Deck 12: Capital Investment Decisions and the Time Value of Money

Question 1

Investments with shorter payback periods are more desirable,all else being equal.

Answer 1

True

Question 2

What is the name given to choosing among different alternative investments due to limited resources?

A)Capital rationing
B)Capital investing
C)Resource rationing
D)Resource allocation

Answer 2

A

Question 3

Capital budgeting predictions must consider factors such as changing consumer preferences,competition,and government regulations.

Answer 3

True

Question 4

Which term below is best described as a "formal means of analyzing long-range investment alternatives"?

A)Time value of money
B)Capital budgeting
C)Payback period
D)Annuity

Question 5

Self-scan check-out machines are an example of capital assets.

Question 6

Choosing among alternative capital investments is called capital rationing.

Question 7

Which term below is best described as "a stream of equal periodic payments"?

A)Time value of money
B)Capital budgeting
C)Payback period
D)Annuity

Question 8

Which capital budgeting method uses accrual accounting,rather than net cash flows,as a basis for calculations?

A)Payback
B)ARR
C)NPV
D)IRR

Question 9

The process of making capital investment decisions is referred to as capital return.

Question 10

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

Question 11

Which term below is best described as the "relationship among principle,interest rate,and time"?

A)Time value of money
B)Capital budgeting
C)Payback period
D)Annuity

Question 12

Post-audits of capital investments help determine the net cash flows generated by capital investments.

Question 13

Capital budgeting is based on job costing.

Question 14

After a company invests in capital assets,which of the following will it perform in order to compare the actual to the projected net cash inflows?

A)Cash flow analysis
B)Post-audit
C)Pre and post analysis
D)Post-cash flow

Question 15

The cost associated with renovating a warehouse to be used as a restaurant would be considered to be a capital asset.

Question 16

Which of the following items would be considered to be a capital asset?

A)Purchase of office supplies to be used internally over the next year
B)Payment for this year's advertising campaign
C)Donation of money to United Way
D)Construction of new store building

Question 17

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 NPV.
C)Companies should always choose the investment with the highest ARR.
D)Companies may have to choose a subset of available capital investments.

Question 18

Which term below is best described as "the length of time required to recover the cost of an investment"?

A)Time value of money
B)Capital budgeting
C)Payback period
D)Annuity

Question 19

The costs to develop a major website for a company would be considered to be a capital asset if those costs are significant.

Question 20

The health care insurance cost of a company for its assembly-line workers would be considered to be a capital asset.

Question 21

When computing the accounting rate of return for a capital asset,which of the following is used as the equation's numerator?

A)Average annual operating income from the asset
B)Average amount invested in the asset
C)Total amount invested in the asset
D)Average net cash flows from the asset

Question 22

What is the accounting rate of return for Proposal X at Latimer Corporation?

A)3.50%
B)4.22%
C)15.38%
D)27.27%

Question 23

Accrual-based accounting is used in determining the accounting rate of return.

Question 24

Mahtomedi Corporation is considering investing in specialized equipment costing $240,000.The equipment has a useful life of 5 years and a residual value of $20,000.Depreciation is calculated using the straight-line method.The expected net cash inflows from the investment are:

Mahtomedi Corporation's required rate of return on investments is 14%.
What is the accounting rate of return on the investment?

A)6.67%
B)8.75%
C)9.25%
D)16.40%

Question 25

Brackett Corporation is adding a new product line that will require an investment of $120,000.The product line is estimated to generate cash inflows of $25,000 the first year,$23,000 the second year,and $18,000 each year thereafter for ten more years.What is the payback period?

A)4.80 years
B)6.00 years
C)6.32 years
D)6.67 years

Question 26

How does depreciation affect the calculation of a project's accounting rate of return (ARR)?

A)Depreciation is deducted from the annual cash inflows.
B)Depreciation is added to the annual cash inflows.
C)Depreciation does not affect ARR.
D)Depreciation is only deducted if the ARR is less than the minimum required rate of return.

Question 27

How long is the payback period for Investment B at Boyle Company?

A)2.40 years
B)3.38 years
C)3.75 years
D)10.00 years

Question 28

Which of the following is the formula for calculating the accounting rate of return for a capital asset?

A)Average annual net cash inflow from asset/amount invested in asset
B)Average annual operating income from asset/amount invested in asset
C)(Average annual operating income + depreciation expense)/amount invested in asset
D)(Average annual cash inflows - depreciation expense)/(amount invested in asset + residual value of asset)

Question 29

How long is the payback period for Proposal Y at Latimer Corporation?

A)20.31 years
B)9.75 years
C)6.50 years
D)5.00 years

Question 30

The accounting rate of return is a measure of liquidity computed by dividing the average annual cash flows from an asset by the average amount invested in the asset.

Question 31

One disadvantage of the payback method is that it does not consider the time value of money.

Question 32

The accounting rate of return method of analyzing capital budgeting decisions measures the average annual rate of return from using the asset over its entire life.

Question 33

One advantage of the accounting rate of return is that it considers the time value of money.

Question 34

What is the accounting rate of return for Proposal Y at Latimer Corporation?

A)7.50%
B)8.78%
C)20.00%
D)32.50%

Question 35

How long is the payback period for Investment A at Boyle Company?

A)2.49 years
B)3.60 years
C)4.00 years
D)10.00 years

Question 36

The payback method primarily focuses on time and not profitability.

Question 37

When computing the payback period for a capital asset with equal annual net cash inflows,which of the following is used as the equation's numerator?

A)Expected annual cash inflow
B)Amount invested
C)Total cash inflows
D)Net cash outflow

Question 38

How long is the payback period for Proposal X at Latimer Corporation?

A)5.00 years
B)6.50 years
C)10.42 years
D)20.31 years

Question 39

How does depreciation affect the calculation of a project's payback period?

A)Depreciation is deducted from the annual cash inflows.
B)Depreciation is added to the annual cash inflows.
C)Depreciation does not affect the payback calculation.
D)Depreciation is only deducted if the payback period exceeds five years.

Question 40

All else being equal,a company would choose to invest in a capital asset if which of the following is true?

A)If the payback period equals the amount invested
B)If the expected accounting rate of return is less than the required rate of return
C)If the average amount invested is equal to the net cash inflows
D)If the expected accounting rate of return is greater than the required rate of return

Question 41

Meccah,Inc. ,is considering investing $250,000 in a machine that will last 4 years with no residual value.The new machine will generate annual operating income of $60,000 per year for 4 years.What is the accounting rate of return?

Question 42

Total net inflows from savings at Dazzle Company DURING the useful life of the asset are

A)$595,000.
B)$575,000.
C)$555,000.
D)$75,000.

Question 43

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre.The project would require a capital investment of $240,000;have a 10 year useful life with no residual value and generate net cash flows of $60,000 per year Lincoln uses the straight line method of amortization on all capital assets.
Compute the payback period for this proposal.

Question 44

The total depreciation expense at Dazzle Company over the life of the asset is

A)$160,000.
B)$480,000.
C)$520,000.
D)$575,000.

Question 45

Total operating income at Dazzle Company from the asset over the 3-year period is

A)$75,000.
B)$95,000.
C)$160,000.
D)$415,000.

Question 46

Ryan Manufacturing is considering acquiring another facility for a cost of $610,000.The required payback period is 4.5 years.Assume annual net cash inflows are $160,000 for the first two years and $125,000 for years 3 and 4.What must the inflow be in the fifth year to meet the 4.5 year payback period?

Question 47

Rinky Dink Family Fun Center bought new bumper boats for its recreation facility.The useful life is 6 years.The bumper boats had a total cost $5,338 and will generate $1,570 total cash inflows each year for the life of the boats.The residual value of the bumper boats is $650.The payback period in years is closest to

A)2.40.
B)2.99.
C)3.40.
D)3.81.

Question 48

Sierra Discount Drugstore bought a new high-speed photo printer for customers to be able to bring in their digital pictures to make high-quality prints.Its useful life is 6 years.The printer cost $8,170 and will generate annual cash inflows of $2,150.The residual value of the printer is $1,320.The payback period in years is closest to

A)2.35.
B)3.19.
C)3.80.
D)4.41.

Question 49

The Harris Corporation bought a new machine that cost $170,000 with a 15-year life and a residual value of $20,000.They plan to generate annual cash inflows of $40,000 over 15 years.Calculate the accounting rate of return.

Question 50

The accounting rate of return for the Kentucky proposal is closest to

A)10.83%.
B)11.17%.
C)12.50%.
D)20.83%.

Question 51

Suppose Barnes & Noble Booksellers is considering investing in warehouse-management software that costs $500,000,has $50,000 residual value and should lead to cash cost savings of $120,000 per year for its five-year life.In calculating the ARR,which of the following figures should be used as the equation's denominator?

A)$225,000
B)$500,000
C)$250,000
D)$275,000

Question 52

Sawyer & Cecil,Computer Consultants,is considering an investment in computer and network equipment costing $254,000.This equipment would allow them to offer new programming services to clients.The equipment will be depreciated on the straight-line basis over an eight-year period with an estimated residual value of $60,000.Using the accounting rate of return model,what is the minimum average annual operating income that must be generated from this investment in order to achieve a 12% accounting rate of return?

A)$7,200
B)$23,280
C)$30,480
D)$31,750

Question 53

Simone Corporation bought a new machine which cost $87,500,has a useful life of 10 years,and will generate annual cash inflows of $25,000.The residual value of the machine is $5,500.What is the payback period?

Question 54

The accounting rate of return for the Indiana proposal is closest to

A)11.17%.
B)12.22%.
C)12.50%.
D)22.22%.

Question 55

The accounting rate of return at Dazzle Company is closest to

A)38.33%.
B)32.00%.
C)6.33%.
D)5.51%.

Question 56

Buster Corporation is evaluating a capital investment project which would require an initial investment of $285,000 to purchase machinery.The annual revenues and expenses generated solely by this project each year during the project's nine year life would be:

The residual value of the machinery at the end of the nine years would be $15,000.The payback period of this potential project in years would be closest to

A)1.6.
B)3.1.
C)3.7.
D)4.6.

Question 57

The payback period for the Indiana proposal is closest to

A)3.6 years.
B)4.5 years.
C)4.8 years.
D)36.0 years.

Question 58

The Jones Company bought a new specialty machine that cost $120,000 with a 6-year life with no residual value.The company plans to generate annual cash inflows of $32,000 each year for 6 years.Calculate the accounting rate of return.

Question 59

The payback period for the Kentucky proposal is closest to

A)4.5 years.
B)4.8 years.
C)6.0 years.
D)7.0 years.

Question 60

Richol Corporation is considering an investment in new equipment costing $180,000.The equipment will be depreciated on a straight-line basis over a five-year life and is expected to generate net cash inflows of $45,000 the first year,$65,000 the second year,and $90,000 every year thereafter until the fifth year.What is the payback period for this investment? The equipment has no residual value.

A)2.00 years
B)2.37 years
C)2.78 years
D)4.00 years

Question 61

The Future Value of $1 table is used to calculate how much $100 would be worth in 5 years.

Question 62

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre.The project would require a capital investment of $300,000;have a 5 year useful life with no residual value and generate net cash flows as follow:

Lincoln uses the straight line method of amortization on all capital assets.
Compute the accounting rate of return for this proposal.

Question 63

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre.The project would require a capital investment of $300,000;have a 5 year useful life with no residual value and generate net cash flows as follow:

Lincoln uses the straight line method of amortization on all capital assets.
Compute the payback period for this proposal

Question 64

Calculating interest on the principal and on all the interest earned to date is called compound interest.

Question 65

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre.The project would require a capital investment of $240,000;have a 10 year useful life with no residual value and generate net cash flows of $60,000 per year Lincoln uses the straight line method of amortization on all capital assets.
Compute the accounting rate of return for this proposal

Question 66

Your grandmother has promised to give you $2,000 a year at the end of each of the next four years if you earn Cs or better in all of your courses each year.Using a discount rate of 8%,which of the following is correct for determining the present value of the gift?

A)PV = $2,000 × 8% × 4
B)PV = $2,000 × (PV factor,i = 4%,n = 8)
C)PV = $2,000 × (Annuity FV factor,i = 8%,n = 4)
D)PV = $2,000 × (Annuity PV factor,i = 8%,n = 4)

Question 67

Which of the following explains the time value of money?

A)Money is more valuable over time.
B)Invested money earns income over time.
C)A stream of payments is received over time.
D)Interest is always compounded over time.

Question 68

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre.The project would require a capital investment of $228,000;have a 6 year useful life with no residual value and generate net cash flows of $40,000 per year Lincoln uses the straight line method of amortization on all capital assets.
Compute the payback period for this proposal.

Question 69

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre.The project would require a capital investment of $228,000;have a 6 year useful life with no residual value and generate net cash flows as follow:

Lincoln uses the straight line method of amortization on all capital assets.
Compute the accounting rate of return for this proposal

Question 70

You win the lottery and must decide how to take the payout.Use an 8% discount rate.
What is the present value of $10,000 a year received at the end of each of the next six years?

A)$6,300
B)$46,230
C)$49,928
D)$60,000

Question 71

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre.The project would require a capital investment of $228,000;have a 6 year useful life with no residual value and generate net cash flows as follow:

Lincoln uses the straight line method of amortization on all capital assets.
Compute the payback period for this proposal

Question 72

The three factors that affect the time value of money are principal,number of periods,and interest rate.

Question 73

You won the lottery and have a number of choices as to how to take the money.Which choice yields a greater present value?

A)$12,000 a year at the end of each of the next 6 years using a 6% discount rate
B)$53,500 (lump sum)now using a 6% discount rate
C)$84,000 (lump sum)7 years from now using a 6% discount rate
D)$92,000 (lump sum)7 years from now using an 8% discount rate

Question 74

The net present value method incorporates the time value of money.

Question 75

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre.The project would require a capital investment of $252,000;have a 6 year useful life with no residual value and generate net cash flows as follow:

Lincoln uses the straight line method of amortization on all capital assets.
Compute the accounting rate of return for this proposal.

Question 76

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre.The project would require a capital investment of $252,000;have a 5 year useful life with no residual value and generate net cash flows as follow:

Lincoln uses the straight line method of amortization on all capital assets.
Compute the payback period for this proposal.

Question 77

When computing the time value of money,the interest rate must always be expressed as an annual rate.

Question 78

The principal amount and the interest rate are the only factors needed to calculate the time value of money.

Question 79

Lincoln Transportation Services is considering a capital expenditure proposal for the improvement of its distribution centre.The project would require a capital investment of $228,000;have a 6 year useful life with no residual value and generate net cash flows of $70,000 per year Lincoln uses the straight line method of amortization on all capital assets.
Compute the accounting rate of return for this proposal

Question 80

Your rich aunt has promised to give you $3,000 a year at the end of each of the next four years to help with college.Using a discount rate of 10%,the present value of the gift can be stated as

A)PV = $3,000 (PV factor,i = 4%,n = 4).
B)PV = $3,000 x 10% × 5.
C)PV = $3,000 (Annuity PV factor,i = 10%,n = 4).
D)PV = $3,000 (Annuity FV factor,i = 10%,n = 4).