Braun3 12 Tif

Managerial Accounting, 3e (Braun/Tietz) Chapter 12 Capital Investment Decisions and the Time Value of Mone
1) Capital investments do not typically require large sums of money. Answer: FALSE iff: 1 L!: 1"#1 E!C: S1"#1 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts ") &'e process of ma(ing capital investment decisions is referred to as capital )udgeting. Answer: &%*E iff: 1 L!: 1"#1 E!C: S1"#1 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts +) Self#c'ec(#in mac'ines at airports are an e,ample of capital assets. Answer: &%*E iff: 1 L!: 1"#1 E!C: E1"#1AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts .) Capital )udgeting is done w'en common stoc( is issued. Answer: FALSE iff: 1 L!: 1"#1 E!C: S1"#1 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts /) C'oosing among alternative capital investments is called a post#audit. Answer: FALSE iff: 1 L!: 1"#1 E!C: S1"#1 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts -) 0ost#audits of capital investments compare actual net cas' inflows to pro1ected net cas' inflows. Answer: &%*E iff: 1 L!: 1"#1 E!C: S1"#1 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 2) &'e costs to develop a ma1or we)site for a company would )e considered to )e a capital asset if t'ose costs are significant and material 3for e,ample4 t'e costs to develop t'e we)site e,ceed 51664666). Answer: &%*E iff: 1
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L!: 1"#1 E!C: E1"#1AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts :) &'e cost associated wit' renovating a ware'ouse to )e used as a restaurant would )e considered to )e a capital asset. Answer: &%*E iff: 1 L!: 1"#1 E!C: E1"#1AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts ;) &'e 'ealt' care insurance cost of a company for its assem)ly#line wor(ers would not )e considered to )e a capital asset. Answer: &%*E iff: 1 L!: 1"#1 E!C: E1"#1AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
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16) &'e following are all met'ods of analy<ing capital investments e!cept A) 0ay)ac( 0eriod. $) %egression Analysis. C) =et 0resent >alue 3=0>). ) Accounting %ate of %eturn 3A%%). Answer: $ iff: 1 L!: 1"#1 E!C: E1"#1AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 11) ?'ic' of t'e following items would )e considered a capital asset@ A) 0urc'ase of office supplies to )e used internally over t'e ne,t year $) 0ayment for t'is yearAs advertising campaign C) Construction of a new store )uilding ) onation of money to *nited ?ay Answer: C iff: 1 L!: 1"#1 E!C: E1"#1AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 1") ?'ic' of t'e following is a c'aracteristic of a capital asset@ A) &'e item will )e used for a long period of time. $) &'e item involves a significant sum of money. C) =one of t'ese c'aracteristics are correct. ) $ot' A and $ are correct. Answer: iff: 1 L!: 1"#1 E!C: E1"#1AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
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1+) &'e process of c'oosing among different alternative investments due to limited resources is referred to as A) capital investing. $) capital rationing. C) resource rationing. ) resource allocation. Answer: $ iff: 1 L!: 1"#1 E!C: S1"#1 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 1.) &'e BBBBBBBB capital )udgeting met'od uses accrual accounting4 rat'er t'an net cas' flows4 as a )asis for calculations. A) A%% $) 0ay)ac( C) =0> ) 8%% Answer: A iff: 1 L!: 1"#1 E!C: S1"#1/ AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 1/) %egarding capital rationing decisions for capital assets4 w'ic' of t'e following is true@ A) Companies s'ould always c'oose t'e investment wit' t'e s'ortest pay)ac( period. $) Companies s'ould always c'oose t'e investment wit' t'e 'ig'est =0>. C) Companies s'ould always c'oose t'e investment wit' t'e 'ig'est A%%. ) =one of t'e a)ove are true. Answer: iff: 1 L!: 1"#1 E!C: S1"#1/ AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
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1-) After a company invests in capital assets4 it will perform a BBBBBBBB in order to compare t'e actual to t'e pro1ected net cas' inflows. A) cas' flow analysis $) pre and post analysis C) post#audit ) post#cas' flow Answer: C iff: 1 L!: 1"#1 E!C: S1"#1 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 12) &'e term BBBBBBBB is descri)ed as a Cformal means of analy<ing long#range investment alternatives.C A) annuity $) time value of money C) pay)ac( period ) capital )udgeting Answer: iff: 1 L!: 1"#1 E!C: S1"#1 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 1:) &'e term BBBBBBBB is )est descri)ed as a Crelations'ip among principal4 interest rate4 and time.C A) capital )udgeting $) time value of money C) pay)ac( period ) annuity Answer: $ iff: 1 L!: 1"#1 E!C: S1"#2 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
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1;) &'e term BBBBBBBB is )est descri)ed as Ca stream of equal periodic payments.C A) time value of money $) capital )udgeting C) annuity ) pay)ac( period Answer: C iff: 1 L!: 1"#1 E!C: S1"#2 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts "6) &'e term BBBBBBBB is )est descri)ed as Ct'e lengt' of time required to recover t'e cost of an investment.C A) time value of money $) pay)ac( period C) capital )udgeting ) annuity Answer: $ iff: 1 L!: 1"#1 E!C: E1"#12 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts "1) &'e accounting rate of return uses non#cas' flow factors including depreciation in calculating t'e operating income of t'e asset. Answer: &%*E iff: 1 L!: 1"#" E!C: S1"#1/ AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts "") 8nvestments wit' longer pay)ac( periods are more desira)le4 all else )eing equal. Answer: FALSE iff: 1 L!: 1"#" E!C: E1"#12 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
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"+) &'e pay)ac( met'od can )e used w'en t'e net cas' inflows from a capital investment are unequal. Answer: &%*E iff: 1 L!: 1"#" E!C: E1"#1: AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts ".) Capital )udgeting predictions must consider factors suc' as c'anging consumer preferences4 competition4 and government regulations. Answer: &%*E iff: 1 L!: 1"#" E!C: S1"#1 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts "/) &'e accounting rate of return met'od of analy<ing capital )udgeting decisions measures t'e average annual rate of return from using t'e asset over its entire life. Answer: &%*E iff: " L!: 1"#" E!C: E1"#"6 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts "-) &'e accounting rate of return is a measure of profita)ility computed )y dividing t'e average annual operating income from an asset )y t'e initial amount invested in t'e asset. Answer: &%*E iff: " L!: 1"#" E!C: E1"#"6 AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
"2) Accrual#)ased accounting is not used in determining t'e accounting rate of return. Answer: FALSE iff: 1 L!: 1"#" E!C: S1"#1/ AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment ":) &'e pay)ac( met'od primarily focuses on profita)ility and not time. Answer: FALSE iff: 1 L!: 1"#" E!C: S1"#1/ AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment ";) !ne advantage of t'e internal rate of return is t'at it considers t'e time value of money. Answer: &%*E iff: 1 L!: 1"#" E!C: S1"#1/ AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment +6) !ne disadvantage of t'e pay)ac( met'od is t'at it does not consider t'e time value of money. Answer: &%*E iff: 1 L!: 1"#" E!C: S1"#1/ AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment +1) 8f t'e accounting rate of return e,ceeds t'e required accounting rate of return4 A) invest in t'e capital asset. $) do not invest in t'e capital asset. C) only invest if t'e pay)ac( period is also greater t'an t'e required rate of return. ) only invest if t'e pay)ac( period is also less t'an t'e required rate of return. Answer: A iff: 1 L!: 1"#" E!C: E1"#"6 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts +") 9ow does depreciation affect t'e calculation of a pro1ectAs pay)ac( period@ A) epreciation is deducted from t'e annual cas' inflows. $) epreciation is added to t'e annual cas' inflows. C) epreciation is only deducted if t'e pay)ac( period e,ceeds five years. ) epreciation does not affect t'e pay)ac( calculation. Answer: iff: 1
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L!: 1"#" E!C: E1"#12 AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment ++) 9ow does depreciation affect t'e calculation of a pro1ectAs accounting rate of return 3A%%)@ A) epreciation is added to t'e annual cas' inflows. $) epreciation is deducted from t'e annual cas' inflows. C) epreciation does not affect A%%. ) epreciation is only deducted if t'e A%% is less t'an t'e minimum required rate of return. Answer: $ iff: 1 L!: 1"#" E!C: E1"#"6 AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment +.) ?'ic' of t'e following is used as t'e equationAs numerator w'en computing t'e pay)ac( period for a capital asset wit' equal annual net cas' inflows@ A) E,pected annual cas' inflow $) &otal cas' inflows C) Amount invested ) =et cas' outflow Answer: C iff: 1 L!: 1"#" E!C: E1"#12 AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
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+/) ?'ic' of t'e following is used as t'e equationAs numerator w'en computing t'e accounting rate of return for a capital asset@ A) Average amount invested in t'e asset $) Average annual operating income from t'e asset C) &otal amount invested in t'e asset ) Average net cas' flows from t'e asset Answer: $ iff: 1 L!: 1"#" E!C: E1"#1; AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment +-) All else )eing equal4 a company would c'oose to invest in a capital asset if w'ic' of t'e following is true@ A) 8f t'e pay)ac( period equals t'e amount invested $) 8f t'e e,pected accounting rate of return is less t'an t'e required rate of return C) 8f t'e e,pected accounting rate of return is greater t'an t'e required rate of return ) 8f t'e average amount invested is equal to t'e net cas' inflows Answer: C iff: " L!: 1"#" E!C: E1"#"6 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts +2) &'e formula for calculating t'e accounting rate of return for a capital asset is A) average annual operating income from assetDamount invested in asset. $) average annual net cas' inflow from assetDamount invested in asset. C) 3average annual operating income E depreciation e,pense)Damount invested in asset. ) 3average annual cas' inflows # depreciation e,pense)D3amount invested in asset E residual value of asset). Answer: A iff: 1 L!: 1"#" E!C: E1"#1; AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
+:) Fome< Corporation is considering two alternative investment proposals wit' t'e following data: 0roposal G 5 :/64666 : years 5 1"/4666 5 .64666 Straig't#line 1.I 0roposal H 5 .-:4666 : years 5 2:4666 5# Straig't#line 16I
8nvestment *seful life Estimated annual net cas' inflows for : years %esidual value epreciation met'od %equired rate of return
9ow long is t'e pay)ac( period for 0roposal G@ A) 16.;6 years $) -.66 years C) -.:6 years ) "1."/ years Answer: C E,planation: C) 0ay)ac( J 8nvestmentDannual cas' flow 5:/64666.66D51"/4666.66 J -.: years iff: 1 L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
+;) Fome< Corporation is considering two alternative investment proposals wit' t'e following data: 0roposal G 5 :/64666 : years 5 1"/4666 5 .64666 Straig't#line 1.I 0roposal H 5 .-:4666 : years 5 2:4666 5# Straig't#line 16I
9ow long is t'e pay)ac( period for 0roposal H@ A) "1."/ years $) -.66 years C) -.:6 years ) 11.26 years Answer: $ E,planation: $) 0ay)ac( J 8nvestmentDannual cas' flow 5.-:4666D52:4666.66 J -.6 years iff: " L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
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.6) Fome< Corporation is considering two alternative investment proposals wit' t'e following data: 0roposal G 5 :/64666 : years 5 1"/4666 5 .64666 Straig't#line 1.I 0roposal H 5 .-:4666 : years 5 2:4666 5# Straig't#line 16I
?'at is t'e accounting rate of return for 0roposal G@ A) ".:: I $) 1..21 I C) "-.-" I ) ".2;I Answer: E,planation: ) 3Annual net cas' flow # depreciation)D8nvestment J Accounting rate of return 351"/4666 # 3:/64666 # .6666D:))D:/64666 351"/4666 # 1614"/6)D:/64666 J ".2;I iff: " L!: 1"#" E!C: E1"#1; AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
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.1) Fome< Corporation is considering two alternative investment proposals wit' t'e following data: 0roposal G 5 :/64666 : years 5 1"/4666 5 .64666 Straig't#line 1.I 0roposal H 5 .-:4666 : years 5 2:4666 5# Straig't#line 16I
?'at is t'e accounting rate of return for 0roposal H@ A) /.".I $) ..12I C) ";.12I ) 1-.-2I Answer: $ E,planation: $) 3Annual net cas' flow # depreciation)D8nvestment J Accounting rate of return 352:4666 # 3.-:4666D:))D.-:4666J 352:4666 # /:4/66)D.-:4666 J..12I iff: " L!: 1"#" E!C: E1"#1; AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
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.") &'e ?arren Company is considering investing in two alternative pro1ects: 0ro1ect 1 5.664666 / 51664666 5"/4666 Straig't#line 1"I 0ro1ect " 5"/64666 5./4666 51/4666 Straig't#line :I
8nvestment *seful life 3years) Estimated annual net cas' inflows for useful life %esidual value epreciation met'od %equired rate of return
?'at is t'e pay)ac( period for 0ro1ect 1@ A) ..66 years $) /./- years C) 1-.66 years ) :.:; years Answer: A E,planation: A) 0ay)ac( J 8nvestmentDannual cas' flow 5.664666D51664666 J . years iff: 1 L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
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.+) &'e ?arren Company is considering investing in two alternative pro1ects: 0ro1ect 1 5.664666 / 51664666 5"/4666 Straig't#line 1"I 0ro1ect " 5"/64666 5./4666 51/4666 Straig't#line :I
?'at is t'e pay)ac( period for 0ro1ect "@ A) ..66 years $) /./- years C) 16.66 years ) 1-.66 years Answer: $ E,planation: $) 0ay)ac( J 8nvestmentDannual cas' flow 5"/64666D5./4666.66 J /./- years iff: " L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
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..) &'e ?arren Company is considering investing in two alternative pro1ects: 0ro1ect 1 5.664666 / 51664666 5"/4666 Straig't#line 1"I 0ro1ect " 5"/64666 5./4666 51/4666 Straig't#line :I
?'at is t'e accounting rate of return for 0ro1ect 1@ A) .+.2/I $) -."/I C) 1.::I ) "/.66I Answer: $ E,planation: $) 3Annual net cas' flow # depreciation)D8nvestment J Accounting rate of return 351664666 # 3.664666 # "/4666D/))D.664666 351664666 # 2/4666)D.664666 J -."/I iff: " L!: 1"#" E!C: E1"#1; AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
./) &'e ?arren Company is considering investing in two alternative pro1ects: 0ro1ect 1 5.664666 / 51664666 5"/4666 Straig't#line 1"I 0ro1ect " 5"/64666 5./4666 51/4666 Straig't#line :I
?'at is t'e accounting rate of return for 0ro1ect "@ A) ++.-2I $) +.66I C) 1:.66I ) ".++I Answer: E,planation: ) 3Annual net cas' flow # depreciation)D8nvestment J Accounting rate of return 35./4666 # 3"/64666 # 1/4666D-))D"/64666J 35./4666 # +;41-2)"/64666 J".++ I iff: " L!: 1"#" E!C: E1"#1; AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment .-) %i)elin Corporation is adding a new product line t'at will require an investment of 51+:4666. &'e product line is estimated to generate cas' inflows of 5"/4666 t'e first year4 5"+4666 t'e second year4 and 51:4666 eac' year t'ereafter for ten more years. ?'at is t'e pay)ac( period@ A) 2."- years $) /./" years C) 2.66 years ) 2.-2 years Answer: C iff: " L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
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.2) 0itt Company is evaluating two possi)le investments in deprecia)le plant assets. &'e company uses t'e straig't# line met'od of depreciation. &'e following information is availa)le: Investment " Investment B 511"4/66 51-64666 / years / years 5164666 51/4666 5"/4666 16I 5.64666 1"I
8nitial capital investment Estimated useful life Estimated residual value Estimated annual net cas' inflow For + years %equired rate of return
9ow long is t'e pay)ac( period for 8nvestment A@ A) ../6 years $) ..16 years C) 11."/ years ) "..; years Answer: A E,planation: A) 0ay)ac( J 8nvestmentDannual cas' flow 511"4/66D"/4666 J ../6 years iff: " L!: 1"#" E!C: E1"#1: AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
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.:) 0itt Company is evaluating two possi)le investments in deprecia)le plant assets. &'e company uses t'e straig't# line met'od of depreciation. &'e following information is availa)le: Investment " Investment B 511"4/66 51-64666 / years / years 5164666 51/4666 5"/4666 16I 5.64666 1"I
8nitial capital investment Estimated useful life Estimated residual value Estimated annual net cas' inflow For + years %equired rate of return
9ow long is t'e pay)ac( period for 8nvestment $@ A) +.-+ years $) ..66 years C) "..6 years ) 16.-2 years Answer: $ E,planation: $) 0ay)ac( J 8nvestmentDannual cas' flow 51-64666D.64666 J ..66 years iff: " L!: 1"#" E!C: E1"#1: AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
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.;) Landrum Corporation is considering investing in speciali<ed equipment costing 5"/64666. &'e equipment 'as a useful life of / years and a residual value of 5"64666. epreciation is calculated using t'e straig't#line met'od. &'e e,pected net cas' inflows from t'e investment are: Hear 1 Hear " Hear + Hear . Hear / &otal cas' inflows 5 -64666 5 ;64666 51164666 5 .64666 5 "/4666 5+"/4666
Landrum CorporationAs required rate of return on investments is 1.I. ?'at is t'e accounting rate of return on t'e investment@ A) 2.-6I $) /.-6I C) 1:..6I ) ....6I Answer: A E,planation: A) 3Annual net cas' flow # depreciation)D8nvestment J Accounting rate of return 35+"/4666D/ # 3"/64666 # "64666)D/)D5"/64666 35-/4666 # 5.-4666)5D"/64666 J 2.-6 I iff: " L!: 1"#" E!C: E1"#1; AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment /6) Cowell Corporation is considering an investment in new equipment costing 51//4666. &'e equipment will )e depreciated on a straig't#line )asis over a five#year life and is e,pected to generate net cas' inflows of 5./4666 t'e first year4 5-/4666 t'e second year4 and 5;64666 every year t'ereafter until t'e fift' year. ?'at is t'e pay)ac( period for t'is investment@ &'e equipment 'as no residual value. A) ".6. years $) +... years C) 1.2" years ) "./6 years Answer: iff: " L!: 1"#" E!C: E1"#1: AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
/1) Suppose ?'ole Foods is considering investing in ware'ouse#management software t'at costs 5-6646664 'as 5-64666 residual value and s'ould lead to cas' cost savings of 51+64666 per year for its five#year life. 8n calculating t'e A%%4 w'ic' of t'e following figures s'ould )e used as t'e equationAs denominator@ A) 5-64666 $) 5-664666 C) 51+64666 ) 5"2/4666 Answer: $ E,planation: $) 8nvestment J 5-664666 iff: 1 L!: 1"#" E!C: E1"#1: AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment /") &'e 9anna Company uses straig't#line depreciation and is considering a capital e,penditure for w'ic' t'e following relevant cas' flow data 'ave )een estimated: Estimated useful life: + years 8nitial investment: 5/664666 Savings year 1: 5"164666 Savings year ": 51/64666 Savings year +: 5""/4666 %esidual value after + yrs 5 /64666 &otal net inflows during t'e useful life of t'e asset are A) 5-+/4666. $) 5/+/4666. C) 5/:/4666. ) 5:/4666. Answer: C E,planation: C) Savings year 1: 5"164666 Savings year ": 51/64666 Savings year +: 5""/4666 &otal 5/:/4666 iff: " L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
"" Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
/+) &'e 9anna Company uses straig't#line depreciation and is considering a capital e,penditure for w'ic' t'e following relevant cas' flow data 'ave )een estimated: Estimated useful life: + years 8nitial investment: 5/664666 Savings year 1: 5"164666 Savings year ": 51/64666 Savings year +: 5""/4666 %esidual value after + yrs 5 /64666 &otal operating income from t'e asset over t'e +#year period is A) 5:/4666. $) 51/64666. C) 5.+/4666. ) 51+/4666. Answer: iff: " L!: 1"#" E!C: E1"#1; AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment. /.) &'e 9anna Company uses straig't#line depreciation and is considering a capital e,penditure for w'ic' t'e following relevant cas' flow data 'ave )een estimated: Estimated useful life: + years 8nitial investment: 5/664666 Savings year 1: 5"164666 Savings year ": 51/64666 Savings year +: 5""/4666 %esidual value after + yrs 5 /64666 &'e total depreciation e,pense over t'e life of t'e asset is A) 51/64666. $) 5//64666. C) 5./64666. ) 5/:/4666. Answer: C E,planation: C) 8nvestment # residual value 5/664666 # /64666 J ./64666 iff: " L!: 1"#" E!C: E1"#1: AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment. //) &'e 9anna Company uses straig't#line depreciation and is considering a capital e,penditure for w'ic' t'e following relevant cas' flow data 'ave )een estimated: Estimated useful life: + years 8nitial investment: 5/664666 Savings year 1: 5"164666
"+ Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
Savings year ": Savings year +: %esidual value after + yrs
51/64666 5""/4666 5 /64666
&'e accounting rate of return is closest to A) +;.66I. $) ;.66I. C) +6.66I. ) 2.-;I. Answer: $ E,planation: $) 3Annual net cas' flow # depreciation)D8nvestment J Accounting rate of return 3"164666 E 1/64666 E ""/4666) # 3/664666 # /64666)D/664666 3/:/4666 # ./64666)D/664666 J "2.66 ivide )y + years J ;.66 I iff: " L!: 1"#" E!C: E1"#"6 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
". Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
/-) !AKally epartment Stores is considering two possi)le e,pansion plans. !ne proposal involves opening / stores in 8ndiana at t'e cost of 514;"64666. *nder t'e ot'er proposal4 t'e company would focus on Lentuc(y and open stores at a cost of 5"4/664666. &'e following information is availa)le: 8ndiana proposal Lentuc(y proposal 514;"64666 5"4/664666 16 years 16 years 5/64666 5:64666 5.664666 5/664666 16I 16I
%equired investment Estimated life Estimated residual value Estimated annual cas' inflows over t'e ne,t 16 years %equired rate of return
&'e pay)ac( period for t'e Lentuc(y proposal is closest to A) ../ years. $) -."/ years. C) /.66 years. ) +1."/ years. Answer: C E,planation: C) 8nvestmentDAnnual cas' flows 5"4/664666D/664666 J /.6 yrs iff: " L!: 1"#" E!C: E1"#1: AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
"/ Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
/2) !AKally epartment Stores is considering two possi)le e,pansion plans. !ne proposal involves opening / stores in 8ndiana at t'e cost of 514;"64666. *nder t'e ot'er proposal4 t'e company would focus on Lentuc(y and open stores at a cost of 5"4/664666. &'e following information is availa)le: 8ndiana proposal Lentuc(y proposal 514;"64666 5"4/664666 16 years 16 years 5/64666 5:64666 5.664666 5/664666 16I 16I
&'e pay)ac( period for t'e 8ndiana proposal is closest to A) +.: years. $) /.6 years. C) ..: years. ) +:.. years. Answer: C E,planation: C) 8nvestmentDAnnual cas' flows 514;"64666D.664666 J ..: yrs iff: " L!: 1"#" E!C: E1"#1: AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
"Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
/:) !AKally epartment Stores is considering two possi)le e,pansion plans. !ne proposal involves opening / stores in 8ndiana at t'e cost of 514;"64666. *nder t'e ot'er proposal4 t'e company would focus on Lentuc(y and open stores at a cost of 5"4/664666. &'e following information is availa)le: 8ndiana proposal Lentuc(y proposal 514;"64666 5"4/664666 16 years 16 years 5/64666 5:64666 5.664666 5/664666 16I 16I
&'e accounting rate of return for t'e Lentuc(y proposal is closest to A) 16.+"I. $) 11.6;I. C) 16.66I. ) "6.66I. Answer: A E,planation: A) 3Annual net cas' flow # depreciation)D8nvestment J Accounting rate of return 35/664666 # 3"4/664666 # :64666)D16)D"4/664666 35/664666 # "."4666)D"4/664666 J 16.+"I iff: " L!: 1"#" E!C: E1"#1: AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
/;) !AKally epartment Stores is considering two possi)le e,pansion plans. !ne proposal involves opening / stores in 8ndiana at t'e cost of 514;"64666. *nder t'e ot'er proposal4 t'e company would focus on Lentuc(y and open stores at a cost of 5"4/664666. &'e following information is availa)le: 8ndiana proposal Lentuc(y proposal 514;"64666 5"4/664666 16 years 16 years 5/64666 5:64666 5.664666 5/664666 16I 16I
&'e accounting rate of return for t'e 8ndiana proposal is closest to A) 16.+"I. $) 11.6;I. C) "6.:+I. ) 16.:+I. Answer: $ E,planation: $) 3Annual net cas' flow # depreciation)D8nvestment J Accounting rate of return 35.664666 # 314;"64666 # /64666)D16)D14;"64666 35.664666 # 1:24666)D14;"64666 J 11.6;+2/I iff: " L!: 1"#" E!C: E1"#1: AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment -6) %unninA ?ild Family Fun Center )oug't new go#(arts for its recreation facility. &'e useful life is - years. &'e go#(arts 'ad a total cost of 5/4166 and will generate 514266 total cas' inflows eac' year for t'e life of t'e go#(arts. &'e residual value of t'e go#(arts is 5-/6. &'e pay)ac( period in years is closest to A) +.+:. $) +.66. C) ".-". ) ".12. Answer: $ E,planation: $) 8nvestmentDAnnual cas' flows /4166D14266 J +.66 yrs iff: " L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
": Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
-1) Speedy 0rint S'op )oug't a new 'ig'#speed p'oto copier for customers to )e a)le to )ring in t'eir digital pictures to ma(e 'ig'#quality copies. 8ts useful life is - years. &'e copier cost 5242.6 and will generate annual cas' inflows of 5"41/6. &'e residual value of t'e copier is 514+"6. &'e pay)ac( period in years is closest to A) .."1. $) +.-6. C) ".;;. ) "."+. Answer: $ E,planation: $) 8nvestmentDAnnual cas' flows 5242.6D"41/6 J +.- yrs iff: " L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment -") $u,ton Corporation is evaluating a capital investment pro1ect w'ic' would require an initial investment of 5".64666 to purc'ase new mac'inery. &'e annual revenues and e,penses generated specifically )y t'is pro1ect eac' year during t'e pro1ectAs nine year life would )e: Sales >aria)le e,penses Contri)ution margin Fi,ed e,penses: Salaries e,pense %ent e,pense epreciation e,pense &otal fi,ed e,penses !perating income 51:/4666 5 +:4666 51.24666 5 +14666 5 ".4666 5 "/4666 5 :64666 5 -24666
&'e residual value of t'e mac'inery at t'e end of t'e nine years would )e 51/4666. &'e pay)ac( period of t'is potential pro1ect in years would )e closest to A) ".-. $) +.-. C) +.1. ) 1... Answer: A E,planation: A) 8nvestmentDAnnual cas' flows 5".64666 D 3-24666 E "/4666) J ".- yrs iff: + L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment -+) Smit' M Cramer4 Computer %epair4 is considering an investment in computer and networ( equipment costing 5"/.4666. &'is equipment would allow t'em to offer new programming services to clients. &'e equipment will )e depreciated on t'e straig't#line )asis over an eig't#year period wit' an estimated residual value of 5-64666. *sing t'e accounting rate of return model4 w'at is t'e minimum average annual operating income t'at must )e generated from t'is investment in order to ac'ieve an 11I accounting rate of return@ A) 5-4-66
"; Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
$) 5"14+.6 C) 5+142/6 ) 5"24;.6 Answer: E,planation: ) 3Annual net cas' flow # depreciation)D8nvestment J Accounting rate of return Annual net cas' flowD"/.4666 J 11I Annual net cas' flow J 11I N "/.4666 J "24;.6. iff: + L!: 1"#" E!C: E1"#"6 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment -.) 0ro#Am Audio is a company t'at is contracted to O private events. ue to a recent increase in )oo(ings4 0ro# Am is considering t'e purc'ase of anot'er mo)ile O unit. 0ro#Am uses t'e pay)ac( met'od to evaluate its investments. &'e mo)ile O unit will cost 51"46664 'as a useful life of 16 years4 and will generate 5"4666 in net cas' inflows per year. &'e residual value of t'e unit is 514666. ?'at is t'e pay)ac( period for t'e mo)ile O unit@ A) -./6 years $) /./6 years C) -.66 years ) ..66 years Answer: C E,planation: C) 8nvestmentDAnnual cas' flows 1"4666 D "4666 J - years iff: " L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
+6 Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
-/) Spar(y t'e Electrician speciali<es in rewiring 'istoric 'ouses. Spar(y recently purc'ased a new wire#pulling device t'at will decrease t'e time to complete eac' 1o) and increase total revenues. &'e device will cost 5.4+2/ and will increase net cas' flows )y 5142/6 per year. &'e new device 'as a useful life of 2 years and a residual value of 5"/6. ?'at is t'e pay)ac( period for t'e new wire#pulling device@ A) ".-. years $) "./6 years C) ".+- years ) ".1; years Answer: $ E,planation: $) 8nvestmentDAnnual cas' flows .4+2/ D 142/6 J "./ years iff: " L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment --) $onneville Kanufacturing is considering an investment t'at would require an initial net investment of 5-/64666. &'e following revenuesDe,penses relate e,clusively to t'e investment: #ales Varia$le e!penses Contri$ution mar%in &i!ed e!penses Salaries e,pense %ent e,pense epreciation e,pense &otal fi,ed e,penses !perating income 5+/64666 5.64666 5+164666 5":4666 5"64666 5.64666 5::4666 5"""4666
&'e investment will 'ave a residual value of 5/64666 at t'e end of its 1/ year useful life. ?'at is t'e pay)ac( period for t'is investment@ A) 1.:- years $) +.62 years C) ".;+ years ) "..: years Answer: E,planation: ) 8nvestmentDAnnual cas' flows 5-/64666 D 3"""4666 E .64666) J "..: yrs iff: + L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
-2) FlenFary 8nvestment Corporation is analy<ing a proposal to )uild condo units in sout'ern Florida. &'e pro1ect will require an initial invest of 5/664666. &'e )uilding 'as a useful life of "6 years4 a residual value of 5"6646664 and is depreciated on a straig't#line )asis. FlenFary uses t'e accounting rate of return model to evaluate investment pro1ects. ?'at is t'e minimum annual operating income t'at must )e generated )y t'is pro1ect to ac'ieve t'e ;I accounting return required )y FlenFary@ A) 51:4666 $) 5./4666 C) 5"/4666 ) 5"24666 Answer: $ E,planation: $) 3Annual net cas' flow # depreciation)D8nvestment J Accounting rate of return Annual net cas' flowD/664666 J ;I Annual net cas' flow J ;I N /664666 J ./4666. iff: + L!: 1"#" E!C: E1"#"6 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment -:) Flo)e Enterprises purc'ased a new mac'ine wit' a total cost of 5+64./6 and a useful life of - years. &'e mac'ine will produce net cas' inflows of 524"/6 over its useful life and 'as a residual value of 5"41"/. ?'at is t'e pay)ac( period for t'e new mac'ine@ A) ...; years $) +.;1 years C) .."6 years ) +."/ years Answer: C E,planation: C) 5+64./6 D 524"/6 J .."6 years iff: " L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
+" Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
-;) Siesta Kanufacturing 'as as(ed you to evaluate a capital investment pro1ect. &'e pro1ect will require an initial investment of 5::4666. &'e life of t'e investment is 2 years wit' a residual value of 5.4666. 8f t'e pro1ect produces net annual cas' inflows of 51-46664 w'at is t'e accounting rate of return@ A) +.;6I $) ..//I C) //6.66I ) 1:.1:I Answer: $ E,planation: $) 35::4666 # .4666)D2 years J 51"4666 annual depreciation e,pense 51-4666 # 51"4666D5::4666 J ..//I iff: " L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 26) A)dul Corporation )oug't a new mac'ine4 w'ic' cost 5;646664 'as a useful life of 16 years4 and will generate annual cas' inflows of 5"/4666. &'e residual value of t'e mac'ine is 5/4/66. ?'at is t'e pay)ac( period@ Answer: 5;64666D5"/4666 J +.-6 years iff: " L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 21) &'e &ot' Company )oug't a new specialty mac'ine t'at cost 51664666 wit' a .#year life wit' no residual value. &'e company plans to generate annual cas' inflows of 5+64666 eac' year for . years. Calculate t'e accounting rate of return. Answer: /.66I Calculations: 351664666 # 6)D. years J 5"/4666 annual depreciation e,pense 5+64666 # 5"/4666D51664666 J 5/4666D51664666 J /.66I iff: " L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
++ Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
2") &'e 9awn Corporation )oug't a new mac'ine t'at cost 51/64666 wit' a 16#year life and a residual value of 5"64666. &'e company plans to generate annual cas' inflows of 5.64666 over 16 years. Calculate t'e accounting rate of return. Answer: 1:.66I Calculations: 351/64666 # 5"64666)D16 years J 51+4666 annual depreciation e,pense 5.64666 # 51+4666D51/64666 J 5"24666D51/64666 J 1:.66I iff: " L!: 1"#" E!C: E1"#12 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 2+) Sicily4 8nc..4 is considering investing 5"/64666 in a mac'ine t'at will last . years wit' no residual value. &'e new mac'ine will generate annual operating income of 5//4666 per year for . years. ?'at is t'e accounting rate of return@ Answer: ""I Calculations: 5//4666D5"/64666 J ""I iff: " L!: 1"#" E!C: E1"#"6 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 2.) $uller Kanufacturing is considering acquiring anot'er facility for a cost of 5-164666. &'e required pay)ac( period is ../ years. Assume annual net cas' inflows are 51/64666 for t'e first two years and 51"/4666 for years + and .. ?'at must t'e inflow )e in t'e fift' year to meet t'e ../ year pay)ac( period@ Answer: 51"64666 Calculations: 5+664666 E 5"/64666 E ./G J 5-164666P G J 51"64666 iff: + L!: 1"#" E!C: E1"#"6 AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
+. Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
2/) !ne dollar to )e received in t'e future is wort' more t'an one dollar today. Answer: FALSE iff: 1 L!: 1"#+ E!C: S1"#16 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 2-) &'e net present value met'od does not incorporate t'e time value of money. Answer: FALSE iff: 1 L!: 1"#+ E!C: S1"#16 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 22) &'e principal amount4 t'e interest rate4 and t'e num)er of periods are all factors needed to calculate t'e time value of money. Answer: &%*E iff: 1 L!: 1"#+ E!C: S1"#16 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 2:) Calculating interest on t'e principal and on all t'e interest earned to date is called compound interest. Answer: &%*E iff: 1 L!: 1"#+ E!C: S1"#16 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 2;) ?'en computing t'e present value of a future sum4 t'e interest rate must always )e e,pressed as an annual rate. Answer: FALSE iff: " L!: 1"#+ E!C: S1"#16 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
+/ Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
:6) &'e Future >alue of 51 ta)le is used to calculate 'ow muc' 5166 in 'and today would )e wort' in / years. Answer: &%*E iff: 1 L!: 1"#+ E!C: S1"#2 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts :1) &'e t'ree factors t'at affect t'e time value of money are principal4 num)er of periods4 and t'e interest rate. Answer: &%*E iff: 1 L!: 1"#+ E!C: S1"#16 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts :") ?'ic' of t'e following areas does not ma(e significant use of time value of money concepts@ A) Capital investment analysis $) Lending and )orrowing C) 0ersonal finance planning ) Kar(eting researc' Answer: iff: " L!: 1"#+ E!C: S1"#16 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts :+) &'e time value of money is e,plained )y w'ic' of t'e following@ A) 8nvested money earns income over time. $) Koney is more valua)le over time. C) A stream of payments is received over time. ) 8nterest is always compounded over time. Answer: A iff: " L!: 1"#+ E!C: S1"#16 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
+Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
:.) Hour grandfat'er 'as promised to give you 514666 a year at t'e end of eac' of t'e ne,t four years if you earn Cs or )etter in all of your courses eac' year. *sing a discount rate of -I4 w'ic' of t'e following is correct for determining t'e present value of t'e gift@ A) 0> J 514666 N -I N . $) 0> J 514666 N 30> factor4 i J .I4 n J -) C) 0> J 514666 N 3Annuity 0> factor4 i J -I4 n J .) ) 0> J 514666 N 3Annuity F> factor4 i J -I4 n J .) Answer: C iff: " L!: 1"#+ E!C: S1"#16 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts :/) Hou 'ave )een awarded a sc'olars'ip t'at will pay you 5/66 per semester at t'e end of eac' of t'e ne,t : semesters t'at you earn a F0A of +./ or )etter. Hou are a very serious student and you anticipate receiving t'e sc'olars'ip every semester. *sing a discount rate of +I per semester4 w'ic' of t'e following is t'e correct calculation for determining t'e present value of t'e sc'olars'ip@ A) 0> J 5/66 N +I N : $) 0> J 5/66 N 3Annuity 0> factor4 i J +I4 n J :) C) 0> J 5/66 N 3Annuity F> factor4 i J -I4 n J .) ) 0> J 514666 N 30> factor4 i J +I4 n J .) Answer: $ iff: " L!: 1"#+ E!C: S1"#16 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts :-) Hou won t'e lottery and 'ave a num)er of c'oices as to 'ow to ta(e t'e money. ?'ic' c'oice yields a greater present value@ A) 51"4666 a year at t'e end of eac' of t'e ne,t - years using a -I discount rate $) 5/+4/66 3lump sum) now using a -I discount rate C) 5;64666 3lump sum) 2 years from now using a -I discount rate ) 5;"4666 3lump sum) 2 years from now using an :I discount rate Answer: C iff: " L!: 1"#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
:2) ?'en you graduate from college4 your mot'er plans to give you a gift of 5/64666 to start you on your way. 9owever4 to determine w'at you learned in )usiness sc'ool4 your mot'er presents you wit' four options on 'ow to receive t'e gift. ?'ic' of t'e four options presented )y your mot'er will yield t'e greatest present value to you@ A) A lump sum of 5/64666 today $) 5"/4666 per year for t'e ne,t " years using a +I discount rate C) A lump sum of 5/64666 after grad sc'ool 3" years) assuming a /I discount rate ) A lump sum of 5/64666 after grad sc'ool 3" years) assuming a +I discount rate Answer: A iff: " L!: 1"#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts ::) Hour wealt'y neig')or 'as promised to give you 5"4666 a year at t'e end of eac' of t'e ne,t four years to 'elp wit' college. *sing a discount rate of :I4 t'e present value of t'e gift can )e stated as A) 0> J 5"4666 30> factor4 i J .I4 n J .). $) 0> J 5"4666 N :I N /. C) 0> J 5"4666 3Annuity F> factor4 i J :I4 n J .). ) 0> J 5"4666 3Annuity 0> factor4 i J :I4 n J .). Answer: iff: " L!: 1"#+ E!C: S1"#16 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts :;) Hour 'ard wor( in college paid off4 quite literally4 and you received a graduate assistants'ip for your K$A program. &'e assistants'ip pays a stipend of 5164666 at t'e end of eac' of t'e ne,t " years. *sing an average discount rate of +I4 t'e future value of your assistants'ip can )e calculated )y A) 0> J 5164666 N +I N ". $) 0> J 5164666 30> factor4 i J +I4 n J "). C) 0> J 5164666 3Annuity 0> factor4 i J +I4 n J "). ) 0> J 5164666 3Annuity F> factor4 i J +I4 n J "). Answer: iff: " L!: 1"#+ E!C: S1"#16 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
+: Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
;6) &'e present value of an investment is affected )y w'ic' of t'e following@ A) &'e interest rate $) &'e num)er of time periods 3lengt' of t'e investment) C) &'e type of investment 3annuity versus lump sum) ) All of t'e a)ove Answer: iff: " L!: 1"#+ E!C: S1"#16 AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts ;1) Hou win t'e lottery and must decide 'ow to ta(e t'e payout. *se an :I discount rate. ?'at is t'e present value of 51/4666 a year received at t'e end of eac' of t'e ne,t si, years@ A) 5;4./6 $) 5;64666 C) 52.4:;+ ) 5-;4+./ Answer: E,planation: ) 0resent value annuity Q :I for - yrs J ..-"+ N 1/4666 J 5-;4+./ iff: 1 L!: 1"#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts ;") Assuming an interest rate of 16I4 t'e present value of 5/64666 to )e received : years from now would )e closest to A) 5"+4+/6. $) 5"14"66. C) 51;4+66. ) 51624"66. Answer: A E,planation: A) 0resent value Q 16I for : yrs J ..-2 N /64666 J 5"+4+/6 iff: 1 L!: 1"#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
+; Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
;+) Assuming an interest rate of 16I4 t'e present value of 5114666 received at t'e end of eac' year for - years would )e closest to A) 5-4"6.. $) 5--4666. C) 5.24;6/. ) 5:.4:2-. Answer: C E,planation: C) 0resent value annuity Q 16I for - yrs J ..+// N 114666 J 5.24;6/ iff: 1 L!: 1"#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts ;.) Assuming an interest rate of 16I4 if you invest a lump sum of 5/4666 now4 t'e )alance of your investment in 2 years will )e closest to A) 51"4;26. $) 5;42./. C) 5"+4+.6. ) 5+/4666. Answer: $ E,planation: $) Future value Q 16I for 2 yrs J 1.;.; N /666 J ;42./ iff: 1 L!: 1"#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts ;/) 8f you invest 514"66 at t'e end of every year for five years at an interest rate of 16I4 t'e )alance of your investment in / years will )e closest to A) 514;++. $) 5-4666. C) 524+"-. ) 5.4/.;. Answer: C E,planation: C) Future value annuity Q 16 I for / yrs J -.16/1 N 1"66 J 24+"iff: 1 L!: 1"#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
.6 Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
;-) 8ncome from an apartment )uilding you own totals 5"-64666 per year. Hou plan on selling t'e )uilding and retiring to France in 1" years. Assuming you can invest t'e income from t'e )uilding eac' year at +I4 'ow muc' money will you 'ave on w'ic' to retire@ A) 5+4++646:6 $) 5.46-64-:6 C) 5+4-:;4;"6 ) 5"4//:46.6 Answer: C E,planation: C) Future value Q +I for 1" yrs J 1..1;" N "-64666 J 5+4-:;4;"6 iff: 1 L!: 1"#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts ;2) Hou recently won a contest sponsored )y a local radio station. &'e radio station will pay you 5"4/66 at t'e end of eac' of t'e ne,t 1/ years. Assuming an interest rate of +I4 w'at is t'e present value of t'is pri<e@ A) 5.-4.;: $) 5";4:./ C) 5":4".6 ) 5."421/ Answer: $ E,planation: $) 0resent value annuity Q +I for 1/ yrs J 11.;+: N "4/66 J 5";4:./ iff: 1 L!: 1"#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts ;:) &'e present value of 5146664666 received in 1+ years4 given an interest rate of +I4 is A) 5-:14666. $) 5--14666. C) 514.-;4666. ) 5164-+/4666. Answer: A E,planation: A) 0resent value Q +I for 1+ yrs J 6.-:1 N 146664666 J 5-:14666 iff: 1 L!: 1"#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
;;) !n a w'im you purc'ased a scratc'#off lottery tic(et at t'e gas station. 8t must 'ave )een your luc(y day )ecause you won 5146664666. $eing logical and rational you decide to invest t'e money at +I for 16 years until you are ready to start a family. At t'e end of 16 years4 'ow muc' will your investment )e wort'@ A) 5114.-.4666 $) 514+..4666 C) 52..4666 ) 514+:.4666 Answer: $ E,planation: $) Future value Q +I for 16 yrs J 146664666 N 1.+.. J 514+..4666 iff: 1 L!: 1"#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 166) Assuming an interest rate of -I4 t'e present value of 5""4666 to )e received ; years from now would )e closest to A) 51-4.+.. $) 51+46".. C) 5+241-". ) 5+/46-:. Answer: $ E,planation: $) 0resent value Q -I for ; yrs J ./;" N ""4666 J 51+46". iff: 1 L!: 1"#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 161) Assuming an interest rate of -I4 t'e present value of 51:4666 received at t'e end of eac' year for - years would )e closest to A) 5::4/6-. $) 5114;26. C) 516:4666. ) 51"/4//6. Answer: A E,planation: A) 0resent value annuity Q -I for - yrs J ..;12 N 1:4666 J 5::4/6iff: 1 L!: 1"#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
." Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
16") Assuming an interest rate of -I4 if you invest a lump sum of 5-4/66 now4 t'e )alance of your investment in 2 years will )e closest to A) 5./4/66. $) 5114-.". C) 5+-4":+. ) 5;422-. Answer: E,planation: ) Future value Q -I for 2 yrs J 1./6. N -4/66 J 5;422iff: 1 L!: 1"#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 16+) 8f you invest 5/4666 at t'e end of every year for nine years at an interest rate of -I4 t'e )alance of your investment in / years will )e closest to A) 5-4-;6. $) 5":41:/. C) 5"146-6. ) 5"/4666. Answer: $ E,planation: $) Future value annuity Q -I for / yrs J /.-+2 N /4666 J 5":41:/ iff: 1 L!: 1"#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 16.) Hou win t'e lottery and must decide 'ow to ta(e t'e payout. *se an :I discount rate for all parts of t'is question. %equired: a. ?'at is t'e present value of 51"4666 a year received at t'e end of eac' of t'e ne,t si, years@ ). ?'at is t'e present value of ta(ing a 5-64666 lump sum now@ c. ?'at is t'e present value of a 5;64666 lump sum ta(en in 2 years@ Answer: a. 351"4666 N ..-"+) J 5//4.2). 5-64666 c. 35;64666 N 6./:+) J 5/"4.26 iff: " L!: ;#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 16/) Solve t'e following two cases 3t'e cases are independent). a. 8f you invest 5/4666 today at 16I interest4 w'at is t'e value of t'e investment at t'e end of / years@ ). 8f you invest 514"66 at t'e end of eac' of t'e ne,t / years and t'e investment earns 16I interest4 w'at is t'e value of t'e investment at t'e end of / years@ Answer: a. F> J 5/4666 N 1.-11 J 5:46// ). F>A J 514"66 N -.16/ J 524+"iff: "
.+ Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
L!: 1"#+ E!C: S1"#2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 16-) &'e A%% allows managers to compare t'e present value of future cas' generated )y a pro1ect against t'e cost of investing in t'at pro1ect. Answer: FALSE iff: " L!: 1"#. E!C: S1"#11 AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 162) =et present value and t'e internal rate of return are e,amples of discounted cas' flow models used in capital )udgeting decisions. Answer: &%*E iff: " L!: 1"#. E!C: S1"#11 AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 16:) 8n calculating t'e net present value of an investment in equipment4 t'e required investment and its residual value s'ould )e su)tracted from t'e present value of all future cas' inflows. Answer: FALSE iff: " L!: 1"#. E!C: S1"#11 AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
.. Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
16;) &'e profita)ility inde, equals t'e present value of net cas' inflows from t'e investment divided )y t'e cost of t'e investment. Answer: &%*E iff: 1 L!: 1"#. E!C: E1"#"AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 116) &'e residual value is considered in a net present value computation. Answer: &%*E iff: 1 L!: 1"#. E!C: E1"#"AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 111) A series of equal payments or deposits made at equal time intervals are called compound interest. Answer: FALSE iff: 1 L!: 1"#. E!C: E1"#"AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 11") &'e interest rate t'at ma(es t'e net present value of t'e investment equal to <ero is t'e internal rate of return. Answer: &%*E iff: " L!: 1"#. E!C: E1"#"AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 11+) &'e internal rate of return is used as t'e discount rate w'en calculating t'e net present value of a pro1ect. Answer: FALSE iff: " L!: 1"#. E!C: E1"#"AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 11.) &'e net present value met'od assumes t'at all cas' inflows are immediately reinvested at a rate of return equal to t'e internal rate of return. Answer: FALSE iff: " L!: 1"#. E!C: E1"#"AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 11/) ?'en evaluating capital investment pro1ects4 if t'e internal rate of return is less t'an t'e required rate of return4 t'e pro1ect will )e accepted.
./ Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
Answer: FALSE iff: " L!: 1"#. E!C: E1"#"AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 11-) ?'en selecting a capital investment pro1ect from t'ree alternatives4 t'e pro1ect wit' t'e 'ig'est net present value will always )e prefera)le. Answer: FALSE iff: " L!: 1"#. E!C: E1"#"AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 112) &'e 'urdle rate is t'e lengt' of time it ta(es to recoup an investmentAs initial cost from t'e cas' inflows t'at investment generates. Answer: FALSE iff: " L!: 1"#. E!C: E1"#"AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
.Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
11:) ?'en evaluating t'e cas' flows from an investment4 a reduction in cas' outflows is treated as t'e same as an increase in cas' inflows. Answer: &%*E iff: " L!: 1"#. E!C: E1"#"AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 11;) ?'en t'e profita)ility inde, is less t'an 1.66 for a pro1ect4 t'at pro1ect 'as a positive net present value. Answer: FALSE iff: " L!: 1"#. E!C: E1"#"AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 1"6) ?'at is an attri)ute of t'e internal rate of return@ A) 8t is t'e interest rate t'at ma(es t'e =0> of t'e investment equal to <ero. $) 8t is t'e interest rate t'at ma(es t'e cost of t'e investment equal to t'e present value of t'e investmentAs net cas' inflows. C) 8t is used in t'e capital rationing process. ) All of t'e a)ove are attri)utes of t'e internal rate of return. Answer: iff: " L!: 1"#. E!C: E1"#"AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 1"1) ?'at would a pro1ectAs profita)ility inde, )e if t'e pro1ect 'as an internal rate of return w'ic' is equal to t'e companyAs discount rate@ A) 8t would )e 6./. $) 8t would )e 6.6. C) 8t would )e 1.6. ) 8t cannot )e determined from information provided Answer: $ iff: " L!: 1"#. E!C: E1"#"AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 1"") ?'at will 'appen to t'e net present value 3=0>) of a pro1ect if t'e discount rate is increased from :I to 16I@ A) =0> will always decrease. $) =0> will always increase. C) &'e discount rate c'ange will not affect =0>. ) ?e cannot determine t'e direction of t'e effect on =0> from t'e information provided. Answer: A iff: 1 L!: 1"#.
E!C: E1"#"AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 1"+) ?'at will 'appen to t'e internal rate of return 38%%) of a pro1ect if t'e discount rate is decreased from ;I to 2I@ A) 8%% will always increase. $) &'e discount rate c'ange will not affect 8%%. C) 8%% will always decrease. ) ?e cannot determine t'e direction of t'e effect on 8%% from t'e information provided. Answer: $ iff: 1 L!: 1"#. E!C: E1"#"AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 1".) &'e net present value met'od assumes t'at t'e cas' inflows from a pro1ect are immediately reinvested at t'e A) internal rate of return. $) accounting rate of return. C) mar(et rate of return. ) required rate of return. Answer: iff: 1 L!: 1"#. E!C: E1"#"AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
.: Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1"/) A company finds t'at t'e residual value of 5:4666 for t'e equipment in a capital )udgeting pro1ect 'as )een inadvertently omitted from t'e calculation of t'e net present value 3=0>) for t'at pro1ect. 9ow does t'is omission affect t'e =0> of t'at pro1ect@ A) &'e pro1ectAs =0> s'ould )e 'ig'er4 )ut )e less t'an 5:4666 'ig'er4 wit' t'e residual value included. $) &'e pro1ectAs =0> s'ould )e 5:4666 'ig'er wit' t'e residual value included. C) &'e pro1ectAs =0> s'ould )e 5:4666 lower wit' t'e residual value included. ) &'e pro1ectAs =0> s'ould )e lower4 )ut )e less t'an 5:4666 lower4 wit' t'e residual value included. Answer: A iff: 1 L!: 1"#. E!C: E1"#"AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 1"-) ?'ic' of t'e following is a wea(ness of t'e internal rate of return 38%%)@ A) 8%% assumes t'at t'e cas' inflows from t'e pro1ect are immediately reinvested at t'e minimum required rate of return. $) 8%% ignores t'e time value of money. C) 8%% assumes t'at t'e cas' inflows from t'e pro1ect are immediately reinvested at t'e internal rate of return. ) 8%% is not a percentage rate4 )ut is e,pressed in dollars. Answer: C iff: 1 L!: 1"#. E!C: E1"#"; AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 1"2) Anot'er name for t'e minimum desired rate of return is A) discount rate. $) required rate of return. C) 'urdle rate. ) All of t'e a)ove Answer: iff: " L!: 1"#. E!C: E1"#"; AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
.; Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1":) A company would consider all of t'e following in computing t'e 8%% of an investment4 e!cept A) predicted cas' inflows over t'e life of t'e pro1ect. $) t'e cost of t'e pro1ect. C) depreciation e,pense on t'e assets of t'e pro1ect. ) present value factors. Answer: C iff: " L!: 1"#. E!C: E1"#"; AACS$: %eflective &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 1";) 30resent value ta)les are required.) Kantua Kotors is evaluating a capital investment opportunity. &'is pro1ect would require an initial investment of 5+:4666 to purc'ase equipment. &'e equipment will 'ave a residual value at t'e end of its life of 5+4666. &'e useful life of t'e equipment is / years. &'e new pro1ect is e,pected to generate additional net cas' inflows of 51"4666 per year for eac' of t'e five years. Kantua KotorsA required rate of return is 1.I. &'e net present value of t'is pro1ect is closest to A) 3514;;.). $) 5.42/+. C) 5+41;-. ) 5":4+:-. Answer: $ E,planation: $) Annual cas' flow 351"4666 N +..++) J 5.14"1+ %esidual value 35+4666 N 6./1;) J 14//2 Less investment cost J 3+:4666) =et present value 5 .42/+ iff: + L!: 1"#. E!C: 01"#/; AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
/6 Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1+6) 30resent value ta)les are required.) Kaers( Ketal Stamping is analy<ing a special investment pro1ect. &'e pro1ect will require t'e purc'ase of two mac'ines for 5+64666 and 5:4666 3)ot' mac'ines are required). &'e total residual value at t'e end of t'e pro1ect is 514/66. &'e pro1ect will generate cas' inflows of 5114666 per year over its :#year life. 8f Kaers( requires a -I return4 w'at is t'e net present value 3=0>) of t'is pro1ect@ A) 5+64+6: $) 5:4++" C) 5"4./) 5;4./+ Answer: E,planation: ) Hear3s) Amount Facctor 0resent value 8nitial investment in equipment Additional equipment needed Annual net cas' inflow %esidual value =et present value
=ow =ow 1 to : :
53+64666) 53:4666) 5114666 51./66
1.666 1.666 .."1" 6.2.2
53+64666) 53:4666) 5.-4++" 5141"1 5;4./+
iff: + L!: 1"#. E!C: 01"#/; AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 1+1) 30resent value ta)les are required.) Figgey4 a plastics processor4 is considering t'e purc'ase of a 'ig'#speed e,truder as one option. &'e new e,truder would cost 5/"4666 and would 'ave a residual value of 5/4666 at t'e end of its : year life. &'e annual operating e,penses of t'e new e,truder would )e 5:4666. &'e ot'er option t'at Figgey 'as is to re)uild its e,isting e,truder. &'e re)uilding would require an investment of 5+64666 and would e,tend t'e life of t'e e,isting e,truder )y : years. &'e e,isting e,truder 'as annual operating costs of 5114666 per year and does not 'ave a residual value. Figgey discount rate is 1.I. *sing net present value analysis4 w'ic' option is t'e )etter option and )y 'ow muc'@ A) $etter )y 5:46:+ to re)uild e,isting e,truder $) $etter )y 5:46:+ to purc'ase new e,truder C) $etter )y 5-4+": to re)uild e,isting e,truder ) $etter )y 5-4+": to purc'ase new e,truder Answer: C iff: + L!: 1"#. E!C: 01"#/; AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 1+") 30resent value ta)les are required.) &'e Speedy# elivery Company 'as two options for its delivery truc(. &'e first option is to purc'ase a new truc( for 51/4666. &'e new truc( will 'ave a useful life of / years and a residual value of 5"4666. !perating costs for t'e new truc( will )e 5"66. &'e second option is to over'aul its e,isting truc(. &'e cost of t'e over'aul will )e 5:4666. &'e over'auled truc( will 'ave a useful life of / years and a residual value of 56. !perating costs for t'e over'auled truc( will )e 5-66. *sing SpeedyAs discount rate of /I4 w'ic' option is )etter and )y w'at amount@ A) $etter to over'aul )y 5+4266 $) $etter to purc'ase new )y 5+4266
C) $etter to over'aul )y 5/41.. ) $etter to purc'ase new )y 5/41.. Answer: A E,planation: A)
iff: + L!: 1"#. E!C: 01"#/; AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
/" Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1++) 30resent value ta)les are required.) 8nterior 0roducts4 8nc. is evaluating t'e purc'ase of a new mac'ine to use in its manufacturing process. &'e new mac'ine would cost 5.14666 and 'ave a useful life of - years. At t'e end of t'e mac'ineAs life4 it would 'ave a residual value of 5"4/66. Annual cost savings from t'e new mac'ine would )e 51"4.66 per year for eac' of t'e si, years of its life. 8nterior 0roducts4 8nc. 'as a minimum required rate of return of 1-I on all new pro1ects. &'e net present value of t'e new mac'ine would )e closest to A) 5+4--;. $) 5/421;. C) 5.4-;.. ) 5.-421;. Answer: $ E,planation: $) Cost of Equipment 5#.14666 %esidual value "4/66 0> 1-I - yrs 6..16 146"/ Annual E,pense 1"4.66 0FA 1-I - yrs +.-:/ ./4-;. &otal /421; iff: + L!: 1"#. E!C: 01"#/; AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 1+.) 30resent value ta)les are required.) ?estin Kanufacturing is considering t'e purc'ase of a new mac'ine to use in its pac(ing department. &'e new mac'ine will 'ave an initial cost of 512646664 a useful life of 1" years and a 5164666 residual value. ?estin will reali<e 51/42/6 in annual savings for eac' of t'e mac'ineAs 1"#year useful life. Fiven ?estinAs .I required rate of return4 t'e new mac'ine will 'ave a net present value 3=0>) of A) 35":4.+-). $) 351/4;+-). C) 351/.46-.). ) 35""41:-). Answer: $
E,planation: $) iff: + L!: 1"#. E!C: 01"#/; AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
/+ Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1+/) 30resent value ta)les are required.) Cal)y Enterprises is evaluating t'e purc'ase of a new computer networ( system. &'e new system would cost 5"/4666 and 'ave a useful life of - years. At t'e end of t'e systemAs life4 it would 'ave a residual value of 5+4666. Annual operating cost savings from t'e new system would )e 5:4:66 per year for eac' of t'e si, years of its life. Cal)y Enterprises 'as a minimum required rate of return of 1"I on all new pro1ects. &'e net present value of t'e new networ( system would )e closest to A) 5;4-/-. $) 51"4-;:. C) 5114122. ) 5+24-;:. Answer: $ iff: + L!: 1"#. E!C: 01"#/; AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 1+-) 30resent value ta)les are required.) Larpets 8ndustries is investing in a new 'ig'#speed loom for weaving its rugs and carpets. &'e new loom will 'ave a useful life of 2 years and cost 5:64666. &'e loomAs residual value is 5/4666. Assume t'at Larpets requires a return of 16I and t'at t'e loom will create annual cost savings of 51-4"/6. ?'at is t'e net present value 3=0>) of t'e new loom@ A) 514-26 $) 35+4.-6) C) 5:14-26 ) 35:;/) Answer: A E,planation: A)
iff: + L!: 1"#. E!C: 01"#/; AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
/. Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1+2) 30resent value ta)les are required.) %enfroe Corporation is considering t'e purc'ase of a mac'ine t'at would cost 5""421" and would 'ave a useful life of / years. &'e mac'ine would generate 5-4+66 of net annual cas' inflows per year for eac' of t'e / years of its life. &'e internal rate of return on t'e mac'ine would )e closest to A) :I. $) 16I. C) 1"I. ) 1.I. Answer: C E,planation: C) Costs 5""421"D-4+66 net cas' flow J +.-6/ Closest F>A J R1".66I iff: + L!: 1"#. E!C: 01"#/; AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 1+:) 30resent value ta)les are required.) 9incapie Kanufacturing evaluating investing in a new metal stamping mac'ine costing 5+64;".. 9incapie estimates t'at it will reali<e 51"4666 in annual cas' inflows for eac' year of t'e mac'ineAs +#year useful life. &'e internal rate of return 38%%) for t'e mac'ine is appro,imately A) :I. $) 16I. C) /I. ) -I. Answer: A E,planation: A) Costs 5+64;".D1"4666 net cas' flow J "./22 Closest F>A for + years J :I iff: + L!: 1"#. E!C: 01"#/; AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
// Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1+;) 30resent value ta)les are required.) Currence Corporation is considering t'e purc'ase of a special )low# molding mac'ine t'at would cost 5/;42/" and would 'ave a useful life of : years. &'e mac'ine would generate 5114"66 of net annual cas' inflows per year for eac' of t'e : years of its life. &'e internal rate of return on t'e mac'ine would )e closest to A) :I. $) 16I. C) 1"I. ) 1.I. Answer: $ E,planation: $) Costs 5/;42/"D114"66 net cas' flow J /.++/ Closest F>A J R16.66 I iff: + L!: 1"#. E!C: 01"#/: AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 1.6) 30resent value ta)les are required.) >ino ?inery is considering t'e purc'ase of a state#of#t'e#art )ottling mac'ine. &'e new mac'ine will cost 5":4"/6 and will 'ave a useful life of 16 years. &'e new mac'ine will provide net cas' savings of 5/4666 per year. ?'at is t'e internal rate of return 38%%) for t'e new )ottling mac'ine@ A) :I $) 16I C) 1"I ) 1.I Answer: C E,planation: C) Costs 5":4"/6D/4666 net cas' flow J /.-/ Closest F>A J R1".66 I iff: + L!: 1"#. E!C: 01"#/: AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
/Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1.1) 30resent value ta)les are required.) Lenardi Corporation is evaluating t'e purc'ase of a new mac'ine t'at would 'ave an initial cost of 51"/4666. &'is new mac'ine would 'ave a profita)ility inde, of 1."/. &'e companyAs discount rate is 1"I. ?'at is t'e present value of t'e net cas' inflows of t'e new mac'ine pro1ect@ A) 51/4666 $) 51/-4"/6 C) 51664666 ) 5146.14--2 Answer: $ E,planation: $) Costs 1"/4666 N 1."/ 0rofita)ility inde, J 1/-4"/6 iff: + L!: 1"#. E!C: 01"#/: AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 1.") Senseman Company 'as t'ree potential pro1ects from w'ic' to c'oose. Selected information on eac' of t'e t'ree pro1ects follows: 0ro1ect A 5 ."4/66 5 ./4266 0ro1ect $ 5 /-4666 5 2/4.66 0ro1ect C 5 /+4266 5 264"66
8nvestment required =et present value of pro1ect
*sing t'e profita)ility inde,4 ran( t'e pro1ects from most profita)le to least profita)le. A) A4 $4 C $) C4 $4 A C) $4 A4 C ) $4 C4 A Answer: iff: + L!: 1"#. E!C: 01"#/; AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
1.+) Silver Creations is evaluating a pro1ect t'at would require an initial investment of 5+-4666. &'e present value of t'e net cas' inflows associated wit' t'is pro1ect would )e 5.+4"66. &'e profita)ility inde, for t'is pro1ect would )e closest to A) 6.:+. $) 1."6. C) 6."6. ) /.66. Answer: $ E,planation: $) =et cas' inflows 5.+4"66D+-4666 8nvest. J 1."6 iff: + L!: 1"#. E!C: 01"#/; AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment 1..) 30resent value ta)les are needed.) Cleveland Cove Enterprises is evaluating t'e purc'ase of an ela)orate 'ydraulic lift system for all of its locations to use for t'e )oats )roug't in for repair. &'e company 'as narrowed t'eir c'oices down to twoSt'e $1. Kodel and t'e F/. Kodel. Financial data a)out t'e two c'oices follows. B1' Model 5 +"64666 : 5 264666 5 +64666 Straig't#line 1.I &(' Model 5 ".64666 : 5 +/4666 5 164666 Straig't#line 16I
?'at is t'e total present value of future cas' inflows from t'e F/. Kodel@ A) 53.:4-6/) $) 51:-42"/ C) 51;14+;/ ) 51-246+/ Answer: C iff: + L!: 1"#. E!C: E1"#"1 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
/: Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1./) 30resent value ta)les are needed.) Cleveland Cove Enterprises is evaluating t'e purc'ase of an ela)orate 'ydraulic lift system for all of its locations to use for t'e )oats )roug't in for repair. &'e company 'as narrowed t'eir c'oices down to two: t'e $1. Kodel and t'e F/. Kodel. Financial data a)out t'e two c'oices follows. B1' Model 5 +"64666 : 5 264666 5 +64666 Straig't#line 1.I &(' Model 5 ".64666 : 5 +/4666 5 164666 Straig't#line 16I
?'at is t'e total present value of future cas' inflows from t'e $1. Kodel@ A) 51/4"-6 $) 5++/4"-6 C) 5+:+4;:6 ) 51;14+;/ Answer: $ iff: " L!: 1"#. E!C: E1"#"1 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
/; Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1.-) 30resent value ta)les are needed.) Cleveland Cove Enterprises is evaluating t'e purc'ase of an ela)orate 'ydraulic lift system for all of its locations to use for t'e )oats )roug't in for repair. &'e company 'as narrowed t'eir c'oices down to two: t'e $1. Kodel and t'e F/. Kodel. Financial data a)out t'e two c'oices follows. B1' Model 5 +"64666 : 5 264666 5 +64666 Straig't#line 1.I &(' Model 5 ".64666 : 5 +/4666 5 164666 Straig't#line 16I
?'at is t'e net present value of t'e F/. Kodel@ A) 51/4"-6 positive $) 5.:4-6/ negative C) 51;14+;/ positive ) 51/-4+;/ positive Answer: $ iff: " L!: 1"#. E!C: E1"#"1 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
-6 Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1.2) 30resent value ta)les are needed.) Cleveland Cove Enterprises is evaluating t'e purc'ase of an ela)orate 'ydraulic lift system for all of its locations to use for t'e )oats )roug't in for repair. &'e company 'as narrowed t'eir c'oices down to two: t'e $1. Kodel and t'e F/. Kodel. Financial data a)out t'e two c'oices follows. B1' Model 5 +"64666 : 5 264666 5 +64666 Straig't#line 1.I &(' Model 5 ".64666 : 5 +/4666 5 164666 Straig't#line 16I
?'at is t'e net present value of t'e $1. Kodel@ A) 51/4"-6 positive $) 5.:4-6/ negative C) 5/4:66 negative ) 5++/4"-6 positive Answer: A iff: " L!: 1"#. E!C: E1"#"1 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
1.:) 30resent value ta)les are needed.) Cleveland Cove Enterprises is evaluating t'e purc'ase of an ela)orate 'ydraulic lift system for all of its locations to use for t'e )oats )roug't in for repair. &'e company 'as narrowed t'eir c'oices down to two: t'e $1. Kodel and t'e F/. Kodel. Financial data a)out t'e two c'oices follows. B1' Model 5 +"64666 : 5 264666 5 +64666 Straig't#line 1.I &(' Model 5 ".64666 : 5 +/4666 5 164666 Straig't#line 16I
*sing t'e net present value model4 w'ic' alternative s'ould t'e company select@ A) =eit'er investment s'ould )e selected. $) &'e F/. Kodel s'ould )e selected. C) $ot' investments s'ould )e selected. ) &'e $1. Kodel s'ould )e selected. Answer: iff: " L!: 1"#. E!C: E1"#"1 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
-" Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1.;) 30resent value ta)les are needed.) &'e Oanus >ending Kac'ine Company is loo(ing to e,pand its )usiness )y adding a new line of vending mac'ines. &'e management team is considering e,panding into eit'er soda mac'ines or snac( mac'ines. Following is t'e relevant financial data relating to t'e decision: Soda Kac'ines Snac( Kac'ines 52/4666 5/64666 / 16 5+64666 51:4666 5+64666 5164666 straig't#line straig't#line :I 1"I
?'at is t'e present value of all future cas' inflows from t'e snac( mac'ines@ A) 51614266 $) 516.4;"6 C) 52/46;. ) 5/.4;"6 Answer: $ E,planation: $) Estimated annual net cas' inflows for useful life 0resent value of an annuity factor Cas' flow present value %esidual value 0resent value of 51 factor %esidual value present value Cas' flow present value %esidual value present value 0resent value of future cas' inflows from Snac( Kac'ine iff: + L!: 1"#. E!C: E1"#"1 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
51:4666 51614266 5164666 5+4""6 5164666
-+ Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1/6) 30resent value ta)les are needed.) &'e Oanus >ending Kac'ine Company is loo(ing to e,pand its )usiness )y adding a new line of vending mac'ines. &'e management team is considering e,panding into eit'er soda mac'ines or snac( mac'ines. Following is t'e relevant financial data relating to t'e decision: Soda Kac'ines Snac( Kac'ines 52/4666 5/64666 / 16 5+64666 51:4666 5+64666 5164666 straig't#line straig't#line :I 1"I
?'at is t'e total present value of future cas' inflows from t'e soda mac'ines@ A) 51:;4;+6 $) 516.4;"6 C) 5-"4""6 ) 51.64""6 Answer: E,planation: ) Estimated annual net cas' inflows for useful life 5+64666 0resent value of an annuity factor +.;;+ Cas' flow present value 511;42;6 %esidual value 0resent value of 51 factor %esidual value present value Cas' flow present value %esidual value present value 0resent value of future cas' inflows from Soda mac'ine 5+64666 6.-:1 5"64.+6 511;42;6 5"64.+6 51.64""6
iff: " L!: 1"#. E!C: E1"#"1 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
-. Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1/1) 30resent value ta)les are needed.) &'e Oanus >ending Kac'ine Company is loo(ing to e,pand its )usiness )y adding a new line of vending mac'ines. &'e management team is considering e,panding into eit'er soda mac'ines or snac( mac'ines. Following is t'e relevant financial data relating to t'e decision: Soda Kac'ines Snac( Kac'ines 52/4666 5/64666 / 16 5+64666 51:4666 5+64666 5164666 straig't#line straig't#line :I 1"I
8nvestment *seful life 3years) Estimated annual net cas' inflows for useful life %esidual value epreciation met'od %equired rate of return ?'at is t'e net present value for t'e snac( mac'ines@ A) 53-/4""6) $) 516.4;"6 C) 5/.4;"6 ) 5:-4;"6 Answer: C E,planation: C) Estimated annual net cas' inflows for useful life 0resent value of an annuity factor Cas' flow present value %esidual value 0resent value of 51 factor %esidual value present value Cas' flow present value %esidual value present value 8nvestment =et present value for Snac( Kac'ine
51:4666 51614266 5164666 5+4""6 51614266 5+4""6
-/ Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1/") 30resent value ta)les are needed.) &'e Oanus >ending Kac'ine Company is loo(ing to e,pand its )usiness )y adding a new line of vending mac'ines. &'e management team is considering e,panding into eit'er soda mac'ines or snac( mac'ines. Following is t'e relevant financial data relating to t'e decision: Soda Kac'ines Snac( Kac'ines 52/4666 5/64666 / 16 5+64666 51:4666 5+64666 5164666 straig't#line straig't#line :I 1"I
8nvestment *seful life 3years) Estimated annual net cas' inflows for useful life %esidual value epreciation met'od %equired rate of return ?'at is t'e net present value for t'e soda mac'ines@ A) 531.64""6) $) 5".4+-6 C) 5-/4""6 ) 5/.4;"6 Answer: C E,planation: C) Estimated annual net cas' inflows for useful life 0resent value of an annuity factor Cas' flow present value %esidual value 0resent value of 51 factor %esidual value present value Cas' flow present value %esidual value present value 8nvestment =et present value for Soda Kac'ine
5+64666 511;42;6 5+64666 5"64.+6 511;42;6 5"64.+6
-Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1/+) 30resent value ta)les are needed.) &'e Oanus >ending Kac'ine Company is loo(ing to e,pand its )usiness )y adding a new line of vending mac'ines. &'e management team is considering e,panding into eit'er soda mac'ines or snac( mac'ines. Following is t'e relevant financial data relating to t'e decision: Soda Kac'ines Snac( Kac'ines 52/4666 5/64666 / 16 5+64666 51:4666 5+64666 5164666 straig't#line straig't#line :I 1"I
*sing t'e net present value model4 w'ic' alternative s'ould Oanus >ending Kac'ine Company select@ A) &'e snac( mac'ines s'ould )e selected. $) &'e soda mac'ines s'ould )e selected. C) $ot' investments s'ould )e selected. ) =eit'er investment s'ould )e selected. Answer: $ E,planation: $) ecision %ule: =0> Soda 3-/4""6) R =0> snac( 3/.4;"6) iff: " L!: 1"#. E!C: E1"#"1 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
1/.) 30resent value ta)les are needed.) Somerville Corporation is considering investing in speciali<ed equipment costing 5-1:4666. &'e equipment 'as a useful life of / years and a residual value of 5//4666. epreciation is calculated using t'e straig't#line met'od. &'e e,pected net cas' inflows from t'e investment are: Hear 1 Hear " Hear + Hear . Hear / 5 "/64666 5 1;64666 5 1/"4666 5 11"4666 5 ;/4666 5 2;;4666
Somerville CorporationAs required rate of return is 1.I. &'e net present value of t'e investment is closest to A) 5-"4;2- negative. $) 5/4::- negative. C) 5+.4.+1 negative. ) 51:14666 positive. Answer: $ iff: " L!: 1"#. E!C: E1"#": AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
-: Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1//) 30resent value ta)les are needed.) Somerville Corporation is considering investing in speciali<ed equipment costing 5-1:4666. &'e equipment 'as a useful life of / years and a residual value of 5//4666. epreciation is calculated using t'e straig't#line met'od. &'e e,pected net cas' inflows from t'e investment are: Hear 1 Hear " Hear + Hear . Hear / 5 "/64666 5 1;64666 5 1/"4666 5 11"4666 5 ;/4666 5 2;;4666
Somerville CorporationAs required rate of return is 1.I. 8s t'e internal rate of return of t'e investment equal to4 'ig'er t'an4 or lower t'an 1.I@ A) Equal to 1.I $) 9ig'er t'an 1.I C) Lower t'an 1.I ) Cannot )e determined from t'e given data Answer: C iff: " L!: 1"#. E!C: E1"#": AACS$: Analytical &'in(ing Learning !utcome: Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment
-; Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1/-) 30resent value ta)les are needed.) Kul'eim Corporation is deciding w'et'er to automate one p'ase of its production process. &'e equipment 'as a si,#year life and will cost 5.164666. 0ro1ected net cas' inflows from t'e equipment are as follows: Hear 1 Hear " Hear + Hear . Hear / Hear 5 1"64666 5 1664666 5 1164666 5 1664666 5 ;/4666 5 ;64666
Kul'eim CorporationAs 'urdle rate is 1"I. Assume t'e residual value is <ero. ?'at is t'e net present value of t'e equipment@ A) 531:4"2/) $) 5+46.C) 5"64666 ) 51:4"2/ Answer: iff: + L!: 1"#. E!C: E1"#": AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
1/2) 30resent value ta)les are needed.) Kul'eim Corporation is deciding w'et'er to automate one p'ase of its production process. &'e equipment 'as a si,#year life and will cost 5.164666. 0ro1ected net cas' inflows from t'e equipment are as follows: Hear 1 Hear " Hear + Hear . Hear / Hear 5 1"64666 5 1664666 5 1164666 5 1664666 5 ;/4666 5 ;64666
Kul'eim CorporationAs 'urdle rate is 1"I. 8f Kul'eim Corporation decides to refur)is' t'e equipment at a cost of 5-64666 at t'e end of year -4 it could )e used for one more year and would 'ave a 5+64666 residual value at t'e end of year 2. Assume t'e cas' inflow in year 2 is 5-/4666. ?'at is t'e =0> of 1ust t'e refur)is'ment@ A) 35146.6) $) 51"4/"6 C) 51/4:"6 ) 5.-4".6 Answer: $ E,planation: $) 8nvestment 3end year -) 5 -64666 0resent value of 514 nJ- rJ1"I 6./62 0resent value of investment # Hear 5 +64."6 Cas' inflow # Hear 2 0resent value of 514 nJ2 rJ1"I 0resent value cas' flows # Hear 2 %esidual value # Hear 2 0resent value of 514 nJ2 rJ1"I 0resent value of residual value # Hear 2 5 -/4666 6../" 5 ";4+:6 5 +64666 6../" 5 1+4/-6
0resent value of investment # Hear 0resent value cas' flows # Hear 2 0resent value of residual value # Hear 2 =et present value of refur)is'ment
5 3+64."6) 5 ";4+:6 5 1+4/-6 5 1"4/"6
iff: + L!: 1"#. E!C: E1"#": AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment. 1/:) 30resent value ta)les are needed.) !AKally epartment Stores is considering two possi)le e,pansion plans. !ne proposal involves opening / stores in 8ndiana at t'e cost of 514;"64666. *nder t'e ot'er proposal4 t'e company would focus on Lentuc(y and open - stores at a cost of 5"4/664666. &'e following information is availa)le:
8ndiana proposal Lentuc(y proposal 514;"64666 5"4/664666 16 years 16 years 5/64666 5:64666 5.664666 5/664666 16I 16I
&'e net present value of t'e 8ndiana proposal is closest to A) 5/+:4666. $) 5//24+66. C) 5.-14-/6. ) 5141214:66. Answer: $ E,planation: $) Cas' flow 5.664666 N 30>A 16yr Q 16I) -.1./ J "4./:4666 %esidual /64666 N 30> 16 yr Q 16I) .+:- J 1;4+66 Less Cost #14;"64666 =0> //24+66 iff: " L!: 1"#. E!C: E1"#"AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
2" Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1/;) 30resent value ta)les are needed.) !AKally epartment Stores is considering two possi)le e,pansion plans. !ne proposal involves opening / stores in 8ndiana at t'e cost of 514;"64666. *nder t'e ot'er proposal4 t'e company would focus on Lentuc(y and open - stores at a cost of 5"4/664666. &'e following information is availa)le: 8ndiana proposal Lentuc(y proposal 514;"64666 5"4/664666 16 years 16 years 5/64666 5:64666 5.664666 5/664666 16I 16I
&'e net present value of t'e Lentuc(y proposal is closest to A) 5//24+66. $) 5/2"4/66. C) 5-6+4+:6. ) 5-:.4-66. Answer: C E,planation: C) Cas' flow 5/664666 N 30>A 16yr Q 16I) -.1./ J +462"4/66 %esidual :64666 N 30> 16 yr Q 16I) .+:- J +64::6 Less Cost #"4/664666 =0> -6+4+:6 iff: " L!: 1"#. E!C: E1"#"AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
2+ Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1-6) 30resent value ta)les are needed.) Family Fun 0ar( is evaluating t'e purc'ase of a new game to )e located on its Kidway. Family Fun 'as narrowed t'eir c'oices down to two: t'e ?ac(y ?ater %ace game and t'e ?'ac(#A# Kole game. Financial data a)out t'e two c'oices follows. ?ac(y ?ater %ace 5 +"4666 / 5 :4666 5 "4666 straig't#line :I ?'ac(#A# Kole 5 ""4666 / 5 -4666 5 14666 straig't#line 16I
8nvestment *seful life Estimated annual net cas' inflows for / years %esidual value epreciation met'od %equired rate of return
?'at is t'e total present value of future cas' inflows from t'e ?'ac(#A#Kole game@ A) 5""42.$) 5".4/2; C) 5"+4+-2 ) 5./4+-2 Answer: C E,planation: C) Cas' flow 5 -4666 N 30>A /yr Q 16I) +.2;1 J ""42.%esidual 14666 N 30> / yr Q 16I) .-"1 J -"1 &otal "+4+-2 iff: + L!: 1"#. E!C: E1"#"AACS$: Analytical &'in(ing Learning !utcome: iscuss standard costing and variance analysis. iscuss and calculate direct material4 direct la)or and over'ead variances.
2. Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1-1) 30resent value ta)les are needed.) Family Fun 0ar( is evaluating t'e purc'ase of a new game to )e located on its Kidway. Family Fun 'as narrowed t'eir c'oices down to two: t'e ?ac(y ?ater %ace game and t'e ?'ac(#A# Kole game. Financial data a)out t'e two c'oices follows. ?ac(y ?ater %ace 5 +"4666 / 5 :4666 5 "4666 straig't#line :I ?'ac(#A# Kole 5 ""4666 / 5 -4666 5 14666 straig't#line 16I
?'at is t'e total present value of future cas' inflows from t'e ?ac(y ?ater %ace game@ A) 514+6$) 5"+4+-2 C) 5++4+6) 5+14-;6 Answer: C E,planation: C) Cas' flow 5 :4666 , 30>A /yr Q :I) +.;;+ J +14;.. %esidual "4666 , 30> / yr Q :I) .-:1 J 14+-" &otal ++4+6iff: " L!: 1"#. E!C: E1"#"AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
2/ Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1-") 30resent value ta)les are needed.) Family Fun 0ar( is evaluating t'e purc'ase of a new game to )e located on its Kidway. Family Fun 'as narrowed t'eir c'oices down to two: t'e ?ac(y ?ater %ace game and t'e ?'ac(#A# Kole game. Financial data a)out t'e two c'oices follows. ?ac(y ?ater %ace 5 +"4666 / 5 :4666 5 "4666 straig't#line :I ?'ac(#A# Kole 5 ""4666 / 5 -4666 5 14666 straig't#line 16I
?'at is t'e net present value of t'e ?'ac(#A#Kole game@ A) 514+-2 $) 35/-) C) 5/) 3514+-2) Answer: A E,planation: A) Cas' flow 5 -4666 N 30>A /yr Q 16I) +.2;1 J ""42.%esidual 14666 N 30> / yr Q 16I) -"1 J -"1 &otal "+4+-2 Cost #""4666 =0> 14+-2 iff: " L!: 1"#. E!C: E1"#"AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
2Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1-+) 30resent value ta)les are needed.) Family Fun 0ar( is evaluating t'e purc'ase of a new game to )e located on its Kidway. Family Fun 'as narrowed t'eir c'oices down to two: t'e ?ac(y ?ater %ace game and t'e ?'ac(#A# Kole game. Financial data a)out t'e two c'oices follows. ?ac(y ?ater %ace 5 +"4666 / 5 :4666 5 "4666 straig't#line :I ?'ac(#A# Kole 5 ""4666 / 5 -4666 5 14666 straig't#line 16I
?'at is t'e net present value of t'e ?ac(y ?ater %ace game@ A) 532.-) $) 5314+6-) C) 514+6) 52.Answer: C E,planation: C) Cas' flow 5 :4666 N 30>A /yr Q :I ) +.;;+ J +14;.. %esidual "4666 N 30> / yr Q :I ) .-:1 J 14+-" &otal ++4+6Cost #+"4666 =0> 14+6iff: " L!: 1"#. E!C: E1"#"AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
1-.) 30resent value ta)les are needed.) Family Fun 0ar( is evaluating t'e purc'ase of a new game to )e located on its Kidway. Family Fun 'as narrowed t'eir c'oices down to two: t'e ?ac(y ?ater %ace game and t'e ?'ac(#A# Kole game. Financial data a)out t'e two c'oices follows. ?ac(y ?ater %ace 5 +"4666 / 5 :4666 5 "4666 straig't#line :I ?'ac(#A# Kole 5 ""4666 / 5 -4666 5 14666 straig't#line 16I
*sing t'e net present value model4 w'ic' alternative3s) s'ould Family Fun 0ar( select@ A) &'e ?ac(y ?ater %ace game s'ould )e selected. $) =eit'er investment s'ould )e selected. C) $ot' investments s'ould )e selected. ) &'e ?'ac(#A#Kole game s'ould )e selected. Answer: iff: " L!: 1"#. E!C: E1"#"AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment. 1-/) 8cy 0ea(s Sports ma(es snow)oards. &'e company wants to add a new mac'ine t'at would cost 5:64666 and 'ave a useful life of / years and no residual value. &'e company e,pects t'e mac'ine will generate 5".4666 annual cas' inflows for / years. &'e discount rate is 16I. ?'at is t'e net present value of t'e investment@ Answer: 35".4666 N +.2;1) # 5:64666 J 5164;:. iff: " L!: 1"#. E!C: E1"#"2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
2: Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1--) Louise owns a golf course and wants to add some computers to t'e lounge. &'e computers would cost 51.4666 and would 'ave a + year life and no residual value. Louise e,pects t'e computers to generate 5.4666 annual cas' inflows for + years. &'e discount rate is :I. ?'at is t'e net present value of t'e investment@ Answer: 35.4666 N "./22) # 1.4666 J 35+4-;") iff: " L!: 1"#. E!C: E1"#"2 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment. 1-2) Spinelli Company is deciding w'et'er to automate one p'ase of its production process. &'e equipment 'as a si, year life and will cost 5./64666. &'e interest rate is 1"I. =et cas' inflows per year: Hear 1 Hear " Hear + Hear . Hear / Hear 5 :/4666 5 264666 5 ;/4666 5 2/4666 5 :/4666 5 ;-4666
a. ?'at is t'e present value of t'e net inflow for year 1@ ). ?'at is t'e present value of t'e net inflow for year /@ Answer: a. 5:/4666 N .:;+ J 52/4;6/ ). 5:/4666 N ./-2 J 5.:41;/ iff: + L!: 1"#. E!C: E1"#": AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
2; Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1-:) 30resent value ta)les are needed.) Feorgia 0eac' Farms is upgrading its fruit was'ingDseparating mac'ine. Feorgia 'as narrowed t'e decision down to two mac'ines: Kac'ine A and Kac'ine $.0ertinent information for eac' mac'ine follows: Kac'ine A 5./64666 16 52/4666 5"/4666 straig't#line 16I Kac'ine $ 5-/64666 16 51"64666 5+/4666 straig't#line 1"I
%equired: a. Calculate t'e net present value of Kac'ine A. ). Calculate t'e net present value of Kac'ine $. c. *sing t'e net present value met'od4 w'ic' mac'ine s'ould Feorgia select if it can select only one investment@ Answer: #)*+TI), part aEstimated annual net cas' inflows for useful life 0resent value of an annuity factor Cas' flow present value %esidual value 0resent value of 51 factor %esidual value present value Cas' flow present value %esidual value present value 8nvestment =et present value for Kac'ine A #)*+TI), part $Estimated annual net cas' inflows for useful life 0resent value of an annuity factor Cas' flow present value %esidual value 0resent value of 51 factor %esidual value present value Cas' flow present value %esidual value present value 8nvestment =et present value for Kac'ine $ 52/4666 -.1./ 5.-64:2/ 5"/4666 6.+:5;4-/6 5.-64:2/ 5;4-/6 53./64666) 5"64/"/ 51"64666 /.-/6 5-2:4666 5+/4666 6.+"" 5114"26 5-2:4666 5114"26 53-/64666) 5+;4"26
:6 Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
#)*+TI), part c=0> Kac'ine $ 3+;4"26) R =0> Kac'ine A 3"64/"/)P t'erefore select Kac'ine $. iff: + L!: 1"#. E!C: E1"#": AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment. 1-;) 30resent value ta)les are needed.) S'a(er 8nvestments4 a private investment 'olding company4 is searc'ing for a new investment opportunity. S'a(er 8nvestments 'as identified two potential investment opportunities: an upstart fast food c'ain and a growing organic grocery c'ain. 8nformation for eac' investment follows: Fast Food C'ain 5;2/4666 1/ 51"64666 5/64666 straig't#line :I !rganic Frocery C'ain 514/664666 1/ 5"164666 51664666 straig't#line 16I
%equired: a. Calculate t'e net present value of t'e Fast Food C'ain. ). Calculate t'e net present value of t'e !rganic Frocery C'ain. c. *sing t'e net present value met'od4 w'ic' investment s'ould S'a(er select if it can select only one investment@
Answer: S!L*&8!= part a. Estimated annual net cas' inflows for useful life 0resent value of an annuity factor Cas' flow present value %esidual value 0resent value of 51 factor %esidual value present value Cas' flow present value %esidual value present value 8nvestment =et present value for Fast Food C'ain S!L*&8!= part ). Estimated annual net cas' inflows for useful life 0resent value of an annuity factor Cas' flow present value %esidual value 0resent value of 51 factor %esidual value present value Cas' flow present value %esidual value present value 8nvestment =et present value for !rganic Frocery C'ain S!L*&8!= part c.
51"64666 :.//; 5146"246:6 5/64666 6.+1/ 51/42/6 5146"246:6 51/42/6 53;2/4666) 5-24:+6
5"164666 2.-6514/;24"-6 51664666 6."+; 5"+4;66 514/;24"-6 5"+4;66 5314/664666) 51"141-6
=0> !rganic Frocery 31"141-6) R =0> Fast Food 3-24:+6)P t'erefore c'oose !rganic Frocery iff: " L!: 1"#. E!C: E1"#"1 AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
:" Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
126) &'e A%% is t'e only met'od t'at uses accrual accounting figures and t'us ma(ing it important to financial statement users. Answer: &%*E iff: 1 L!: 1"#/ E!C: E1"#+/ AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment. 121) =eit'er t'e pay)ac( period nor t'e 8%% capital )udgeting met'od recogni<es t'e time value of money. Answer: FALSE iff: 1 L!: 1"#/ E!C: E1"#+/ AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment. 12") &'e pay)ac( and accounting rate of return models are conceptually )etter t'an t'e discounted cas' flow models )ecause t'ey are )ased on cas' flows4 and t'ey consider )ot' profita)ility and t'e time value of money. Answer: FALSE iff: " L!: 1"#/ E!C: E1"#+/ AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment. 12+) &'e net present value model differs from t'e 8%% model in t'at it does =!& s'ow t'e pro1ectAs unique rate of return. Answer: &%*E iff: " L!: 1"#/ E!C: E1"#+/ AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
:+ Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
12.) &'e discounted cas' flow met'ods for capital )udgeting are generally considered inferior to t'e pay)ac( period and t'e A%% )ecause t'ey consider t'e time value of money. Answer: FALSE iff: " L!: 1"#/ E!C: E1"#+/ AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment. 12/) &'e 8nternal %ate of %eturn4 t'e Accounting %ate of %eturn4 =et 0resent >alue and 0ay)ac( 0eriod are four recogni<ed capital )udgeting met'ods. Answer: &%*E iff: 1 L!: 1"#/ E!C: E1"#+/ AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment. 12-) Capital )udgeting met'ods will not wor( wit' unequal cas' flows during t'e capital assetAs life. !t'er met'ods must )e utili<ed in t'ose cases. Answer: FALSE iff: " L!: 1"#/ E!C: E1"#+/ AACS$: %eflective &'in(ing Learning !utcome: iscuss standard costing and variance analysis. iscuss and calculate direct material4 direct la)or and over'ead variances. 122) Capital )udgeting tec'niques suc' as pay)ac( met'od and net present value are )ased upon Fenerally Accepted Accounting 0rinciples 3FAA0) and accrual accounting. Answer: FALSE iff: 1 L!: 1"#/ E!C: E1"#+/ AACS$: %eflective &'in(ing Learning !utcome: iscuss standard costing and variance analysis. iscuss and calculate direct material4 direct la)or and over'ead variances.
:. Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
12:) A manager wants to (now w'ic' investment decision will affect t'e )ottom line of t'e financial statements according to Fenerally Accepted Accounting 0rinciples. ?'ic' capital )udgeting met'od would 'e c'oose@ A) 0ay)ac( met'od $) Accounting rate of return met'od C) =et present value met'od ) 0rofita)ility inde, Answer: $ iff: 1 L!: 1"#/ E!C: E1"#+/ AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 12;) A company is evaluating a variety of different capital investment opportunities. ue to limited funds4 t'e company can only c'oose one pro1ect. ?'at would )e t'e )est capital )udgeting met'od for t'is company to use to select a pro1ect@ A) 0ay)ac( met'od $) Accounting rate of return met'od C) 0rofita)ility inde, ) =et present value met'od Answer: C iff: 1 L!: 1"#/ E!C: E1"#+/ AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 1:6) &'e BBBBBBBB capital )udgeting met'od uses accrual accounting income. A) accounting rate of return $) pay)ac( C) net present value ) internal rate of return Answer: A iff: 1 L!: 1"#/ E!C: E1"#+/ AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts
:/ Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1:1) ?'ic' of t'e following is not an advantage of post#audits of capital investments@ A) &'ey indicate w'et'er pro1ect s'ould continue or s'ould )e a)andoned. $) &'ey 'elp managers ma(e )etter estimates for future pro1ects. C) &'ey encourage managers to su)mit realistic net cas' inflows wit' t'eir pro1ect proposals. ) &'ey 'elp managers to decide w'ic' pro1ect s'ould )e selected. Answer: iff: 1 L!: 1"#/ E!C: E1"#+/ AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 1:") &'e BBBBBBBB capital )udgeting model considers )ot' profita)ility and t'e time value of money. A) pay)ac( $) net present value C) accounting rate of return ) $ot' a and c are correct Answer: $ iff: 1 L!: 1"#/ E!C: E1"#+/ AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment. 1:+) &'e BBBBBBBB capital )udgeting model is generally t'e simplest to compute. A) accounting rate of return $) net present value C) internal rate of return ) pay)ac( Answer: iff: 1 L!: 1"#/ E!C: E1"#+/ AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
:Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1:.) ?'ic' of t'e capital )udgeting met'ods is t'e )est@ A) 0ay)ac( period $) =et present value C) 8nternal rate of return ) =o single met'od is )est. Answer: iff: " L!: 1"#/ E!C: E1"#+/ AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment. 1:/) &'e BBBBBBBB capital )udgeting met'ods are )ased on cas' flows4 profita)ility4 and t'e time value of money. A) pay)ac( and accounting rate of return $) pay)ac( and net present value C) net present value and internal rate of return ) accounting rate of return and internal rate of return Answer: C iff: " L!: 1"#/ E!C: E1"#+/ AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment. 1:-) &'e BBBBBBBB is generally considered to )e t'e most superior met'od for ma(ing capital )udgeting decisions. A) accounting rate of return met'od $) net present value met'od C) pay)ac( met'od ) incremental met'od Answer: $ iff: " L!: 1"#/ E!C: E1"#+/ AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
1:2) CKanagementAs minimum desired rate of return on an investmentC is )est descri)ed )y w'ic' of t'e following terms@ A) 0ay)ac( return $) 8nternal rate of return C) iscount rate ) =et present value Answer: C iff: 1 L!: 1"#/ E!C: E1"#+/ AACS$: Analytical &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts 1::) CA measure of profita)ility computed )y dividing t'e average annual operating income )y t'e amount of t'e investmentC is )est descri)ed )y w'ic' of t'e following terms@ A) =et present value $) iscount rate C) 8nternal rate of return ) Accounting rate of return Answer: iff: 1 L!: 1"#/ E!C: E1"#+/ AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment. 1:;) &'e Crate of return t'at ma(es t'e =0> of a capital pro1ect equal to <eroC is )est descri)ed )y w'ic' of t'e following terms@ A) Accounting rate of return $) 8nternal rate of return C) iscount rate ) =et present value Answer: $ iff: 1 L!: 1"#/ E!C: E1"#+/ AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
:: Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all
1;6) &'e Cdecision model t'at computes t'e difference )etween t'e present value of t'e investmentAs net cas' inflows4 using a desired rate of return4 and t'e cost of t'e initial investmentC is )est descri)ed )y w'ic' of t'e following terms@ A) Accounting rate of return $) iscount rate C) =et present value ) 8nternal rate of return Answer: C iff: 1 L!: 1"#/ E!C: E1"#+/ AACS$: %eflective &'in(ing Learning !utcome: iscuss t'e )asics of capital investments and illustrate t'e time value of money concepts. Calculate t'e =0>4 internal rate of return4 pay)ac( period4 and accounting rate of return and use to evaluate a potential investment.
:; Copyrig't 7 "61+ 0earson Education4 8nc. pu)lis'ing as 0rentice 9all

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Managerial Accounting, 3e (Braun/Tietz) Chapter 12 Capital Investment Decisions and the Time Value of Mone

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Savings year ": Savings year +: %esidual value after + yrs

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C) $etter to over'aul )y 5/41.. ) $etter to purc'ase new )y 5/41.. Answer: A E,planation: A)

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8nvestment required =et present value of pro1ect

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