Question 1

Keltner Enterprises is considering investing in a new packing machine.The new machine will provide annual cash operating inflows of $12,300 for 5 years.The cost of the machine is $42,300 and it can be sold at the end of its 5-year useful life for $6,800.Keltner's required rate of return is 10%.What is the packing machine's payback period?

Accepted Answer

The payback period is calculated by dividing the initial investment by the annual cash inflow. The initial investment is $42,300. The annual cash inflow is $12,300. Therefore, the payback period is $42,300 / $12,300 = 3.44 years. The salvage value is not considered in the payback period calculation.

Question 2

Pilot Corporation is considering the purchase of equipment costing $100,000.The equipment will reduce operating cash expenses by $25,000 each year.The new equipment has a salvage value of $2,000 and will be depreciated over a 10-year useful life.The accounting rate of return is closest to

Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. The annual savings from reduced expenses is $25,000, and depreciation is ($100,000 - $2,000) / 10 = $9,800. The annual profit is $25,000 - $9,800 = $15,200. ARR = $15,200 / $100,000 = 15.2%.

Question 3

Assume that on January 1, 2021 you purchased ten shares of XYZ Corporate stock for $22 each.On September 30, 2023, you sell one-half of your stock for $28 per share.What is your return on your investment?

Accepted Answer

The answer of Assume that on January 1, 2021 you...

Question 4

The accounting rate of return is also known as the

Accepted Answer

The accounting rate of return is often referred to as the unadjusted rate of return because it does not take into account the time value of money.

Question 5

Identify which of the following items is classified as part of capital assets.
a.Pollution prevention technology
b.Direct material
c.Computer-generated manufacturing system
d.Office supplies
e.Delivery van

Accepted Answer

The answer of Identify which of the following items is...

Question 6

Which of the following is not used in the calculation of the accounting rate of return?

Accepted Answer

The present value of an annuity factor is not used in the calculation of the accounting rate of return. The formula for the accounting rate of return is (average annual income from investment) / (initial investment). The additional revenues and operating expenses are taken into account when determining the average annual income from the investment.

Question 7

Judy Blue, CEO of the clothing store All Blue, is planning to open a new store in Manhattan.She plans to purchase a small storefront for $5,250,000 which has a remaining useful life of 15 years.She plans to hire 2 part-time sales clerks and will pay each of them $34,000 per year in wages and other benefits.Judy expects that revenues will average $86,000 per month and other monthly operating costs will run $13,200.What is the accounting rate of return for the Manhattan store?

Accepted Answer

The answer of Judy Blue, CEO of the clothing store...

Question 8

Which of the following is the formula for the accounting rate of return?

Accepted Answer

The accounting rate of return (ARR) is calculated by dividing the average annual profit by the initial investment. The formula is essentially (Project revenue - Project operating expenses) ÷ (Initial investment - salvage of old asset), which reflects the average return over the investment's life, considering any salvage value from replaced assets.

Question 9

Which of the following is not a weakness of the accounting rate of return?

Accepted Answer

A and B are well-known weaknesses of the accounting rate of return, but C is not a weakness of it. The accounting rate of return uses an average accounting profit during the life cycle of the investment, which does not involve a discount rate that could change over time.

Question 10

Which of the following is a weakness of the accounting rate of return?

Accepted Answer

The accounting rate of return does not consider the time value of money, which means that it assumes that money received in the future has the same value as money received today. This weakness can lead to incorrect investment decisions, as it does not accurately reflect the true profitability of a project.

Question 11

Bowen is considering the purchase of equipment costing $150,000.The equipment has a 12- year useful life, has an estimated salvage value of zero, and is expected to generate $25,000 in annual cash flows.The company has a 10% required rate of return and uses the straight-line depreciation method.The accounting rate of return on this equipment is closest to

Accepted Answer

First, we need to calculate the annual depreciation expense using the straight-line method, which is (cost - salvage value) / useful life = ($150,000 - $0) / 12 = $12,500 per year.

Next, we need to calculate the annual net cash inflows, which are $25,000 - $12,500 = $12,500 per year.

Using the formula for accounting rate of return, which is average annual net income / initial investment, we can calculate the ARR:

Average annual net income = ($25,000 - $12,500) / 2 = $6,250
Initial investment = $150,000

ARR = $6,250 / $150,000 = 0.0417 = 4.17%

However, the question asks for the accounting rate of return as a percentage of the required rate of return, which is 10%. Therefore, we need to divide the ARR by the required rate of return:

4.17% / 10% = 0.417 = 41.7%

The closest answer choice to this is B (8.3%).

Question 12

The accounting rate of return is also known as the

Accepted Answer

The accounting rate of return is also known as the simple rate of return. The other options listed are different concepts in finance and accounting. The internal rate of return is a measure of profitability that takes into account the time value of money, the present value is a calculation of the current value of future cash flows, and the required rate of return is the minimum rate of return an investor expects to earn on an investment.

Question 13

Which of the following is an advantage of the accounting rate of return?

Accepted Answer

The answer of Which of the following is an advantage...

Question 14

Johnson Whole Distributors is anticipating investing in equipment that cost $120,000.The equipment has an 8-year life and no salvage value.Johnson uses straight-line depreciation.The equipment has a payback period of 5 years.The accounting rate of return is closest to

Accepted Answer

The Accounting Rate of Return (ARR) is calculated as the average annual profit divided by the initial investment. Here, the equipment costs $120,000 and is depreciated straight-line over 8 years, so annual depreciation is $120,000 / 8 = $15,000. With a payback period of 5 years, the equipment generates enough cash flow to recover its initial cost in 5 years, implying annual cash flows of $24,000 ($120,000 / 5 years). The annual profit (ignoring taxes and interest) is the annual cash flow minus annual depreciation, which is $24,000 - $15,000 = $9,000. Therefore, the ARR = ($9,000 / $120,000) * 100% = 7.5%.

Question 15

Identify which of the following items are classified as capital assets.
a.Manufacturing equipment
b.Forklift
c.Janitorial supplies
d.Manufacturing overhead
e.Office furniture

Accepted Answer

The answer of Identify which of the following items are...

Question 16

Andrea Kris is opening a small flower shop that will focus primarily on delivery, though it will provide a small showroom for walk-in customers.A local florist is retiring and selling her small flower shop to Andrea for $162,500.The shop has a remaining life of 20 years.Andrea expects to have incremental revenues of $81,250 per year and pay approximately 60% of revenues in operating costs.What is the payback period for Andrea's flower shop?

Accepted Answer

The answer of Andrea Kris is opening a small flower...

Question 17

Morrow Company is considering a purchase of equipment that costs $70,000.The equipment has a 7-year life and no salvage value.Morrow uses straight-line depreciation.The equipment has a payback period of 4 years.The accounting rate of return is closest to

Accepted Answer

To calculate the accounting rate of return, we need to find the average annual net income from the equipment and divide it by the average investment in the equipment.

Average annual net income = Total net income / Life of equipment
Total net income = Revenue - Expenses - Depreciation
Revenue and expenses are not given, so we can assume they cancel each other out as they are equal.

Depreciation = Cost of equipment / Life of equipment = 70,000/7 = 10,000

Total net income = 0 - 10,000 = -10,000 (assuming no revenue)

Average annual net income = (-10,000) / 7 = -1,428.57

Average investment = (Initial investment + Salvage value) / 2
Since there is no salvage value, 
Average investment = Initial investment / 2 = 70,000 / 2 = 35,000

Accounting rate of return = (Average annual net income / Average investment) x 100%
= (-1,428.57 / 35,000) x 100%
= -0.0408 x 100%
= -4.08%

Since the accounting rate of return is negative, it means that the investment does not meet the minimum desired rate of return and should be rejected.

Therefore, the best choice is B, as it is not within the choices and we can assume that the investment should not be made.

Question 18

Andrea Kris is opening a small flower shop that will focus primarily on delivery, but will provide a small showroom for walk-in customers.A local florist is retiring and selling her small flower shop to Andrea for $162,500.The shop has a remaining life of 20 years.Andrea expects to have revenues of $81,250 per year and pay approximately 60% of revenues in operating costs.What is the accounting rate of return for Andrea's flower shop?

Accepted Answer

The accounting rate of return is calculated by dividing the annual net income by the initial investment. In this case, the annual net income is $81,250 - (60% x $81,250) = $32,500. The initial investment is $162,500. Therefore, the accounting rate of return is $32,500 / $162,500 = 20%.

Question 19

The payback period measures

Accepted Answer

The payback period is the length of time it takes for an investment to generate enough cash flow to recover the original amount of invested capital. It's usually expressed in years, and it's a useful tool for evaluating the time it takes for a business to break even on an investment. A shorter payback period generally indicates a lower risk investment, while a longer payback period may indicate a riskier investment. Therefore, the correct choice is C.

Question 20

Which of the following is an advantage of the payback period?

Accepted Answer

The advantage of the payback period is that it is a simple technique that provides a clear indicator of when the investment will be recovered. While it may not take into account depreciation, and accounting records may not be based on cash flow, it is still a widely used method for evaluating the profitability of investments.

Quiz 9: Using Accounting Information to Make Managerial Decisions

Pilot Corporation is considering the purchase of equipment costing $100,000.The equipment will reduce operating cash expenses by $25,000 each year.The new equipment has a salvage value of $2,000 and will be depreciated over a 10-year useful life.The accounting rate of return is closest to

Assume that on January 1, 2021 you purchased ten shares of XYZ Corporate stock for $22 each.On September 30, 2023, you sell one-half of your stock for $28 per share.What is your return on your investment?

The accounting rate of return is also known as the

Identify which of the following items is classified as part of capital assets. a.Pollution prevention technology b.Direct material c.Computer-generated manufacturing system d.Office supplies e.Delivery van

Which of the following is not used in the calculation of the accounting rate of return?

Which of the following is the formula for the accounting rate of return?

Which of the following is not a weakness of the accounting rate of return?

Which of the following is a weakness of the accounting rate of return?

The accounting rate of return is also known as the

Which of the following is an advantage of the accounting rate of return?

Johnson Whole Distributors is anticipating investing in equipment that cost $120,000.The equipment has an 8-year life and no salvage value.Johnson uses straight-line depreciation.The equipment has a payback period of 5 years.The accounting rate of return is closest to

Identify which of the following items are classified as capital assets. a.Manufacturing equipment b.Forklift c.Janitorial supplies d.Manufacturing overhead e.Office furniture

Morrow Company is considering a purchase of equipment that costs $70,000.The equipment has a 7-year life and no salvage value.Morrow uses straight-line depreciation.The equipment has a payback period of 4 years.The accounting rate of return is closest to

The payback period measures

Which of the following is an advantage of the payback period?