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Capital Budgeting and Managerial Decisions
Capital Budgeting and Managerial Decisions MCQs
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The cost of a new machine is $24,000. The machine has a 5-year service life and no salvage. The annual cash flow will be 15% of the cost of the machin...
in 6.7 years
in 15.0 years
in 1.5 years
after the machine’s service life has expired
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Equipment will be purchased at a cost of $30,000. It will have no salvage value. The cash flows are expected to be: $12,000, $10,000, $15,000, and $8,...
3.1 years
4.0 years
2.50 years
2.53 years
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The company expects an after-tax income of $2,400 per year over the life of an investment that will cost $25,000, has a 5-year service life, and has n...
19.2%
9.2%
10.4%
9.6%
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Which is not true of the net present value method of determining the acceptability of an investment?
Net cash flows from the investment are estimated
The net cash flows are discounted at an acceptable rate of return
The initial cost of the investment is added to the net cash flows
A positive net present value of the cash flows is required
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Each of the three projects cost $20,000, the amount available for investment. Each project has a service life of 3 years and no salvage value. The inv...
Project A
Project B
Project C
none of the projects
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When selecting an earnings rate to use in evaluating projects under the net present value method, a company will consider a rate that:
is equal to the current interest rate to borrow money
is equal to the current rate of return on assets
is equal to the current tax rate
exceeds the current interest rate to borrow money
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Which line of the following schedule is incorrect?
Payback period Basis of Measurement: Cash Flows Measure Expressed As: Number of Years
Net Present value Basis of Measurement: Cash Flows Measure Expressed As: Dollar Amount
Internal rate of return Basis of Measurement: Accrual Income Measure Expressed As: Percent
Accounting rate of return Basis of Measurement: Accrual Income Measure Expressed As: Percent
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Which of the following is incorrect?
Payback period Basis of Measurement: Cash Flows Measure Expressed As: Number of Years
Net Present value Basis of Measurement: Cash Flows Measure Expressed As: Percent
Internal rate of return Basis of Measurement: Cash Flows Measure Expressed As: Percent
Accounting rate of return Basis of Measurement: Accrual Income Measure Expressed As: Percent
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An additional cost that results from a particular course of action is known as a(an):
sunk cost
opportunity cost
incremental cost
net present cost
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A cost incurred as a consequence of a past irrevocable decision and that, therefore, cannot be avoided, is known as a:
decremental cost
differential cost
sunk cost
opportunity cost
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Which of the following is not a relevant cost in decision making? a. b. c. d.
Opportunity cost
Relevant benefits
Avoidable costs
Sunk costs
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The cost to produce 8,000 units at 70% capacity is: Direct materials: $16,000 Direct labour: $8,000 Factory overhead, all fixed: $12,000 Selling e...
$8.90
$7.80
$7.40
$7.00
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Given the following list of costs, which one should be ignored in a decision to produce additional units of product for a factory that is operating at...
Fixed administrative expenses
Variable factory overhead
Per hour cost of direct labour
Variable selling expenses
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Henny-Penny has 8,000 defective units of a product that cost $4 per unit to manufacture, and can be sold for $2 per unit. These units can be reworked ...
$ 24,000
$ 8,000
$(24,000
$ 48,000
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Henny-Penny has 8,000 defective units of a product that cost $3 per unit to manufacture, and can be sold for $1 per unit. These units can be reworked ...
$24,000
$(8,000)
$16,000
$ 8,000
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Sales of 50,000 units at $4 per unit are made monthly. The unit cost is $1.50. Incremental costs of $1 per unit to further process the units will resu...
Do further processing and sell the units at $4.75
Sell the units at the current stage of completion (50,000 @ $4)
Do further processing on only one-half of the units
Commit its resources to a different product
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Product A sells for $8 per unit. Its variable cost per unit is $5. Product B sells for $12 per unit. Its variable cost per unit is $8. The plant capac...
200,000 units of Product A, 100,000 units of Product B
100,000 units of Product A, 200,000 units of Product B
150,000 units of Product A, 150,000 units of Product B
No units of Product A, 300,000 units of Product B
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Segment Auburn generates total sales of $52,000, its direct expenses are $11,000, and its indirect expenses are $13,000. Its cost of goods sold is $32...
The company will lose $13,000 if Segment Auburn is eliminated.
Segment Auburn’s revenue is greater than its avoidable costs.
Segment Auburn is a candidate for elimination.
Segment Auburn’s unavoidable costs are greater than avoidable costs.
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The following incomplete information is provided for investment decisions. .tg {border-collapse:collapse;border-spacing:0;} .tg td{border-color:b...
be recovered at the end of year 2
not be recovered in three years
be recovered in 2.27 years
be recovered in 2.73 years
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An investment project for which the net present value is $300 would result in which of the following conclusions?
The net present value is too small; the project should be rejected.
The investment project promises slightly more than the required rate of return.
The net present value method is not suitable for evaluating this project; the time-adjusted rate of return method should thus be employed in analyzing this project.
The investment project should only be accepted if net present value is zero; a positive net present value indicates an error(s) in the estimates associated with the analysis of this investment.
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Working capital required for an investment project would be considered as:
a cash outflow at the inception of the project with no discounting required.
a cash inflow at the end of the term of the investment project when working capital is released, discounted back to the inception of the project at the appropriate rate.
both a cash outflow at the inception of the project and a cash inflow at the end of the term of an investment project resulting in an offsetting of two equal amounts that has no effect on the net present value analysis.
described in both item a and item b above.
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The net present value method:
makes no allowance for recovery of the original investment.
requires the deduction of amortization in order to provide for the recovery of the original investment.
provides for recovery of the original investment since each inflow is allocated between a return of principal and interest.
only makes allowance for return on the investment.
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The evaluation of an investment having uneven cash flows using the payback method:
cannot be done.
can be done only by matching cash inflows and investment outflows on a year-by-year basis.
will produce essentially the same results as those obtained through the use of discounted cash flow techniques.
requires the use of a sophisticated calculator or computer software.
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In which of the following situations would a project be acceptable under the internal rate of return method? 1. The internal rate of return is equal t...
Only 1.
Only 3.
Both 1 and 3.
Both 1 and 2.
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Anthony operates a part time auto repair service. He estimates that a new diagnostic computer system will result in increased cash inflows of $1,500 i...
$4,599.
$5,502.
$5,638.
$5,107.
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Which of the following capital budgeting techniques implicitly assumes that the cash flows are reinvested at the company’s minimum required rate of ...
Yes/Yes
Yes/No
No/Yes
No/No
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Billy Bob,Inc. has gathered the following data on a proposed investment project: Investment in amortizable equipment, $150,000; Annual cash flows, $ 4...
0.27 years.
3.75 years.
10.00 years.
2.13 years.
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Billy Bob,Inc. has gathered the following data on a proposed investment project: Investment in amortizable equipment, $150,000; Annual cash flows, $ 4...
26.67%.
16.67%.
36.67%.
10.00%.
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Which of the following statements is accurate regarding the ranking of projects using the net present value method?
Projects can never be ranked using the net present value method.
The net present value of one project cannot be compared directly to the net present value of another project unless the investments in the projects are of equal size.
The net present value of one project can be compared directly to the net present value of another project even when the investments in the projects are not of equal size.
All projects, regardless of size, can be ranked using the net present value method.
