Question 1

As part of the capital budgeting process, capital expenditure analysis attempts to determine the impact of a proposed capital expenditure on the organization's:
A)short-term decision making strategy.
B)contribution margin.
C)ROI.
D)cost of capital.

Accepted Answer

Capital expenditure analysis in capital budgeting primarily focuses on assessing the impact of a proposed investment on the organization's Return on Investment (ROI), as it evaluates the potential profitability and efficiency of the investment.

Question 2

For most firms, the cost of capital is probably in the range of:
A)the prime rate, plus or minus 2 percentage points.
B)less than 10%.
C)between 10% and 20%.
D)more than 20%.

Accepted Answer

The cost of capital for most firms typically falls between 10% and 20%, reflecting the average return required by investors and the risk associated with the firm's operations.

Question 3

________ costs are not relevant in a decision to continue or discontinue a segment of the organization.
A)Avoidable
B)Unavoidable
C)Opportunity
D)Differential

Accepted Answer

Unavoidable costs are not relevant in a decision to continue or discontinue a segment of the organization because they will be incurred regardless of the decision made.

Question 4

The profitability index of a proposed investment project will be:
A)equal to 1.0 if the net present value is positive.
B)negative if the proposed investment meets the cost of capital target.
C)less than 1.0 if the net present value is negative.
D)greater than 1.0 if the cost of capital exceeds the internal rate of return.

Accepted Answer

The profitability index is less than 1.0 when the net present value is negative, indicating that the present value of future cash flows is less than the initial investment.

Question 5

In order to calculate the net present value of a proposed investment, it is necessary to know:
A)the cash flows expected from the investment.
B)the net income expected from the investment.
C)the interest rate paid on funds borrowed to make the investment.
D)the cash dividends paid on the stock each year.

Accepted Answer

To calculate the net present value (NPV) of an investment, you need to know the expected cash flows from the investment and the discount rate. The cash flows are essential as they represent the returns from the investment over time.

Question 6

The decision to continue or discontinue a segment of the business should focus on:
A)sales minus total variable expenses and total fixed expenses.
B)sales minus total variable expenses and avoidable fixed expenses of the segment.
C)sales minus total variable expenses and allocated fixed expenses of the business.
D)None of the answers are correct.

Accepted Answer

The decision should focus on the contribution margin (sales minus total variable expenses) and the avoidable fixed expenses, as these are the costs that can be eliminated if the segment is discontinued.

Question 7

Which cash flow item calculation will be affected by depreciation expense even though depreciation expense is not a cash flow item itself?
A)initial investment.
B)income taxes.
C)salvage value.
D)release of working capital.

Accepted Answer

Depreciation expense affects income taxes because it reduces taxable income, thereby affecting the cash flow related to taxes.

Question 8

An investment project that provides a higher rate of return than the firm's cost of capital will likely:
A)increase ROI.
B)decrease residual income.
C)increase payback.
D)decrease accounting rate of return.

Accepted Answer

An investment project that provides a higher rate of return than the firm's cost of capital will likely increase ROI (return on investment) because it will generate more income than the cost of the investment.

Question 9

If the net present value of the investment is $8,510, then:
A)the rate of return is less than the cost of capital.
B)the present value of the cash flows is greater than the required investment.
C)the cost of capital is higher than the internal rate of return.
D)the present value of the cash flows is $8,510 less than the investment.

Accepted Answer

The net present value (NPV) being positive ($8,510) indicates that the present value of the cash flows is greater than the required investment, meaning the investment is expected to generate more value than its cost.

Question 10

The cost of capital used in the capital budgeting analytical process is primarily a function of:
A)ROE.
B)ROI.
C)the cost of acquiring the funds that will be invested.
D)the discount rate.

Accepted Answer

The cost of capital represents the cost of acquiring funds, whether through debt, equity, or other means, and is used as a benchmark for evaluating investment projects.

Question 11

A principal difference between operational budgeting and capital budgeting is the time frame of the budget.Because of this difference, capital budgeting:
A)is an activity that involves only the financial staff.
B)is done on a rolling budget period basis.
C)focuses on the present value of cash flows from investments.
D)is concerned with a long-term net income forecast.

Accepted Answer

Capital budgeting focuses on the present value of cash flows from investments because it involves evaluating long-term investment projects and their potential returns over time.

Question 12

The decision for solving production mix problems involving multiple products and scarce production resources should focus on:
A)gross profit of each product.
B)sales price of each product.
C)contribution margin per unit of scarce resource.
D)contribution margin of each product.

Accepted Answer

The focus should be on the contribution margin per unit of scarce resource because it helps in determining which product provides the highest return for the limited resources available.

Question 13

If the net present value of a proposed investment is positive:
A)the investment not will be made.
B)the cost of capital is higher than the internal rate of return.
C)the cost of capital is positive.
D)the cost of capital is less than the expected rate of return.

Accepted Answer

A positive net present value indicates that the expected rate of return on the investment is greater than the cost of capital, making the investment attractive.

Question 14

When considering the results of a proposed investment determined by present value analysis which indicates that the proposal has a rate of return greater than the cost of capital, the investment might not be made because:
A)the quantitative analysis indicates that it should not be made.
B)management's assessment of qualitative factors overrides the quantitative analysis.
C)the timing of the cash flows of the investment will not be as assumed in the present value calculation.
D)post-audits of prior investments have revealed that cash flow estimates were consistently higher than actual cash flows realized.

Accepted Answer

Management may decide not to proceed with an investment if qualitative factors, such as strategic alignment or risk considerations, outweigh the positive quantitative analysis.

Question 15

Capital budgeting differs from operational budgeting because:
A)depreciation calculations are required.
B)it considers the time value of money.
C)operating expenses are not relevant.
D)capital budgets don't affect cash flow.

Accepted Answer

Capital budgeting considers the time value of money, which is not a factor in operational budgeting.

Question 16

Which of the following is not an important qualitative factor to consider in the capital budgeting decision?
A)regulations that mandate investment to meet safety, environmental, or access requirements.
B)technological developments within the industry may require new facilities to maintain customers or market share at the cost of lower ROI for a period of time.
C)commitment to a segment of the business that requires capital investments to achieve or regain competitiveness even though that segment does not have as great an ROI as others.
D)All of the answers are important qualitative factors to consider.

Accepted Answer

All the options listed are important qualitative factors to consider in capital budgeting decisions, as they involve strategic, regulatory, and competitive considerations that can impact the long-term success of the investment.

Question 17

ABC Company produces three products: X, Y, and Z.Product X has a contribution margin of $40 and requires 2 hour of machine time.Product Y has a contribution margin of $60 and requires 4 hours of machine time.Product Z has a contribution margin of $72 and requires 3 hours of machine time.If machine hours are considered scarce, in what product mix order should ABC Company schedule the production of Products X, Y, and Z for the available machine hours?
A)first X, then Y, then Z.
B)first Z, then X, then Y.
C)first Z, then Y, then X.
D)first Y, then Z, then X.

Accepted Answer

The product mix should be based on the highest contribution margin per machine hour. Product Z has a contribution margin of $24 per hour ($72/3), Product X has $20 per hour ($40/2), and Product Y has $15 per hour ($60/4). Therefore, the order should be Z, X, Y.

Question 18

Product X sells for $80 per unit in the marketplace and ABC Company requires a 35% minimum profit margin on all product lines.In order to compete in this market, the target cost for Product X must be equal to or lower than:
A)$28.
B)$45.
C)$52.
D)$80.

Accepted Answer

To achieve a 35% profit margin on a selling price of $80, the cost must be 65% of the selling price. Therefore, the target cost is 65% of $80, which is $52.

Question 19

Discounting a future cash inflow at an 8% discount rate will result in a higher present value than discounting it at a:
A)7% rate.
B)8% rate.
C)9% rate.
D)All of the answers are correct.

Accepted Answer

A higher discount rate results in a lower present value, so discounting at 9% will result in a lower present value than at 8%.

Question 20

Which of the following is typically not important when calculating the net present value of a project?
A)timing of cash flows from the project.
B)income tax effect of cash flows from the project.
C)method of financing the project.
D)amount of cash flows from the project.

Accepted Answer

The method of financing the project is not typically considered in the NPV calculation, as NPV focuses on cash flows and their timing, not how the project is financed.

Quiz 16: Cost for Decision Making

As part of the capital budgeting process, capital expenditure analysis attempts to determine the impact of a proposed capital expenditure on the organization's:

For most firms, the cost of capital is probably in the range of:

________ costs are not relevant in a decision to continue or discontinue a segment of the organization.

The profitability index of a proposed investment project will be:

In order to calculate the net present value of a proposed investment, it is necessary to know:

The decision to continue or discontinue a segment of the business should focus on:

Which cash flow item calculation will be affected by depreciation expense even though depreciation expense is not a cash flow item itself?

An investment project that provides a higher rate of return than the firm's cost of capital will likely:

If the net present value of the investment is $8,510, then:

The cost of capital used in the capital budgeting analytical process is primarily a function of:

A principal difference between operational budgeting and capital budgeting is the time frame of the budget.Because of this difference, capital budgeting:

The decision for solving production mix problems involving multiple products and scarce production resources should focus on:

If the net present value of a proposed investment is positive:

When considering the results of a proposed investment determined by present value analysis which indicates that the proposal has a rate of return greater than the cost of capital, the investment might not be made because:

Capital budgeting differs from operational budgeting because:

Which of the following is not an important qualitative factor to consider in the capital budgeting decision?

Product X sells for $80 per unit in the marketplace and ABC Company requires a 35% minimum profit margin on all product lines.In order to compete in this market, the target cost for Product X must be equal to or lower than:

Discounting a future cash inflow at an 8% discount rate will result in a higher present value than discounting it at a:

Which of the following is typically not important when calculating the net present value of a project?