Q&A Hero

Q: Which of the following best describes the internal rate of return?A) The discount rate that makes the cost of the investment equal to the present value of the cash flowsB) The discount rate that is used to borrow funds from a lenderC) The ratio of average annual income to average amount investedD) The rate at which an investment pays back

Q: Which of the following is the rate of return, based on discounted cash flows, that a company can expect to earn by investing in a capital asset?A) Rate of returnB) Net present value (NPV)C) Internal rate of return (IRR)D) Payback period

Q: Which of the following best describes the term opportunity cost?A) The cost incurred to qualify for an investment opportunityB) The benefit that is given up when choosing one out of a series of optionsC) The benefits of an investment which has come available suddenlyD) The opportunity to invest in certain cash flows and returns

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Q: Which of the following best describes the profitability index?A) An index of projects in order of which has the most net incomeB) The ratio of present value of cash flows to initial investmentC) The ratio of total cash flows to initial investmentD) An array of possible investment outcomes at different discount rates

Q: Under conditions of limited resources, when a company is comparing several investments with the different amounts for their initial outlay, the decision should be made on the basis of which of the following?A) Which project has the most total cash flowsB) Which project has the shortest paybackC) Which project has the highest profitability indexD) Which project is completed first

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Q: When a company is evaluating an investment with discounted cash flows, if the investment has a higher risk, the company will use a lower discount rate, and vice versa.

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Q: An investment would be considered a good prospect under which of the following conditions?A) The present value of the cash flows exceeds the initial investment.B) The IRR is lower than the hurdle rate.C) The cash inflows are greater than the initial investment.D) It has a residual value.

Q: Cash flows used in NPV and IRR analyses include all of the following EXCEPT:A) future increased sales.B) future cost savings.C) depreciation expense.D) residual value.

Q: Which of the following is TRUE of discounted cash flow methods like NPV and IRR?A) They use simple interest calculations.B) They assume that cash flows will be reinvested when received.C) They focus on the payback period.D) They must follow the rules of GAAP.

Q: Compound interest used in discounted cash flow calculations assumes that companies will reinvest future cash flows when they are received.

Q: The rate of return and payback methods DO NOT take into consideration the time value of money. Discounted cash flow methods DO make use of the time value of money.

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Q: When evaluating a potential investment, managers should use more than one measure for making a sound investment decision.

Q: Considering the four common methods of evaluating investmentsue004payback, rate of return, net present value, and internal rate of returnue004the discounted cash flow methods are superior because they consider both the time value of money and the profitability of the investment.

Q: Using the NPV method of evaluating investments, a company should consider a project a good investment opportunity as long as the NPV of the total cash flows is positive.

Q: If a company uses a higher discount rate to calculate NPV of an investment, it reflects a higher level of perceived risk for the investment.

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Q: Jim wants to invest $5,000 a year for the next 25 years to prepare for his retirement. If he wants to calculate the value of his investment at the end of the 25 year period, which of the following tables would be the best for him to use?A) Present Value of $1B) Present Value of an Annuity of $1C) Future Value of $1D) Future Value of an Annuity of $1

Q: Which of the following MOST accurately describes the term annuity?A) An investment which grows in value over timeB) An installment loan with amortizing principal paymentsC) A stream of equal installments of cash paymentsD) A term life insurance policy

Q: A company is evaluating 3 possible investments. Each uses straight-line depreciation. See data below: Project AProject BProject CInvestment$400,000 $20,000 $100,000 Salvage value$0 $2,000 $5,000 Net cash flows: Year 1$100,000 $10,000 $40,000 Year 2$100,000 $8,000 $25,000 Year 3$100,000 $5,000 $30,000 Year 4$100,000 $3,000 $10,000 Year 5$100,000 $0 $0 What is the rate of return for Project C?A) 5%B) 4%C) 18%D) 10%

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Q: Clapton Corporation is considering an investment in new equipment costing $900,000. The equipment will be depreciated on a straight-line basis over a ten-year life and is expected to have a salvage value of $90,000. The equipment is expected to generate net cash flows of $140,000 for each of the first five years and $100,000 for each of the last five years. What is the accounting rate of return associated with the equipment investment?A) 12.1%B) 7.9%C) 17.3%D) 9.7%

Q: Dylan Company is considering an investment in new equipment costing $720,000. The equipment will be depreciated on a straight-line basis over a five-year life and is expected to have a salvage value of $45,000. The equipment is expected to generate net cash flows totaling $970,000 during the five years. What is the rate of return associated with the equipment investment?A) 15.4%B) 16.4%C) 30.4%D) 13.9%

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Q: Pearl Manufacturing is considering an investment in equipment costing $660,000. The equipment will be depreciated on the straight-line basis over an eight-year period with an estimated residual value of $120,000. The investment is expected to generate annual net cash inflows of $135,000 for 8 years. Using the rate of return model, what is the minimum average annual operating income that must be generated from this investment in order to achieve a 14% rate of return?A) $18,900B) $37,800C) $54,600D) $92,400

Q: Landmark Company is considering an investment in new equipment costing $360,000. The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $70,000 the first year, $80,000 the second year, and $120,000 every year thereafter until the fifth year. What is the payback period for this investment? The residual value is zero.A) 3.25 yearsB) 3.50 yearsC) 3.75 yearsD) 4 years

Q: Atlantic Company is considering investing in specialized equipment costing $360,000. The equipment has a useful life of 5 years and a residual value of $45,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are:Year 1$160,000Year 2130,000Year 3100,000Year 455,000Year 5 40,000 $485,000What is the rate of return on the investment?A) 16.8%B) 23.9%C) 18.9%D) 12.4%

Q: Logan, Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available: Investment AInvestment BInitial capital investment$60,000$90,000Estimated useful life3 years3 yearsEstimated residual valueu2014 0 u2014u2014 0 u2014Estimated annual net cash inflow for 3 years$25,000$40,000Required rate of return10%12%How long is the payback period for Investment B?A) 0.44 yearsB) 2.25 yearsC) 2.35 yearsD) 3.00 years

Q: ABC Company is adding a new product line that will require an investment of $1,500,000. The product line is estimated to generate cash inflows of $300,000 the first year, $250,000 the second year, and $200,000 each year thereafter for ten more years. What is the payback period?A) 2.73 yearsB) 6.00 yearsC) 6.75 yearsD) 7.25 years

Q: 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 net present value.C) Companies should always choose the investment with the highest rate of return.D) Companies should consider several different methods of evaluation before choosing an investment.

Q: Which capital budgeting method uses accrual accounting, rather than net cash flows, as a basis for calculations?A) PaybackB) Rate of returnC) Net present valueD) Internal rate of return

Q: Which of the following methods ignores the time value of money?A) PaybackB) Internal rate of returnC) Return on assetsD) Net present value

Q: The payback method and the rate of return method are powerful, comprehensive evaluation tools, and would normally be sufficient to make a final investment decision.

Q: The rate of return calculations ignores the time value of money, but the payback period does include consideration of the time value of money.

Q: The rate of return is the only capital budgeting method that uses accrual accounting.

Q: The payback method and the rate of return method are both conceptually better than the discounted cash flow models because they are based on cash flows.

Q: Neither the payback period nor the rate of return capital budgeting method recognizes the time value of money.

Q: The payback method ignores cash flows after the payback period, whereas the rate of return includes them.

Q: The payback method uses discounted cash flows to make investment decisions.

Q: The payback method is a very thorough and comprehensive way to choose the best investment among alternatives.

Q: A criticism of the rate of return method is that it ignores the time value of money.

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

Q: The rate of return method and the payback method are often used as preliminary screening measures, but are insufficient to fully evaluate a capital investment.

Q: Capital budgeting is:A) planning how to invest in long-term assets.B) budgeting for operating expenses.C) evaluating the ongoing profitability of a business.D) making pricing decisions for products.

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Q: When projecting future cash flows of an investment, which of the following is TRUE?A) Cash flow data must also include non-cash transactions like depreciation.B) Cash inflows and cash outflows are treated separately, rather than being netted together.C) Cash flows are typically projected by accounting personnel without input from other business functions.D) The initial investment is always treated separately from all other cash flows.

Q: Which two methods are typically used for initial screening of investments, rather than for detailed in-depth analysis?A) Payback and rate of returnB) Net present value and paybackC) Internal rate of return and net present valueD) Rate of return and net present value

Q: Which of the following is the ONLY capital budgeting method which uses accrual accounting information?A) Payback periodB) Rate of return (ROR)C) Net present value (NPV)D) Internal rate of return (IRR)

Q: Which of the following is a common capital budgeting method?A) Return on assetsB) Acid test ratioC) Internal rate of returnD) Debt-to-equity ratio

Q: Capital budgeting applies to which of the following?A) Budgeting for yearly operational expensesB) Making decisions about sales budgets for the coming yearC) Deciding among various long-term investment decisionsD) Making decisions about the financing of operations

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Q: After a company invests in capital assets, which of the following activities will it perform in order to compare the actual to the projected net cash inflows?A) Cash flow analysisB) Post-auditC) Pre and post analysisD) Post-cash flow

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Q: Capital budgeting methods which do NOT incorporate time value of money are generally used for the initial stage of screening investment alternatives.

Q: When projecting the cash flows of an investment, the inflows are netted against the outflows

Q: Most capital budgeting methods focus on cash flows rather than book income.

Q: The payback method and the rate of return method are often used to perform an initial screening of investments, rather than a detailed in-depth analysis.

Q: The payback period and rate of return (ROR) methods are more suitable to investments with a shorter time span.

Q: Short-term investment decisions are inherently riskier than long-term decisions because they have a shorter period in which to recoup the investment.

Q: The further into the future the investment cash flows extend, the more likely it is that actual results will differ from the initial predictions.

Q: All else being equal, investments with longer payback periods are more desirable.

Q: Capital rationing is when a company has limited resources, and it must find ways to reduce operating expenses in all of its divisions and units.

Q: Learning Objective 21-1 A post-audit is an analysis of an investment that is made after the investment is underway or completed.

Q: Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe they can boost the price. If so, the variable cost will go up to $230 and the fixed costs will rise by 50%. The CEO wishes to increase his operational income by 25%. What price level would give the desired results? A) $330 per unit B) $370 per unit C) $320 per unit D) $345 per unit

Q: Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe they can boost the price up to $340. If so, the variable cost will go up to $230 and the fixed costs will rise by 50%. If Victory decides to upgrade, how will it affect operational income? A) Go down $1,250 B) Go down $4,500 C) Go up $12,500 D) Remain the same

Q: Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe they can boost the price up to $325. If so, the variable cost will go up to $230 and the fixed costs will rise by 40%. If Victory decides to upgrade, how will it affect operational income? A) Go down $1,250 B) Go down $4,500 C) Go up $12,500 D) Go up $7,500

Q: Victory Company makes a special kind of racing tire. Variable costs are $220, and fixed costs are $30,000 per month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tire, they believe they can boost the price up to $325. If so, the variable cost will go up to $230 and the fixed costs will remain the same. If Victory decides to upgrade, how will it affect operational income? A) Go down $1,250 B) Go down $5,000 C) Go up $12,500 D) Go up $7,500

Q: A company produces 1,000 packs of chicken feed per month. Sales price is $4.00 per pack. Variable cost is $1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, and fixed costs will go up by 20%. The CEO wishes to price the new product at a level which will bring operational income up to $1,000 per month. What price is needed? A) $5.00 B) $5.06 C) $4.99 D) $4.76

Q: A company produces 1,000 packs of chicken feed per month. Sales price is $4.00 per pack. Variable cost is $1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, and fixed costs will go up by 20%. At what price for the new product will the two alternatives (sell as is or process further) produce the same operational income? (Please round to nearest cent.) A) $5.00 B) $4.76 C) $3.99 D) $4.40

Q: A company produces 1,000 packs of chicken feed per month. Sales price is $4.00 per pack. Variable cost is $1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, and fixed costs will go up by 20%. The company will price the new product at $5.00 per pack. If they do so, how will this affect operational income? A) Go down $150 per month B) Remain unchanged C) Go down $400 per month D) Go up by $240 per month

Q: A company produces 1,000 packs of chicken feed per month. Sales price is $4.00 per pack. Variable cost is $1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, but there will be no change in fixed costs. The company will price the new product at $4.25 to compete with other producers. If they do so, how will this affect operational income? A) Go down $150 per month B) Go up $250 per month C) Go down $400 per month D) Remain unchanged

Q: Nordin Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and requires $2,000 per month in fixed costs. Nordin sells 30 radios per month. If they process the radio further to enhance its functionality, it will require an additional $25 per unit of variable costs, plus an increase in fixed costs of $800 per month. The current price of the radio is $260. The CEO wishes to improve operational income by $1,000 per month by selling the enhanced version of the radio. In order to hit his target, what price would be needed for the enhanced product? (Please round to nearest whole dollar.) A) $212 per unit B) $345 per unit C) $440 per unit D) $367 per unit

Q: Nordin Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and requires $2,000 per month in fixed costs. Nordin sells 30 radios per month. If they process the radio further to enhance its functionality, it will require an additional $25 per unit of variable costs, plus an increase in fixed costs of $800 per month. The current price of the radio is $260. The marketing manager is sure they can charge a higher price for the improved version. At what price level would the newer, improved radio begin to improve operational earnings? (Please round to nearest whole dollar.) A) At a price of $312 or higher B) At a price of $309 or higher C) At a price of $420 or higher D) At a price of $295 or higher

Q: Nordin Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and requires $2,000 per month in fixed costs. If they process the radio further to enhance its functionality, it will require an additional $25 per unit of variable costs, plus an increase in fixed costs of $800 per month. The marketing manager believes they would be able to boost their price of the radio from $260 to $300. Nordin sells 30 radios per month. If they decide to process further, what would the impact be on monthly operational income? A) It would increase by $1,050. B) It would increase by $250. C) It would decrease by $350. D) It would decrease by $750.

Q: Nordin Avionics makes aircraft instrumentation. Their basic navigation radio requires $80 in variable costs and requires $2,000 per month in fixed costs. If they process the radio further to enhance its functionality, it will require an additional $25 per unit of variable costs, but no change to the fixed costs. The marketing manager believes they would be able to boost their price of the radio from $260 to $280. If they do so, how would the change affect operational income? A) It would remain the same. B) It would go up by $25 per unit. C) It would go up by $20 per unit. D) It would go down by $5 per unit.