Question 1

Young Corporation is considering purchasing equipment that costs $80,000 and is expected to provide the following cash inflows over its five-year useful life:  What is the payback period of this investment project (rounded to the nearest year) ?

Accepted Answer

A)   2 years
B)   4 years
C)   3 years
D)   6 yearsE) B) and D)
F) C) and D)

Question 2

Capital investment decisions involve all of the following, except:

Accepted Answer

A)   the acquisition of short-term operational assets.
B)   projects requiring relatively long periods of time and large cash flows.
C)   the acquisition of long-term operational assets.
D)   none of these answers is correct.E) B) and C)
F) A) and B)

Question 3

George Company has the opportunity to purchase an asset that costs $40,000. The asset is expected to increase net income by $10,000 per year. Depreciation expense will be $5,000 per year. Based on this information the payback period is:

Accepted Answer

A)   4 years.
B)   2.5 years.
C)   2.67 years.
D)   8 years.E) B) and C)
F) A) and D)

Question 4

A project's net present value can be found by subtracting the cost of the project from the total present value of the future cash flows generated by the project.

Accepted Answer

A) True 
 B)False

Question 5

For a capital investment project to be acceptable, it must generate a rate of return:

Accepted Answer

A)   less than the hurdle rate.
B)   equal to or greater than the cost of capital.
C)   equal to the conversion rate.
D)   none of these answers is correct.E) None of the above
F) A) and C)

Question 6

The compensation a company receives for investing in capital assets is referred to as a return on investment.

Accepted Answer

A) True 
 B)False

Question 7

Connor has $300,000 to invest in a 5-year annuity. Assuming the time value of money is 10%, what amount will Connor receive in cash each year? . (Round your answer to the nearest dollar.)

Accepted Answer

A)   $79,139
B)   $60,000
C)   $96,631
D)   None of these answers is correct.E) C) and D)
F) None of the above

Question 8

Mary needs to have $20,000 one year from today. The formula to compute the amount of money that must be invested today is future value ÷ (1 - interest rate).

Accepted Answer

A) True 
 B)False

Question 9

Generally, the unadjusted rate of return should be calculated based on the average investment rather than the amount of the original investment in a depreciable asset such as equipment.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements about postaudits is correct?

Accepted Answer

A)   A postaudit should be conducted at the time a capital investment is purchased.
B)   The postaudit of a capital investment project should be made using the same analytical technique that was used in deciding to make the investment.
C)   The purpose of postaudits is to improve a company's cost-volume-profit analysis.
D)   The postaudit process uses expected cash flows and the company's cost of capital.E) A) and C)
F) B) and C)

Question 11

Cash outflows generated by capital investments include all of the following except:

Accepted Answer

A)   depreciation expense
B)   transportation costs
C)   increased operating expenses
D)   increase in the required amount of working capitalE) All of the above
F) B) and D)

Question 12

When a capital investment is expected to provide unequal annual cash inflows, the payback period cannot be calculated.

Accepted Answer

A) True 
 B)False

Question 13

Cash inflows from a capital investment may include the terminal value of capital assets and increases in revenues.

Accepted Answer

A) True 
 B)False

Question 14

Cash outflows generated by capital investments include all of the following except:

Accepted Answer

A)   annual depreciation of the capital asset.
B)   initial investment in the capital asset.
C)   increase in operating expenses.
D)   increase in the amount of required working capitalE) B) and C)
F) A) and D)

Question 15

The instantaneous computation power of spreadsheet software makes it ideal for answering "what-if" questions regarding present values.

Accepted Answer

A) True 
 B)False

Question 16

If a project has a positive net present value, its internal rate of return will exceed the firm's hurdle rate.

Accepted Answer

A) True 
 B)False

Question 17

A capital investment decision is essentially a decision to exchange current cash outflows for future cash inflows.

Accepted Answer

A) True 
 B)False

Question 18

The payback method shows how long will be required to recover the cost of an investment in a capital asset.

Accepted Answer

A) True 
 B)False

Question 19

The unadjusted rate of return is found by dividing the average incremental increase in annual operating income by the cost of the investment.

Accepted Answer

A) True 
 B)False

Question 20

The cost of capital is sometimes referred to as the hurdle or discount rate.

Accepted Answer

A) True 
 B)False

Exam 16: Planning for Capital Investments

A capital investment decision is essentially a decision to exchange current cash outflows for future cash inflows.

Correct AnswerverifiedShow Answer

Cash inflows from a capital investment may include the terminal value of capital assets and increases in revenues.

Correct AnswerverifiedShow Answer

Young Corporation is considering purchasing equipment that costs $80,000 and is expected to provide the following cash inflows over its five-year useful life: What is the payback period of this investment project (rounded to the nearest year) ?

Correct AnswerverifiedShow Answer

Capital investment decisions involve all of the following, except:

Correct AnswerverifiedShow Answer

The payback method shows how long will be required to recover the cost of an investment in a capital asset.

Correct AnswerverifiedShow Answer

Mary needs to have $20,000 one year from today. The formula to compute the amount of money that must be invested today is future value ÷ (1 - interest rate).

Correct AnswerverifiedShow Answer

A project's net present value can be found by subtracting the cost of the project from the total present value of the future cash flows generated by the project.

Correct AnswerverifiedShow Answer

Which of the following statements about postaudits is correct?

Correct AnswerverifiedShow Answer

Cash outflows generated by capital investments include all of the following except:

Correct AnswerverifiedShow Answer

If a project has a positive net present value, its internal rate of return will exceed the firm's hurdle rate.

Correct AnswerverifiedShow Answer

For a capital investment project to be acceptable, it must generate a rate of return:

Correct AnswerverifiedShow Answer

Generally, the unadjusted rate of return should be calculated based on the average investment rather than the amount of the original investment in a depreciable asset such as equipment.

Correct AnswerverifiedShow Answer

The instantaneous computation power of spreadsheet software makes it ideal for answering "what-if" questions regarding present values.

Correct AnswerverifiedShow Answer

George Company has the opportunity to purchase an asset that costs $40,000. The asset is expected to increase net income by $10,000 per year. Depreciation expense will be $5,000 per year. Based on this information the payback period is:

Correct AnswerverifiedShow Answer

Connor has $300,000 to invest in a 5-year annuity. Assuming the time value of money is 10%, what amount will Connor receive in cash each year? . (Round your answer to the nearest dollar.)

Correct AnswerverifiedShow Answer

When a capital investment is expected to provide unequal annual cash inflows, the payback period cannot be calculated.

Correct AnswerverifiedShow Answer

The unadjusted rate of return is found by dividing the average incremental increase in annual operating income by the cost of the investment.

Correct AnswerverifiedShow Answer

The compensation a company receives for investing in capital assets is referred to as a return on investment.

Correct AnswerverifiedShow Answer

The cost of capital is sometimes referred to as the hurdle or discount rate.

Correct AnswerverifiedShow Answer

Cash outflows generated by capital investments include all of the following except:

Correct AnswerverifiedShow Answer

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