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Financial and Managerial Accounting: The Basis for Business Decisions, 12/e

Jan R. Williams, University of Tennessee
Susan F. Haka, Michigan State University
Mark S. Bettner, Bucknell University
Robert F. Meigs

Capital Budgeting

Online Tutorial Quiz

Please answer all questions


1	The term capital investment refers broadly to the large expenditures made to purchase plant assets, develop new product lines, or acquire subsidiary companies.
		A)	True
		B)	False


2	The process of evaluating and prioritizing capital investment opportunities is called capital budgeting.
		A)	True
		B)	False


3	Capital budgeting is the expected effects on future cash flows and future profits, which is always a priority consideration over nonfinancial considerations.
		A)	True
		B)	False


4	Most capital budgeting techniques involve analysis of the annual net cash flow, which, for all practical purposes, is the same as net income.
		A)	True
		B)	False


5	If you invest $40,000 in a project that will return an annual net cash flow of $8,000, the payback period of the investment is 5 years.
		A)	True
		B)	False


6	An advantage to using the payback period as the basis for evaluating capital expenditure proposals is that the life of the investment can be ignored.
		A)	True
		B)	False


7	If the average investment is $40,000 and the return on average investment (ROI) is 20%, the average estimated net income is $8,000.
		A)	True
		B)	False


8	Using the return on average investment as a technique to evaluate capital expenditure proposals overcomes all of the shortcomings of the payback method.
		A)	True
		B)	False


9	The return on average investment method fails to consider the timing of the cash outflow for the investment.
		A)	True
		B)	False


10	The present value of an amount of money to be received at some future date can be computed using a formula of p=1/(1+i)n , where p is the present value, 'i' is the interest rate and 'n' is the number of periods until the future cash flow will occur.
		A)	True
		B)	False

Present Values of $1 Due in n Periods
Number of Discount rate
Periods ------------------------------
(n) 8% 10% 12% 15% 20%
1 .926 .909 .893 .870 .833
2 .857 .826 .797 .756 .694
3 .794 .751 .712 .658 .579


11	If you were offered a choice of $10,000 today or $12,000 in 3 Years when the rate of inflation is expected to be 8%, all other things being equal you should choose the $12,000 option.
		A)	True
		B)	False


12	Positive net present value is the excess of the discounted annual cash flows from an investment over the cost of the investment.
		A)	True
		B)	False


13	If the expenses in arriving at the income before taxes of $12,000 from a project include depreciation of $6,000, and the tax rate is 30%, the net cash flow from the project is $13,800.
		A)	True
		B)	False

Present Values of $1 to Be Received Periodically for n Periods

Number of Discount rate
Periods ------------------------------
(n) 8% 10% 12% 15% 20%
1 0.926 O.909 0.893 0.870 0.833
2 1.783 1.736 1.690 1.626 1.525
3 2.577 2.487 2.402 2.283 2.106


14	To receive an annual end-of-period cash flow of $8,000 (ignoring taxes) for three consecutive periods will require a $19,896 investment be made at the beginning of Period 1.
		A)	True
		B)	False

Present Values of $1 to Be Received Periodically for n Periods

Number of Discount rate
Periods ------------------------------
(n) 8% 10% 12% 15% 20%
1 0.926 O.909 0.893 0.870 0.833
2 1.783 1.736 1.690 1.626 1.525
3 2.577 2.487 2.402 2.283 2.106


15	If you invested $110,000 at the beginning of Period 1 and received $50,000 at the end of each 3 consecutive periods, your rate of return will exceed 20%.
		A)	True
		B)	False


16	The factor for 6% for 4 periods in a table for the present values of $1 to be received periodically (an annuity) for 'n' periods is the same as the sum of the factors for 6% for Periods 1 through 4 in a table for the present values of $1 due in 'n' periods.
		A)	True
		B)	False


17	If you have a required rate of 10%, before taxes, you would consider accepting a $1,000 investment, today, for a payback of $1,400 in 3 years.
		A)	True
		B)	False


18	You sold a piece of equipment at a loss of $4,000. The sales price was $20,000, paid on the date of the sale, which was the first day of the fiscal year. If your tax rate is 30% on all gains and losses, the total present value related to sale of the equipment was $21,200.
		A)	True
		B)	False


19	Any investment opportunity that does not provide a positive net present value should be rejected out of hand.
		A)	True
		B)	False


20	A capital budget audit is the process where managers compare the projected expenditures with actual installation and operating costs of a capital budgeting project to identify weaknesses in their planning processes.
		A)	True
		B)	False


21	Which of the following might be a nonfinancial factor in a capital investment decision?
		A)	Corporate image
		B)	Better working conditions
		C)	Employee morale
		D)	Product quality
		E)	All of the above

Consider the following:
Increase in annual revenue investment $40,000
Annual cost of maintaining investment $30,000
Annual depreciation of investment 12,000 32,000
-------
Increase in annual pretax income $ 8,000
Additional income taxes (40%) 3,200
-------
Increase in annual net income from investment $ 4,800
=======


22	What is the amount of annual net cash flows from this investment?
		A)	$16,800
		B)	$20,000
		C)	$13,600
		D)	$ 9,600
		E)	$12,800


23	The investment cost $58,800. What is the payback period?
		A)	12.25 years
		B)	7.35 years
		C)	3.5 years
		D)	6.125 years
		E)	None of the above

Consider the following:
Cost of investment $50,000
Life of investment 5 years
Salvage value $ 5,000
Average estimated income $ 2,700


24	What is the return on average investment (ROI)?
		A)	5.4%
		B)	6.0%
		C)	12.0%
		D)	36.0%
		E)	27.0%


25	Cash flows at the end of each of the next four years will be $10,000, $12,000, $8,000, and $14,000 respectively. What is the total discounted value of the cash flows if the inflation rate is a constant 8% per year?
		A)	$44,000
		B)	$32,340
		C)	$34,936
		D)	$36,186
		E)	$47,520

Present Values of $1 to Be Received Periodically for n Periods
Number of Discount rate
Periods ------------------------------
(n) 8% 10% 12% 15% 20%
4 3.312 3.179 3.037 2.855 2.589
Present Values of $1 Due in n Periods
Number of Discount rate
Periods ------------------------------
(n) 8% 10% 12% 15% 20%
2 .857 .826 .797 .756 .694
3 .794 .751 .712 .658 .579
4 .735 .683 .636 .572 .482


26	A relative has left you an inheritance that you can elect to receive through the selection of one of several options. For the next 4 time periods, it is estimated that the rate of inflation will be 10%. Which option would you chose?
		A)	Receive $40,000 at the end of Period 3
		B)	Receive $38,000 at the end of Period 2
		C)	Receive $12,000 at the end of each of next 4 periods
		D)	Receive $43,000 at the end of Period 4
		E)	Receive $30,000 at beginning of Period 1


27	Expected annual cash flows from an investment of $125,000 are expected to be $35,000. At the end of four years the investment will be sold for $10,000. The investment will be paid in advance. What is the net present value of the investment using a 10% discount rate?
		A)	$13,375, negative
		B)	$3,735, negative
		C)	$6,095, negative
		D)	$25,000 positive
		E)	$17,075 positive


28	Expected annual cash flows from an investment of $170,000 are expected to be $50,000. At the end of four years the investment will be sold for $5,000. The investment will be paid in advance. What is the net present value of the investment using a required rate of return of 10%?
		A)	$19,365 positive
		B)	$35,000 positive
		C)	$15,950 positive
		D)	$30,000 positive
		E)	None of the above


29	The decision to replace existing equipment should involve several decision-making techniques and include identifying which of the following?
		A)	Relevant information
		B)	Incremental analysis
		C)	Discounting future cash flows
		D)	Nonfinancial factors
		E)	All of the above


30	The discount rate for $1 due in 1 year at 15% is .870. The discount rate for $1 to be received periodically for 5 years at 15% is 3.352. The cost of new forklift is $45,000, which will be depreciated straight-line for 5 years, with no salvage value. The book value of the old forklift is $15,000. It can be sold for $6,000 cash. Estimated annual operating costs of the old forklift are $24,000. Estimated annual operating costs of new forklift are $10,000. Assume an income tax rate of 40% and a 15% required rate of return. Which of the following is true?
		A)	The net present value is negative
		B)	The net present value is $333.60
		C)	The net present value is $6,333.60
		D)	The net present value is $801.00
		E)	The net present value cannot be determined

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