## Transcribed Text

The present value of an annuity of $1 table could be constructed using the factors contained in the present value of
$1 table.
True
False
The instantaneous computation power of spreadsheet software makes it ideal for answering "what-if" questions
regarding present values.
True
False
A dollar to be received in the future is subject to the effects of risk and inflation.
True
False
When a capital investment is expected to provide unequal annual cash inflows, the payback period can be calculated
by accumulating the incremental cash inflows until the sum equals the amount of the original investment.
True
False
An annuity is a series of equal payments over equal time intervals that earn a constant rate of return.
True
False
Capital investments differ from stock and bond investments in that stock and bond investments can be sold in
organized markets.
True
False
A project's net present value can be found by subtracting the cost of the project from the total present value of the
future cash flows generated by the project.
True
False
A postaudit should be performed at the end of a capital investment project to determine whether the expected results
were actually achieved.
True
False
Capital investment decisions involve investments in current assets.
True
False
If a company has to pay a given amount of income taxes over the life of a capital investment, managers of the
company should seek to pay the taxes as early as possible in the investment's life.
True
False
Investment projects A and B offer equal cash inflows over their lives, but the cash inflows for project A occur sooner
than those for project B. The two projects are otherwise identical (the cost is the same, for example) Based on this
information, the internal rate of return for A is lower than for B.
True
False
The cost of capital is sometimes referred to as the hurdle or discount rate.
True
False
A capital investment with an internal rate of return equal to or greater than the required rate of return is considered to
be an acceptable investment.
True
False
The future value of $1 table should be used to discount lump sum cash flows expected to occur in the future.
True
False
Sources of cash inflows from capital investments include incremental expenses and installation costs.
True
False
The time value of money concept recognizes the fact that the present value of a dollar to be received in the future is
worth more than a dollar.
True
False
Generally, the unadjusted rate of return should be calculated based on the average investment rather than the
amount of the original investment in a depreciable asset such as equipment.
True
False
Depreciation on a capital investment (such as equipment) has the effect of decreasing the amount of income taxes
that the company owning the asset must pay.
True
False
Matt needs to compute the present value of $5,000 to be received four years from now. He should multiple $5,000 by
the appropriate present value interest factor obtained from the present value of $1 table.
True
False
The compensation a company receives for investing in capital assets is referred to as a return on investment.
True
False
The unadjusted rate of return is found by dividing the average incremental increase in annual operating income by
the cost of the investment.
True
False
The amount of the depreciation tax shield can be calculated by multiplying the amount of depreciation expense by the
tax rate.
True
False
In performing capital budgeting analysis that takes time value of money into account, cash flows generated by a
capital project are assumed to be reinvested at the project's rate of return.
True
False
The payback method of evaluating capital investments measures the recovery of the investment, but it does not
measure profitability.
True
False
Because of the expense of applying multiple techniques, managers should use a single capital budgeting technique
to analyze potential capital investments.
True
False
The assumption regarding ordinary annuities is that cash flows occur at the end of each period.
True
False
Generally, a company should use the MACRS method to calculate depreciation on its income tax return, due to the
effects of the time value of money.
True
False
Cash inflows from a capital investment may include the terminal value of capital assets and increases in revenues.
True
False
If the net present value for a capital investment is equal to zero, the internal rate of return for the investment is equal
to the required rate of return.
True
False
If a project has a positive net present value, its internal rate of return will exceed the firm's hurdle rate.
True
False
ServicePro provides two kinds of services. During the most recent accounting period,
the two service lines produced the following operating results:
Service 1 Service 2
Service
revenue
$
130,000 $
54,000
Unit-level
materials
$
(30,000)
$
(12,000)
Unit-level
labor
$
(40,000)
$
(24,000)
Productlevel selling
&
administrativ
e costs
$
(20,000)
$
(13,500)
Company
wide facilitylevel costs
$
(8,000)
$
(8,000)
Net income $ 32,000 $ (3,500 )
If the company stops providing Service 2:
The company's income will decrease by $5,500 per year.
The company's income will increase by $5,500 per year.
The company's income will decrease by $4,500 per year.
The company's income will increase by $4,500 per year.
Breezy Company is disposing of equipment that was originally purchased for $440,000 and has $134,000 of
accumulated depreciation to date. The same equipment would cost $560,000 to replace. What is the total amount of
sunk cost?
$306,000
$134,000
$560,000
$440,000
Sea Island Company is trying to decide which one of two alternatives it will accept. The costs and revenues
associated with each alternative are listed below:
Alternative A Alternative B
Projected revenue $160,000 $200,000
Unit-level costs 30,000 41,000
Batch-level costs 17,500 29,000
Product-level costs 20,000 22,000
Facility-level costs 15,000 17,500
What is the differential revenue for this decision?
$160,000
$40,000
$200,000
$65,000
The Clear Music Company produces and sells a desktop speaker for $200. The company has the capacity to produce
60,000 speakers each period. At capacity, the costs assigned to each unit are as follows:
Unit level costs $ 95
Product level costs $ 25
Facility level costs $ 15
The company has received a special order for 11,000 speakers. If this order is accepted, the company will have to
spend $20,000 on additional costs. Assuming that no sales to regular customers will be lost if the order is accepted,
at what selling price will the company be indifferent between accepting and rejecting the special order? (Do not
round intermediate calculations. Round your final answer to 2 decimal places.)
$104.32
$146.82
$96.82
$107.32
Max bought a ticket to the championship baseball game for $150. Someone approaches him outside the stadium and
offers him $325 for his ticket. If Max decides to go to the game, instead of selling his ticket, how much does it cost
Max to go to the game?
$325
$175
$150
None of these
Coronet Company provided the following information related to its inventory sales and purchases for December 2013
and the first quarter of 2014:
Dec. 2013 Jan. 2014 Feb. 2014 Mar. 2014
(Actual) (Budgeted) (Budgeted) (Budgeted)
Cost of goods
sold $34,000 $64,000 $84,000 $54,000
Desired ending inventory levels are 30% of the following month's projected cost of goods sold. Budgeted purchases
of inventory in February 2014 would be:
$96,600.
$82,500.
$63,000.
$75,000.
Homer Company expects credit sales for January to be $43,000. Cash sales are expected to be $23,000. The
company expects credit and cash sales to increase 15% for the month of February. Credit sales are collected in the
month following the month in which sales are made. Based on this information the amount of cash collections in
February would be:
$66,000.
$75,900.
$72,450.
$69,450.
Oak Furniture provided the following information relevant to its sales for December 2013 and the first quarter of 2014:
Dec. 2013 Jan. 2014 Feb. 2014
(Actual) (Budgeted) (Budgeted)
Credit sales $ 54,000 $ 134,000 $ 149,000
Cash sales $ 15,000 $ 19,000 $ 24,000
Based on the company's collection history, 3% of credit sales are uncollectible, 45% are collected in month of sale
and the remainder collected in the following month.
Cash collections in January from December 2013 credit sales would be:
$29,700.
$30,000.
$28,080.
$27,930.
Meredith Company has completed its sales budget for the first quarter of 2014. Projected credit sales for the first four
months of the year are shown below:
January $26,000
February $32,000
March $41,000
April $44,000
The company's past records show collection of credit sales as follows: 26% in the month of sale and the balance in
the following month. The total cash collection from receivables in March is expected to be:
$41,000.
$34,340.
$27,560.
$38,660.
Skyland Company wants an ending inventory each month equal to 22% of that month's cost of goods sold. Cost of
goods sold for February is projected at $91,000. Ending inventory at the end of January was $28,000. Based on this
information, purchases for February would be:
$98,980.
$63,000.
$83,020.
$70,980.
Hansen Company provided the following selected information about its consumer products division for 2012:
Desired ROI 7%
Net Income $263,400
Residual Income $220,000
Based on this information, the division's investment amount (amount of operating assets) was
$620,000.
$6,905,714.
$3,762,857.
$3,142,857.
Johansson Company developed the following static budget at the beginning of the company's accounting period:
Revenue (8,100 units) $16,200
Variable costs 4,050
Contribution margin $12,150
Fixed costs 4,050
Net income $ 8,100
If the actual volume of sales was 8,500 units, the flexible budget would show variable costs of (Do not round
intermediate calculations.):
$8,100.
$17,000
$4,050.
$4,250.
Jamison Company has an investment in assets of $901,000, income that is 10% of sales, and an ROI of 17%. From
this information the amount of income would be:
$153,170.
$63,070.
$90,100.
$243,270
Johanssen Company reported the following information for 2012:
Sales $790,000
Average Operating Assets $378,000
Desired ROI 15%
Residual Income $ 11,400
The company's operating income for 2012 was:
$68,100.
$56,700.
$118,500.
$45,300.
Home Town Grocery has invested in yogurt stands for its stores. The investment cost the company $100,000.
Variable materials, preparation, and marketing costs are expected to be $1.60 a unit and fixed costs are estimated at
$8,000 a year. If actual sales were 22,000 servings, what would the ROI be at a sales price of $2.70? (Round your
final answer to 2 decimal places.)
51.40%
16.20%
24.20%
44.90%
What amount of cash would result at the end of one year, if $18,000 is invested today and the rate of return is
10%? (Do not round your PV factors.)
$18,000
$19,620
$19,800
$16,200
Lane Company is considering purchasing a capital investment that is expected to provide annual cash inflows of
$10,400 per year for 3 years. Assuming that the required rate of return is 6%, what is the present value of these cash
inflows? (Do not round your PV factors and intermediate calculations. Round your final answer to the nearest
dollar.)
$29,434
$26,196
$27,768
$27,799
Henrico Company has two investment opportunities. Both investments cost $6,900 and will provide the same total
future cash inflows. The cash receipt schedule for each investment is given below:
Investment I Investment II
Period 1 $ 1,950 $ 1,950
Period 2 1,950 3,140
Period 3 2,950 4,330
Period 4 5,520 2,950
Total $ 12,370 $ 12,370
The net present value of Investment II assuming an 12% minimum rate of return would be which of the following
amounts? (Do not round your PV factors and intermediate calculations. Round your answer to the nearest
whole dollar.)
$12,370
$2,301
$9,201
$8,903
Mountain Brook Company is considering two investment opportunities whose cash flows are provided below:
Year Investment A Investment B
0 ($16,250) ($10,500)
1 5,450 5,450
2 5,450 4,400
3 5,450 3,550
4 4,400 1,600
The company's hurdle rate is 12%. What is the present value index of Investment B? (Do not round your PV factors
and intermediate calculations. Round your answer to 2 decimal places.)
0.88
1.43
1.13
None of these answers are correct.
An investment that costs $36,000 will produce annual cash flows of $12,040 for a period of 4 years. Given a desired
rate of return of 10%, the investment will generate a (Do not round your PV factors and intermediate
calculations. Round your answer to the nearest whole dollar.):
negative net present value of $38,165.
positive net present value of $38,165.
positive net present value of $2,165.
negative net present value of $2,165.
ServicePro provides two kinds of services. During the most recent accounting period, the two service lines produced
the following operating results:
Service 1 Service 2
Service
revenue
$
170,000 $
77,000
Unit-level
materials
$
(38,000)
$
(20,000)
Unit-level
labor
$
(48,000)
$
(32,000)
Productlevel selling
&
administrativ
e costs
$
(28,000)
$
(21,500)
Company
wide facilitylevel costs
$
(7,000)
$
(7,000)
Net income $ 49,000 $ (3,500)
If the company stops providing Service 2:
The company's income will increase by $3,500 per year.
The company's income will decrease by $4,500 per year.
The company's income will decrease by $3,500 per year.
The company's income will increase by $4,500 per year.
Breezy Company is disposing of equipment that was originally purchased for $410,000 and has $131,000 of
accumulated depreciation to date. The same equipment would cost $530,000 to replace. What is the total amount of
sunk cost?
$131,000
$410,000
$279,000
$530,000
Sea Island Company is trying to decide which one of two alternatives it will accept. The costs and revenues
associated with each alternative are listed below:
Alternative A Alternative B
Projected revenue $235,000 $350,000
Unit-level costs 45,000 56,000
Batch-level costs 32,500 44,000
Product-level costs 35,000 37,000
Facility-level costs 30,000 32,500
What is the differential revenue for this decision?
$350,000
$140,000
$115,000
$235,000
The Clear Music Company produces and sells a desktop speaker for $160. The
company has the capacity to produce 56,000 speakers each period. At capacity, the
costs assigned to each unit are as follows:
Unit level costs $ 75
Product level costs $ 21
Facility level costs $ 11
The company has received a special order for 7,000 speakers. If this order is accepted,
the company will have to spend $16,000 on additional costs. Assuming that no sales to
regular customers will be lost if the order is accepted, at what selling price will the
company be indifferent between accepting and rejecting the special order? (Do not
round intermediate calculations. Round your final answer to 2 decimal places.)
$87.79
$127.29
$77.29
$84.79
Max bought a ticket to the championship baseball game for $180. Someone approaches him outside the stadium and
offers him $385 for his ticket. If Max decides to go to the game, instead of selling his ticket, how much does it cost
Max to go to the game?
$385
$205
$180
None of these.
Coronet Company provided the following information related to its inventory sales and purchases for December 2013
and the first quarter of 2014:
Dec. 2013 Jan. 2014 Feb. 2014 Mar. 2014
(Actual) (Budgeted) (Budgeted) (Budgeted)
Cost of goods
sold $36,000 $66,000 $86,000 $56,000
Desired ending inventory levels are 28% of the following month's projected cost of goods sold. Budgeted purchases
of inventory in February 2014 would be:
$102,240.
$85,100.
$77,600.
$64,400.
Homer Company expects credit sales for January to be $56,000. Cash sales are expected to be $36,000. The
company expects credit and cash sales to increase 10% for the month of February. Credit sales are collected in the
month following the month in which sales are made. Based on this information the amount of cash collections in
February would be:
$95,600.
$97,600.
$101,200.
$92,000.
Oak Furniture provided the following information relevant to its sales for December 2013 and the first quarter of 2014:
Dec. 2013 Jan. 2014 Feb. 2014
(Actual) (Budgeted) (Budgeted)
Credit sales $ 66,000 $ 146,000 $ 161,000
Cash sales $ 16,000 $ 31,000 $ 36,000
Based on the company's collection history, 3% of credit sales are uncollectible, 39% are collected in month of sale
and the remainder collected in the following month.
Cash collections in January from December 2013 credit sales would be:
$38,280.
$40,260.
$54,000.
$51,540.
Meredith Company has completed its sales budget for the first quarter of 2014. Projected credit sales for the first four
months of the year are shown below:
January $26,000
February $32,000
March $41,000
April $44,000
The company's past records show collection of credit sales as follows: 26% in the month of sale and the balance in
the following month. The total cash collection from receivables in March is expected to be:
$41,000.
$34,340.
$27,560.
$38,660
Skyland Company wants an ending inventory each month equal to 25% of that month's cost of goods sold. Cost of
goods sold for February is projected at $90,000. Ending inventory at the end of January was $18,000. Based on this
information, purchases for February would be:
$94,500.
$67,500.
$85,500.
$72,000.
Hansen Company provided the following selected information about its consumer products division for 2012:
Desired ROI 6%
Net Income $342,000
Residual Income $300,000
Based on this information, the division's investment amount (amount of operating assets) was
$5,700,000.
$700,000.
$5,000,000.
$10,700,000.
Johansson Company developed the following static budget at the beginning of the company's accounting period:
Revenue (9,400 units) $18,800
Variable costs 4,700
Contribution margin $14,100
Fixed costs 4,700
Net income $ 9,400
If the actual volume of sales was 9,800 units, the flexible budget would show variable costs of (Do not round
intermediate calculations.):
$19,600
$4,700.
$4,900.
$9,400.
Jamison Company has an investment in assets of $1,008,000, income that is 10% of sales, and an ROI of 18%. From
this information the amount of income would be:
$181,440.
$80,640.
$100,800.
$282,240
Johanssen Company reported the following information for 2012:
Sales $793,000
Average Operating Assets $381,000
Desired ROI 12%
Residual Income $ 11,550
The company's operating income for 2012 was:
$95,160.
$57,270.
$45,720.
$34,170
Home Town Grocery has invested in yogurt stands for its stores. The investment cost the company $100,000.
Variable materials, preparation, and marketing costs are expected to be $1.60 a unit and fixed costs are estimated at
$8,000 a year. If actual sales were 22,000 servings, what would the ROI be at a sales price of $2.70? (Round your
final answer to 2 decimal places.)
16.20%
51.40%
44.90%
24.20%
What amount of cash would result at the end of one year, if $15,000 is invested today and the
rate of return is 8%? (Do not round your PV factors.)
$15,000
$16,050
$16,200
$13,800
Lane Company is considering purchasing a capital investment that is expected to provide annual cash inflows of
$10,200 per year for 3 years. Assuming that the required rate of return is 7%, what is the present value of these cash
inflows? (Do not round your PV factors and intermediate calculations. Round your final answer to the nearest
dollar.)
$26,768
$26,727
$24,979
$28,598
Henrico Company has two investment opportunities. Both investments cost $5,000 and
will provide the same total future cash inflows. The cash receipt schedule for each
investment is given below:
Investment I Investment II
Period 1 $ 1,000 $ 1,000
Period 2 1,000 2,000
Period 3 2,000 3,000
Period 4 4,000 2,000
Total $ 8,000 $ 8,000
The net present value of Investment II assuming an 10% minimum rate of return would
be which of the following amounts? (Do not round your PV factors and intermediate
calculations. Round your answer to the nearest whole dollar.)
$3,415
$1,182
$4,425
$6,182
Mountain Brook Company is considering two investment opportunities whose cash flows are provided below:
Year Investment A Investment B
0 ($17,250) ($11,700)
1 5,810 5,810
2 5,810 4,720
3 5,810 3,990
4 4,720 2,080
The company's hurdle rate is 8%. What is the present value index of Investment B? (Do not round your PV factors
and intermediate calculations. Round your answer to 2 decimal places.)
0.83
1.42
1.21
None of these answers are correct.
An investment that costs $39,500 will produce annual cash flows of $13,230 for a period of 4 years. Given a desired
rate of return of 7%, the investment will generate a (Do not round your PV factors and intermediate calculations.
Round your answer to the nearest whole dollar.):
negative net present value of $44,813.
positive net present value of $5,313.
negative net present value of $5,313.
positive net present value of $44,813.