purchasing equipment that costs $80,000 and is expected to provide the following cash inflows over its
fiveyear useful life:
What is the payback period of this investment project (rounded to the nearest year)?
A. 2 years
B. 3 years
C. 4 years
D. 6 years
63. Capital investment decisions involve all of the following,except:
A. the acquisition of shortterm operational assets.
B. projects requiring relatively long periods of time and large cash flows.
C. the acquisition of longterm operational assets.
D. none of the above answers are correct.
64. A series of equal cash flows at fixed intervals is termed a(n):
A. net cash flow.
B. lump sum.
C. annuity.
D. return on investment.
65. Which method for evaluating capital investment proposals reduces the present value of cash outflows from the present value of cash
inflows?
A. Net present value
B. Internal rate of return
C. Payback method
D. Unadjusted rate of return
66. Which of the following arenotpresent value methods of analyzing capital investment proposals?
A. Internal rate of return and payback
B. Internal rate of return and net present value
C. Net present value and payback
D. Payback and unadjusted rate of return
67. Which of the following isnota criteria that is used to determine whether a project is acceptable under the net present value method?
A. If the net present value is equal to zero
B. If the net present value is greater than zero
C. Book value of existing equipment
D. None of the above answers are correct.
68. Jim Tyler is evaluating a potential capital investment. He has calculated the net present value using a minimum rate of return of 10%.
Using this rate, the net present value is negative. What does this tell him about the rate of return expected for the project?
A. If the net present value is negative; the expected rate of return for the project is less than the 10% minimum or required rate of return.
B. If the net present value is negative; the expected rate of return for the project is greater than the 10% minimum or required rate of return.
C. If the net present value is negative; the expected rate of return for the project is equal to the 10% minimum or required rate of return.
D. None of the other answers are correct.
69. Which method of evaluating capital investment decisions uses the concept of present value to compute a rate of return?
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A. Unadjusted rate of return
B. Internal rate of return
C. Net present value
D. Payback
70. Cash inflows generated by capital investments include all of the followingexcept:
A. incremental revenues.
B. cost savings.
C. reduction in the amount of required working capital.
D. increase in operating expenses.
71. Cash outflows generated by capital investments include all of the followingexcept:
A. incremental revenues.
B. initial investment in the capital asset.
C. increase in operating expenses.
D. increase in the amount of required working capital
72. Sarah Meyers is considering alternative proposals that involve different amounts of investments. To compare different size investment
proposals, it may be helpful for Sarah to prepare a relative ranking of the proposals by using a(n):
A. net present value.
B. present value index.
C. internal rate of return.
D. none of the above answers are correct.
73. The present value index indicates:
A. the time it will take to recover the initial cash outflow of an investment.
B. the additional cash inflows from operating activities.
C. the rate of return per dollar invested in a capital project.
D. none of the above answers are correct.
74. The length of time required to recover the initial investment in a capital asset is known as the:
A. the rate of return.
B. payback method.
C. internal rate of return.
D. unadjusted rate of return.
75. The time value of money concept recognizes that a dollar today is worth more than a dollar tomorrow. Which of the following isnota
factor in causing the present value of cash inflows to diminish over time?
A. Current expenses.
B. Earning potential, such as interest.
C. Risk of uncollectability.
D. Inflation reduces future purchasing power.
76. The difference between an ordinary annuity and an annuity due is:
A. an ordinary annuity represents a present value and an annuity due represents a future value.
B. an ordinary annuity represents a future value and an annuity due represents a present value.
C. an ordinary annuity assumes the cash flows occur at the end of the period and an annuity due assumes the cash flows occur at the
beginning of the period.
D. an ordinary annuity assumes the cash flows occur at the beginning of the period and an annuity due assumes the cash flows occur at the
end of the period.
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True False
True False
True False
True False
True False
True False
True False
True False
True False
True False
77. Candy Cups thinks that offering delivery will increase their sales. Candy is considering whether to purchase a used delivery truck costing
$12,000. Additional net income from the delivery service will be $1,400 per year. The truck will last approximately 5 years. What is the
unadjusted rate of return based on the average investment?
A. About 23.3%
B. About 11.7%
C. About 58.3%
D. About 857.1%
78. Which of the following statements isincorrect?
A. The further into the future a cash receipt is expected to occur, the higher is its present value.
B. The return on investment measures the compensation a company expects to receive from investing in capital assets.
C. Most companies use their cost of capital to estimate the minimum return on investment required from capital investments.
D. When a company invests in capital assets, it sacrifices present dollars for the opportunity to receive future dollars.
79. The process by which management evaluates longterm investment decisions involving long term operational assets is called:
A. fixed cost analysis.
B. activity based management.
C. strategic business analysis.
D. capital investment analysis.
80. Which of the following statements is correct?
A. A postaudit should be conducted at the time a capital investment is purchased.
B. The postaudit of a capital investment project should be made using the same analytical technique that was used in deciding to make the
investment.
C. The purpose of postaudits is to improve a company's costvolumeprofit analysis.
D. The postaudit process uses expected cash flows and the company's cost of capital.

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Solution: Question_DOC1_Dec11_2nd  Answer