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Exam 12: Capital Investment Decisions and the Time Value of Money

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Question 71

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Senseman Company has three potential projects from which to choose. Selected information on each of the three projects follows: Using the profitability index, rank the projects from most profitable to least profitable.

A) A, B, C
B) C, B, A
C) B, A, C
D) B, C, A

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Question 72

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Which of the following is used as the equation's numerator when computing the accounting rate of return for a capital asset?

A) Average amount invested in the asset
B) Average annual operating income from the asset
C) Total amount invested in the asset
D) Average net cash flows from the asset

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Question 73

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Which of the following is a characteristic of a capital asset?

Choosing among alternative capital investments is called a post-audit.

Redwood Corporation is considering two alternative investment proposals with the following data: What is the accounting rate of return for Proposal Y? (Round any intermediary calculations to the nearest dollar, and round your final answer to the nearest hundredth of a percent, X.XX%.)

Compound interest means that interest is calculated on

Your hard work in college paid off, quite literally, and you received a graduate assistantship for your MBA program. The assistantship pays a stipend of $12,000 at the end of each of the next 2 years. Using an average discount rate of 2%, the future value of your assistantship can be calculated by

Siesta Manufacturing has asked you to evaluate a capital investment project. The project will require an initial investment of $54,000. The life of the investment is 6 years with a residual value of $6,000. If the project produces net annual cash inflows of $20,000, what is the accounting rate of return? (Round any intermediary calculations to the nearest dollar and your final answer to two decimal places, X.XX%.)

The Toth Company bought a new specialty machine that cost $100,000 with a 4-year life with no residual value. The company plans to generate annual cash inflows of $30,000 each year for 4 years. Calculate the accounting rate of return.

A manager wants to know which investment decision will affect the bottom line of the financial statements according to Generally Accepted Accounting Principles. Which capital budgeting method would he choose?

Post-audits of capital investments compare actual net cash inflows to projected net cash inflows.

The costs to develop a major website for a company would be considered to be a capital asset if those costs are significant and material (for example, the costs to develop the website exceed $100,000).

If you invest $1,600 at the end of every year for four years at an interest rate of 14%, the balance of your investment in 4 years will be closest to: Future Value of $1 Future Value of Annuity of $1

The process of choosing among different alternative investments due to limited resources is referred to as

Dandy's Fun Park is evaluating the purchase of a new game to be located on its Midway. Dandy's has narrowed their choices down to two: the Wacky Water Race game and the Whack-A-Mole game. Financial data about the two choices follows. What is the total present value of future cash inflows and residual value from the Whack-A-Mole game? Present Value of $1 Present Value of Annuity of $1

The Silverside Company is considering investing in two alternative projects: What is the payback period for Project 2?

O'Mally Department Stores is considering two possible expansion plans. One proposal involves opening 5 stores in Indiana at the cost of $1,840,000. Under the other proposal, the company would focus on Kentucky and open 6 stores at a cost of $2,300,000. The following information is available: The net present value of the Indiana proposal is closest to: Present Value of $1 Present Value of Annuity of $1

The payback method can be used when the net cash inflows from a capital investment are unequal.

Capital budgeting is done when common stock is issued.

The formula for calculating the accounting rate of return for a capital asset is