Question 1

Capital budgeting proposals often require input from all of the following stakeholders except:

Accepted Answer

Capital budgeting proposals typically involve input from managers, employees, and directors who are directly involved in the operations and strategic planning of a company. Shareholders, while they have a vested interest in the company's performance, do not usually participate in the day-to-day decision-making processes or in specific capital budgeting proposal evaluations.

Question 2

The shortcomings of the payback method
What are the major shortcomings of relying too heavily upon the payback period in evaluating capital investment decisions?

Accepted Answer

The answer of The shortcomings of the payback method
What are...

Question 3

Redman Company is considering an investment in new machinery.The details of the investment are as follows:
  The company uses straight-line depreciation for its machinery and requires a 12% rate of return.The present value of $1 for 4 years at 12% is 0.636.The present value of an ordinary annuity for $1 for 4 years at 12% is 3.037.
(1)What is the payback period? (Round your answer to one decimal place. )
(2)What is the rate of return on average investment? (Round your percentage to one decimal place. )
(3)What is the net present value?
(4)Would you advise the company to invest in this machinery?

Accepted Answer

The answer of Redman Company is considering an investment in...

Question 4

Discounting cash flows
Determine the present value of the following cash flows discounted at an annual rate of 10%:
(a)$96,000 to be received five years from today (the present value of $1 at a 10% compound interest rate for five years is 0.621): $________
(b)$37,000 to be received annually for five years (the present value of $1 at 10% received annually for five years is 3.791): $________
(c)$58,000 to be received annually for six years,with an additional $16,000 salvage value to be received at the end of the sixth year (the present value of $1 at 10% received annually for six years is 4.355,and the present value of $1 due six years hence at 10% is 0.564): $________

Accepted Answer

The answer of Discounting cash flows
Determine the present value of...

Question 5

Return on average investment vs.discounting cash flows
The computation of return on average investment ignores one characteristic of the earnings stream,which is considered in discounting cash flows.What is this characteristic? Why is it important?

Accepted Answer

The answer of Return on average investment vs.discounting cash flows
The...

Question 6

When using the net present value method for evaluating an investment,an increase in the required rate of return will:

Accepted Answer

An increase in the required rate of return will decrease the net present value of the investment, making it more difficult to accept the investment. This is because the discount rate used in the net present value calculation will increase, decreasing the present value of the expected cash flows. Therefore, option A is the best choice.

Question 7

Capital budgeting
Carry-Along is debating whether or not to invest in new equipment to manufacture a line of high-quality luggage.The new equipment would cost $850,000,with an estimated four-year life and no salvage value.The estimated annual operating results with the new equipment are as follows:
  All revenue from the new luggage line and all expenses (except depreciation)will be received or paid in cash in the same period as recognized for accounting purposes.You are to compute the following for the investment in the new equipment to produce the new luggage line: (rounded)
(a)Annual cash flow: $________
(b)Payback period: ________
(c)Return on average investment: ________%
(d)Total present value of the expected future annual cash flows,discounted at an annual rate of 12%: (An annuity table shows that the present value of $1 received annually for four years discounted at 12% is 3.037. )$________
(e)Net present value of the proposed investment: $________

Accepted Answer

The answer of Capital budgeting
Carry-Along is debating whether or not...

Question 8

Capital budgeting
Mason Co.is evaluating two alternative investment proposals.Below are data for each proposal:
  The following information was taken from present value tables:  All revenue and expenses other than depreciation will be received and paid in cash.The company uses a discount rate of 12% in evaluating all capital investments.
Compute the following for each proposal (round payback period to the nearest tenth of a year and round return on average investment to the nearest tenth of a percent):  (f)Based on your analysis,which proposal appears to be the best investment?

Accepted Answer

The answer of Capital budgeting
Mason Co.is evaluating two alternative investment...

Question 9

Capital budgeting computations
A project costing $80,000 has an estimated life of 3 years and no salvage value.The estimated net income and net after tax cash flows from the project are as follows:  The company's minimum desired rate of return for discounted cash flow analysis is 10%.The present value of $1 at compound interest of 10% at 1,2,and 3 years is 0.909,0.826,and 0.751,respectively.The present value of a $1 annuity for three years at 10% is 2.487.The company uses straight-line depreciation.
Compute
(a)Net present value of the project.________
(b)The rate of return on average investment ________(rounded)
Calculations

Accepted Answer

The answer of Capital budgeting computations
A project costing $80,000 has...

Question 10

Carter & Co.is trying to decide which of two investments they should consider.The following information is available:
  Each investment is expected to have a useful life of 5 years.(Rounded)
(a)What is the rate of return on average investment of each investment?
(b)What is the payback period of each investment?

Accepted Answer

The answer of Carter & Co.is trying to decide which...

Question 11

The accuracy of capital budget decisions is critically dependent on:

Accepted Answer

The accuracy of capital budget decisions is dependent on many factors, but the most critical one is the project life span estimates. Accurate estimates of the project's duration, cash inflows, and outflows are essential to determine the project's net present value (NPV), internal rate of return (IRR), and payback period. These financial analysis tools rely heavily on the accuracy of the anticipated future cash flows, which all begin with realistic projections of the project's life span. Currency exchange rates, employee morale, and supplier availability may all impact a capital budget decision, but they are not as critical as accurate project life span estimates.

Question 12

Capital budget audit
Briefly discuss the reasons that a company's management would conduct a regular capital budget audit.

Accepted Answer

The answer of Capital budget audit
Briefly discuss the reasons that...

Question 13

Capital budgeting
Flynn Corporation is debating whether to purchase a new computerized production system.The system will cost $450,000,and have an estimated 10-year life with a salvage value of $70,000.The estimated operating results from the new production system are as follows:  All revenue and expenses other than depreciation will be received and paid in cash.Compute the following for this proposal: (rounded)
(a)Annual net cash flow: $________
(b)Payback period: ________
(c)Return on average investment: ________
(d)Net present value,discounted at an annual rate of 6%: (The present value of $1 due in 10 years,discounted at 6%,is 0.558;present value of $1 received annually for 10 years,discounted at 6%,is 7.360. ): $________

Accepted Answer

The answer of Capital budgeting
Flynn Corporation is debating whether to...

Question 14

Capital budgeting
Golden Flights,Inc.is considering buying some specialized machinery,which would enable the company to obtain a six-year government contract for the design and engineering of a futuristic plane.The machinery costs $975,000 and must be destroyed for security reasons at the end of the six-year contract period.The estimated annual operating results of the project are as follows:
  All revenue from the contract and all expenses (except depreciation)will be received or paid in cash in the same period as recognized for accounting purposes.You are to compute the following three factors for this project:
(a)Payback period: ________ years
(b)Return on average investment: ________%
(c)Net present value of the investment in this machinery,discounted at an annual rate of 12% (an annuity table shows that the present value of $1 received annually for six years discounted at 12% is 4.111): $________

Accepted Answer

The answer of Capital budgeting
Golden Flights,Inc.is considering buying some specialized...

Question 15

Accounting terminology
Listed below are eight technical accounting terms introduced or emphasized in this chapter.  Each of the following statements may (or may not)describe one of these technical terms.In the space provided beside each statement,indicate the accounting term described,or answer "None" if the statement does not correctly describe any of the terms.
________ (a)The process of analyzing investments in plant assets.
________ (b)The number of years required to recover the entire cost of an investment from its net cash flows.
________ (c)A stream of equal cash flows to be received or paid.
________ (d)The estimated average annual income of an investment expressed as a percentage of its average initial cost.
________ (e)The numerator in the return on average investment computation.
________ (f)The amount an investor should be willing to pay today for the right to receive a specified amount of cash at a specified future date.
________ (g)The process of computing the present value of future cash flows.

Accepted Answer

The answer of Accounting terminology
Listed below are eight technical accounting...

Question 16

Appraising rate of return adequacy
What factors should be taken into consideration when appraising the adequacy of the rate of return of a capital investment proposal?

Accepted Answer

The answer of Appraising rate of return adequacy
What factors should...

Question 17

Capital budgeting
Zhang Corporation is considering investing $190,000 in equipment to produce a new product.Useful service life of the equipment is estimated to be 5 years,with zero salvage value.Straight-line depreciation is used.The company estimates that production and sale of the new product will increase net income by $65,000 a year.(Round your years and percentage answers to one decimal place. )
(a)The payback period will be ________ years.
(b)The expected rate of return on average investment will be ________.

Accepted Answer

The answer of Capital budgeting
Zhang Corporation is considering investing $190,000...

Question 18

An investment's annual net cash flow will always be equal to its:

Accepted Answer

Net cash flow is the difference between the cash receipts and cash disbursements for an investment. Therefore, the correct formula for annual net cash flow is Annual cash receipts - Annual cash disbursements or (B) Annual cash receipts less its annual cash disbursements.

Question 19

Which of the following is not an important financial consideration in capital budgeting?

Accepted Answer

Sunk costs are not relevant in capital budgeting decisions because they are costs that have already been incurred and cannot be recovered or changed by the decision to invest. Therefore, they should not factor into the decision-making process. The timing of future cash flows, future profitability, initial cost, and salvage value are all important financial considerations in capital budgeting.

Quiz 26: Capital Budgeting

Capital budgeting proposals often require input from all of the following stakeholders except:

The shortcomings of the payback method What are the major shortcomings of relying too heavily upon the payback period in evaluating capital investment decisions?

Return on average investment vs.discounting cash flows The computation of return on average investment ignores one characteristic of the earnings stream,which is considered in discounting cash flows.What is this characteristic? Why is it important?

When using the net present value method for evaluating an investment,an increase in the required rate of return will:

The accuracy of capital budget decisions is critically dependent on:

Capital budget audit Briefly discuss the reasons that a company's management would conduct a regular capital budget audit.

Appraising rate of return adequacy What factors should be taken into consideration when appraising the adequacy of the rate of return of a capital investment proposal?

An investment's annual net cash flow will always be equal to its:

Which of the following is not an important financial consideration in capital budgeting?