Question 1

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 above.

Accepted Answer

The best approach is to subtract the segment's total variable expenses and avoidable fixed expenses from its sales to determine its contribution margin. If the contribution margin is positive, the segment should be continued, but if it's negative, the segment should be discontinued. This approach enables management to focus on the cost that can be avoided and gives a clearer picture of the segment's profitability. Option A includes all fixed expenses, which could lead to incorrect decisions. Option C includes all fixed expenses, which could be misleading since some of these expenses cannot be avoided regardless of whether the segment continues or not. Option D is incorrect because one of the other options must be the right approach.

Question 2

The present value ratio of a proposed investment will be:
A) less than 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 present value ratio, also known as profitability index, is calculated as the present value of future cash flows divided by the initial investment. If the net present value is negative, the present value of cash inflows is less than the initial investment, resulting in a present value ratio less than 1.0. Therefore, choice C is the correct answer. The other options are incorrect statements.

Question 3

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 typically not taken into consideration when calculating the net present value of a project. The focus is on the cash flows generated by the project and their present value, as well as any income tax effects.

Question 4

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, it is necessary to know the cash flows expected from the investment. The net income expected from the investment, the interest rate paid on funds borrowed to make the investment, and the cash dividends paid on the stock each year may be relevant information, but they are not sufficient on their own to calculate the net present value.

Question 5

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

The answer of A principal difference between operational budgeting and...

Question 6

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 higher than the cost of capital. Therefore, the investment should be made.

Question 7

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

The time value of money is a key consideration in capital budgeting, which involves evaluating long-term investment decisions that will impact a company's financial structure for years to come. Operational budgeting, on the other hand, focuses on short-term planning and day-to-day expenses, and does not typically involve evaluating the time value of money. Depreciation calculations may be required in both types of budgeting, and operating expenses are relevant in both. Capital budgets do affect cash flow and can have a significant impact on a company's financial position.

Question 8

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

The answer of Product X sells for $80 per unit...

Question 9

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 decision should focus on the contribution margin per unit of scarce resource, which shows how much contribution margin is earned per unit of the limited resource used. This helps in optimizing the production mix to maximize the overall contribution margin and utilize the scarce resources efficiently. Gross profit and sales price do not take into account the resource constraints and may not necessarily lead to an optimal production mix. The contribution margin of each product is relevant but needs to be considered in the context of the scarce resources available.

Question 10

Capital expenditure analysis, which leads to the capital budget, attempts to determine the impact of a proposed capital expenditure on the organization's:
A) segment margin.
B) contribution margin.
C) ROI.
D)cost of capital.

Accepted Answer

Capital expenditure analysis aims to determine the return on investment (ROI) of a proposed capital expenditure, which measures the impact of the expenditure on the organization's profitability. The analysis takes into account the initial cost of the investment, the expected cash flow from the investment, and the expected useful life of the investment. Segment margin, contribution margin, and cost of capital are all important financial metrics, but they are not directly impacted by a specific capital expenditure.

Question 11

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 above are important qualitative factors to consider.

Accepted Answer

All of the factors mentioned in options A, B, and C are important qualitative factors to consider in the capital budgeting decision. Therefore, option D is the correct answer.

Question 12

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

If the net present value of the investment is positive, it means that the present value of the expected cash flows is greater than the required investment. Therefore, option B is the correct answer. Option A cannot be determined with this information alone. Option C is also uncertain as the internal rate of return could be greater or equal to the cost of capital. Option D is incorrect as the net present value already takes into account the difference between the present value of the cash flows and the investment.

Question 13

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 is the rate of return that a firm must earn on its investment projects to maintain its market value and attract funds. It is generally composed of two components - the cost of debt and the cost of equity. The cost of debt is the interest rate that a firm pays on its debt financing, while the cost of equity is the rate of return that equity investors demand. As a result, the cost of capital for most firms falls in the range of 10% to 20%, which represents a reasonable return for both debt and equity investors. The prime rate (currently around 3.25%) is only one component of the cost of debt, and is typically adjusted upward based on a firm's creditworthiness and other factors. Therefore, option A is overly narrow in its scope. Option B is too low, as most firms require a higher rate of return to compensate investors for the risk of investing in them. Option D is too high, as only highly risky or distressed firms would have costs of capital above 20%.

Question 14

The principal weakness of the payback method for evaluating proposed investments is that it does not:
A) provide a way of ranking projects in order of desirability.
B) consider cash flows that continue after the investment has been recovered.
C) result in an easily understood "answer".
D)recognize the time value of money.

Accepted Answer

The payback method does not consider the time value of money, which is a fundamental principle in finance, and can result in incorrect investment decisions. The method only considers the time taken to recover the initial investment, and does not take into account cash flows that continue after the investment has been recovered or the ranking of projects in order of desirability. While it may provide an easily understood "answer", it is not a comprehensive evaluation method.

Question 15

Which of the following costs are not relevant in a decision to continue or discontinue a segment of the organization?
A) avoidable costs.
B) unavoidable costs.
C) opportunity costs.
D)differential costs.

Accepted Answer

Unavoidable costs, by definition, cannot be eliminated regardless of whether the segment is continued or discontinued. Therefore, they are not relevant in the decision-making process. Relevant costs are those that will change depending on the decision taken, such as avoidable costs, differential costs or opportunity costs.

Question 16

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 above.

Accepted Answer

When discounting a future cash inflow, a higher discount rate results in a lower present value because the cash inflow is being valued less due to the higher opportunity cost of investing elsewhere. Therefore, if the cash inflow is discounted at an 8% rate and then discounted again at a higher rate of 9%, the present value will be lower when discounted at the higher rate. So, the best choice would be to discount the cash inflow at a lower rate than 8%, which is option C) 9% rate.

Question 17

If a project promises to generate a higher rate of return than the firm's cost of capital, accepting the project will:
A) increase ROI.
B) decrease ROI.
C) increase payback.
D)decrease payback.

Accepted Answer

Accepting a project that promises to generate a higher rate of return than the firm's cost of capital will increase ROI (return on investment). This means that the firm can generate more profit per dollar invested in the project than it would by investing that same dollar elsewhere. It is therefore a wise decision to accept such a project, as it will increase the overall profitability of the firm.

Question 18

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 answer of The cost of capital used in the...

Question 19

Depreciation expense is not a cash flow item but it will affect the calculation of which cash flow item?
A) initial investment.
B) income taxes.
C) salvage value.
D)working capital.

Accepted Answer

Depreciation expense is a non-cash expense that reduces net income, which in turn reduces the tax liability of the company. Therefore, it affects the calculation of income taxes.

Question 20

When the present value analysis of a proposed investment results in an indication 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 less than actual cash flows realized.

Accepted Answer

Qualitative factors such as strategic fit, organizational capabilities, and other non-financial considerations may still influence the decision to proceed with an investment even if the quantitative analysis indicates a favorable rate of return.

Quiz 16: Costs for Decision Making

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

The present value ratio of a proposed investment will be:

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

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

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

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

Capital budgeting differs from operational budgeting because:

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:

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

Capital expenditure analysis, which leads to the capital budget, attempts to determine the impact of a proposed capital expenditure on the organization's:

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

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

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

The principal weakness of the payback method for evaluating proposed investments is that it does not:

Which of the following costs are not relevant in a decision to continue or discontinue a segment of the organization?

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

If a project promises to generate a higher rate of return than the firm's cost of capital, accepting the project will:

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

Depreciation expense is not a cash flow item but it will affect the calculation of which cash flow item?

When the present value analysis of a proposed investment results in an indication that the proposal has a rate of return greater than the cost of capital, the investment might not be made because: