Accy Chapter 16S

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.

A

In a make or buy decision, which of the following costs would be considered relevant? A. avoidable costs. B. unavoidable costs. C. sunk costs. D. allocated costs.

a

An advantage of the net present value method for evaluating investment proposals over the internal rate of return method is that: A. only one set of present value calculations using a required discount rate is made. B. the actual rate of return on the project is calculated. C. projects can be ranked in order of profitability using the net present value amount. D. estimates of future cash flows do not have to be made

a

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.

a

Relevant costs in decision-making: A. are future costs that represent differences between decision alternatives. B. result from past decisions. C. should not influence the decision. D. none of the above

a

A cost classified "for decision-making purposes" would include: A. period cost. B. opportunity cost. C. controllable cost. D. inventoriable cost.

b

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

b

Capital budgeting techniques using present value techniques are useful in helping management: A. decide which costs are most relevant in decision making. B. identify investment alternatives that will contribute most to future profitability. C. determine an accounting rate of return. D. determine an investments payback period.

b

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.

b

For capital budgeting decisions, the use of present value analysis significantly improves management decision making, however: A. other quantitative techniques may be even more insightful. B. most decisions are significantly influenced by top management's values and experiences. C. the accounting rate of return technique in usually more dependable. D. a relevant cost analysis should always be used in close decisions.

b

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.

b

In a capital budgeting decision, if a firm uses the net present value method and a 12% discount rate, what does a negative net present value indicate? A. the proposal's rate of return exceeds 12%. B. the proposal's rate of return is less than the minimum rate required. C. the proposal earns a rate of return between 10% and 12%. D. none of the above.

b

Opportunity costs are: A. included in inventory. B. foregone benefits. C. sunk costs. D. included in cost of goods sold.

b

The capital budgeting analytical technique that calculates the rate of return on the investment based on the impact of the investment on the financial statements is known as the: A. internal rate of return. B. accounting rate of return. C. payback period. D. net present value.

b

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.

b

The key to analyzing a sell as is or process further decision is to determine that: A. opportunity costs exceed sunk costs. B. incremental revenues exceed incremental costs. C. differential costs do not exist. D. all allocated costs are included in the decision.

b

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.

b

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.

b

Which of the following formula elements is not used in calculating the accounting rate of return? A. operating income. B. a present value factor. C. depreciation expense. D. average investment.

b

Which of the following is a true statement regarding the net present value method in capital budgeting? A. it provides the same basic information as the accounting rate of return. B. it calculates the present value of future cash flows. C. it calculates the proposal's rate of return. D. it doesn't consider the time value of money

b

_____________ costs between two alternative projects are those that would result from selecting one alternative instead of the other. A. Allocated B. Differential C. Sunk D. Irrelevant

b

A cost is considered relevant if: A. it is positive. B. it is sunk. C. it makes a difference. D. if it can't be changed.

c

A cost that will differ according to the alternative activity being considered is called a(n): A. sunk cost. B. allocated cost. C. differential cost. D. opportunity cost.

c

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.

c

A simple cost/benefit analysis is not appropriate for: A. sell or process further decisions. B. make or buy decisions. C. capital expenditure decisions. D. special pricing decisions.

c

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.

c

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.

c

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%.

c

If a cost is irrelevant to a decision, the cost could not be a: A. fixed cost. B. sunk cost. C. differential cost. D. variable cost.

c

Sometimes when management decisions are reached, the investment project with the highest NPV or IRR is not selected. This occurs because: A. a lower IRR is a less risky investment. B. the highest NPV is not necessarily the highest IRR. C. qualitative factors override quantitative analysis techniques. D. sometimes management makes the wrong decision.

c

The accounting rate of return method for evaluating proposed investments: A. is based on cash receipts and disbursements related to the investment. B. uses accounting net income from the operating budget. C. does not recognize the time value of money. D. is easier to use than the net present value method.

c

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.

c

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.

c

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

c

Which of the following cost classifications would not be considered relevant in comparing decision alternatives? A. opportunity cost. B. differential cost. C. sunk cost. D. none of the above

c

Which of the following is a true statement regarding the internal rate of return in capital budgeting? A. it provides the same basic information as the net present value method. B. it calculates the net present value of future cash flows. C. it calculates the proposal's rate of return. D. it doesn't consider the time value of money.

c

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.

c

Which of the following statements is true about capital investment decisions: A. the project with the highest net present value will always be selected. B. the project with the highest internal rate of return will always be selected. C. the project with the highest net present value may not always be selected. D. the project with the highest accounting rate of return will always be selected.

c

______________ can be measured as the income that could have been earned on an asset, based on the potential rate of return that is lost or sacrificed when one alternative use of the asset is chosen over another: A. Target cost B. Sunk cost C. Opportunity cost D. Allocated cost

c

A capital budgeting decision method that considers the time value of money is the A. accounting rate of return method. B. return on stockholders' equity method. C. cash payback method. D. internal rate of return method.

d

A sunk cost is a cost that: A. has been incurred and cannot be eliminated. B. is never relevant in decision-making. C. is never a differential cost. D. all of the above

d

A(n) _____________ is the minimum cost that can be incurred, which when subtracted from the selling price, allows for a desired profit to be earned. A. relevant cost B. opportunity cost C. incremental cost D. target cost

d

After the results of a present value analysis has been obtained for a capital investment opportunity, overriding _______________ should also be considered before a final decision is made. A. interest rates B. relevant costs C. payback calculations D. qualitative factors

d

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.

d

In considering whether to accept a special order at a price less than the normal selling price of the product and where the additional sales will make use of present idle capacity, which of the following costs will not be relevant? A. direct labor. B. direct materials. C. variable manufacturing overhead. D. fixed manufacturing overhead that cannot be avoided.

d

The capital budget provides an overall blueprint to help an organization meet it's: A. operating budget goals. B. current period profitability. C. relevant costing objectives. D. long-term growth and profitability objectives.

d

The discount rate used to determine the present value of an investment proposal being analyzed is also known as the: A. present value ratio. B. earnings growth rate. C. payback rate. D. hurdle rate.

d

The potential rental value of space used in the manufacturing process: A. is a variable production cost. B. is an unavoidable production cost. C. is a sunk production cost. D. is an opportunity cost if production is not outsourced.

d

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.

d

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.

d

Which of the following qualitative factors favors the buy option in the make or buy decision? A. production scheduling. B. utilization of idle capacity. C. ability to control quality. D. technical expertise of supplier

d

Which of the following statements is true regarding the payback period? A. the time value of money is considered when calculating the payback. B. the payback analysis is more accurate than the net present value analysis. C. the payback period is less accurate than the accounting rate of return. D. the time value of money is not considered when calculating the payback.

d

_____________ is a cost management technique in which the firm determines the required cost for a product or service in order to earn a desired profit when the marketplace establishes the product's selling price. A. Relevant costing B. Product costing C. Differential costing D. Target costing

d