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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

Multiple Choice Quiz

Please answer all questions


1	Which of the following is an example of a nonfinancial consideration involving the investment in a new finished goods warehouse?
		A)	The cost of constructing the warehouse.
		B)	The annual cost of heating the warehouse.
		C)	The annual property taxes on the warehouse.
		D)	The accessibility of the warehouse to trucking companies.


2	In selecting among alternative investment opportunities, proposals having the longest payback periods:
		A)	Should immediately be eliminated.
		B)	Are subject to the most risk should changes in economic conditions occur.
		C)	Will provide future cash flows for more years than those proposals having the shortest payback periods.
		D)	Will also have the lowest net present values.


3	A firm's cost of capital refers to:
		A)	The total annual expenditure on capital investments.
		B)	The amount borrowed to finance total annual investment in plant assets.
		C)	The cost of debt and equity financing associated with capital investments.
		D)	The amount by which capital investment expenditures exceed annual cash receipts.


4	MHT, Inc. is planning to purchase a new robot, costing $300,000. The machine is expected to yield an estimated net after tax cash flow of $90,000 per year for 8 years. The estimated salvage value of the robot is zero. To determine the net present value of the robot, the company must first multiply the $90,000 by:
		A)	The present value of $1.
		B)	Future value of $1.
		C)	Present value of a $1 annuity.
		D)	The $90,000 is not multiplied by any of the above; the $300,000 is multiplied by the future value of $1.

Use the following data for questions 5 and 6.

Spring Corporation is considering investing $72,000 in equipment to produce a new product. The useful service life of the equipment is estimated to be eight years, with no salvage value. Straight-line depreciation is used. The company estimates that production and sale of the new product will increase net income by $5,400 per year.


5	Refer to the information above. The payback period of this investment is:
		A)	Five years.
		B)	Over thirteen years.
		C)	Eight years.
		D)	Three years.


6	Refer to the information above. The expected rate of return on average investment in this equipment is:
		A)	40%.
		B)	7 1/2%.
		C)	15%.
		D)	20%.

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