ACC 211 Final Ch 12

Term
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Which of the following is an example of a capital investment decision by a company?
a.To extend discount to new customers
b.To invest in a new project
c.To renew raw material purchase agreement with suppliers
d.To repurchase issued shares from stock market
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Terms in this set (20)
Which of the following is an example of a capital investment decision by a company?
a.To extend discount to new customers
b.To invest in a new project
c.To renew raw material purchase agreement with suppliers
d.To repurchase issued shares from stock market
b.To invest in a new project
A project provides a reasonable return if:
a.it provides a return equal to initial cost of the project.
b.it covers the opportunity cost of funds invested.
c.it provides return lower than the initial investment in the project.
d.it receives a cash flow equal to the original investment in the first year of investment.
b.it covers the opportunity cost of funds invested.
A company makes a $240,000 investment with net income of $102,000, $78,000, and $90,000 for the next three years. The accounting rate of return for this investment is:
a.26%.
b.30%.
c.38%.
d.18%.
c.38%.

Accounting Rate of Return = Average Income / Initial Investment = [($102,000 + $78,000 + $90,000) / 3] / $240,000 = ($270,000 / 3) / = $240,000 = $90,000 / $240,000 = 0.38, or 38%
The payback period method used to make a capital investment decision is used to assess the:
a.impact of an investment on liquidity.
b.time value of cash inflows of an investment.
c.minimum rate of return of a project.
d.profitability of an investment.
a.impact of an investment on liquidity.
Which of the following is a limitation of using the payback period model for making capital budgeting decisions?
a.The payback period model is dependent upon net income, which is something that can be easily manipulated by managers.
b.The payback period model evaluates the profitability of an investment by considering the time value of cash flows from a project.
c.The payback period model ignores the cash flow performance of investments beyond the recovery of the original investment.
d.The payback period model is dependent upon required rate of return of investment.
c.The payback period model ignores the cash flow performance of investments beyond the recovery of the original investment.
Assume that 'P' is present value of cash inflows and 'I' is present value of cash outflows of a project. Which of the following equations is used to calculate the net present value (NPV) of an investment?
a.NPV = P + I
b.NPV = P - I
c.NPV = (P - I) / I
d.NPV = (P × I) - I
Feedback Area
b.NPV = P - I
Which of the following statements is a limitation of the net present value (NPV) model while making a capital investment decision?
a.The NPV model ignores the time value of money while making a capital investment decision.
b.The NPV model assumes that each cash inflow received is reinvested at the internal rate of return, which is not a realistic assumption.
c.The NPV method measures profitability in relative terms, and in the final analysis, what counts are the total dollars earned—the absolute profit— not the relative profits.
d.The NPV model allows firms to use a higher discount rate than its cost of capital because of uncertain future cash flows.
d.The NPV model allows firms to use a higher discount rate than its cost of capital because of uncertain future cash flows.
Wilson Company is considering replacing an existing piece of capital equipment. Relevant information includes: New equipment cost is $245,000; Expected annual savings is $74,000; Incremental working capital is $26,000. The incremental working capital will be recovered at the end of the project's life. Based on this information, an NPV analysis will show for Year 0 as a:
a.$197,000 outflow.
b.$145,000 outflow.
c.$271,000 outflow.
d.$219,000 outflow.
c.$271,000 outflow.
Wilson Company is considering replacing an existing piece of capital equipment. Relevant information includes: New equipment cost is $250,000; expected annual savings is $75,000; incremental working capital is $27,000. The incremental working capital will be recovered at the end of the project's life. In an NPV analysis, the incremental working capital will be considered as:
a.a cash inflow at the project's inception.
b.a sunk cost that cannot be recovered.
c.an opportunity cost that can be recovered.
d.a cash outflow at the project's inception.
d.a cash outflow at the project's inception.
Which of the following statements is a limitation of the net present value (NPV) model while making a capital investment decision?
a.The NPV model assumes that each cash inflow received is reinvested at the internal rate of return, which is not a realistic assumption.
b.The NPV model ignores the time value of money while making a capital investment decision.
c.The NPV model allows firms to use a higher discount rate than its cost of capital because of uncertain future cash flows.
d.The NPV method measures profitability in relative terms, and in the final analysis, what counts are the total dollars earned—the absolute profit— not the relative profits.
c.The NPV model allows firms to use a higher discount rate than its cost of capital because of uncertain future cash flows.
The _____ is the interest rate that sets the present value of a project's cash inflows equal to the present value of the project's cost. a.internal rate of return b.annual rate of return c.minimum rate of return d.accounting rate of returna.internal rate of returnArea Fly High Inc. intends to invest in a new airplane. Information regarding the investment in the airplane is given below:Project ALife of project5 yearsInitial investment$29,111,420Net annual after-tax cash inflow$7,100,000 The cost of capital for the company is 9%. Calculate the internal rate of return (IRR) for the new airplane. a.9% b.11% c.7% d.6%c.7% Discount Factor = Investment / Annual Cash Flow = $29,111,420 / $7,100,000 = 4.10020 Referring to the present value of an annuity table, the discount factor of 4.10020 for five periods corresponds to a rate of 7%. Therefore, the IRR is equal to 7%.Which of the following formulas is used to determine a project's internal rate of return (IRR)? (I = present value of the project's cost; i = required rate of return; Cft = cash inflow to be received in period t, with t = 1 ... n; t = the time period) a.I = ∑[(1 + i)t / Cft ] b.I = ∑[(1 + i)t - Cft ] c.I = ∑[Cft / (1 + i)t] d.I = ∑[(1 + i)t + Cft ]c.I = ∑[Cft / (1 + i)t]Which of the following statements is a limitation of a postaudit? a.A postaudit does not ensure that resources are used wisely when evaluating the profitability of a project. b.A postaudit faces the limitation that the assumptions driving the original analysis may often be invalidated by changes in the actual operating environment. c.A postaudit does not suggest any corrective actions that can be taken if the overall outcome of the investment is negative. d.A postaudit's objective is not achieved if it is done by an independent party.b.A postaudit faces the limitation that the assumptions driving the original analysis may often be invalidated by changes in the actual operating environment.Which of the following statements is true about a postaudit? a.A postaudit compares the actual benefits with the estimated benefits of a project. b.A postaudit analyzes the project using the accounting rate of return model. c.A postaudit is cheap compared to other analyses. d.A postaudit provide useful information for making capital budgeting decisions regarding a new project.a.A postaudit compares the actual benefits with the estimated benefits of a project.The _____ method assumes that each cash inflow received is reinvested at the required rate of return. a.accounting rate of return b.payback period c.internal rate of return d.net present valued.net present valueThere are two mutually exclusive projects, Project A and Project B. Project A has a net present value (NPV) of $2,900 and an internal rate of return (IRR) of 14%. Project B has an NPV of $4,100 and an IRR of 9%. Based on the scenario, which of the following statements is true regarding the mutually exclusive projects? a.Project B should be selected as Project B provides a lower IRR than project A. b.Project A should be selected as Project A provides a lower NPV than project B. c.Project B should be selected as Project B provides a higher NPV than project A. d.Project A should be selected as Project A provides a higher IRR than project B.c.Project B should be selected as Project B provides a higher NPV than project A.Area Which of the following statements is true regarding investing in manufacturing environments using automated systems? a.Estimates of operating cash flows from investments in automated systems typically rely on directly identifiable tangible benefits. b.While assessing the actual cost of an automated system, focus should not only be given to direct costs, but also to the peripheral costs, which can be substantial. c.For an automated system, the direct costs of acquisition represent virtually the entire investment. d.To decide whether to invest or not in an automated system can be done by comparing the net present value of the old project with the new one.b.While assessing the actual cost of an automated system, focus should not only be given to direct costs, but also to the peripheral costs, which can be substantial.If the discount factor for i = 8% and n = 2 is 0.85734, the present value of $10,000 is _____. (Round your answer to two decimal places.) a.$9,663.90 b.$8,573.40 c.$8,754.33 d.$9,666.67b.$8,573.40 P = F (df) = $10,000 × 0.85734 = $8,573.40 (P = Present value; F = Future value; df = Discount factor)The process of computing the present value of future cash flows is often referred to as _____. a.compounding b.investing c.discounting d.costingc.discounting