Accounting II Chap 11

Homer Corp is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $100,000. The equipment will have an initial cost of $400,000 and have a 5 year life. If the salvage value of the equipment is estimated to be $75,000, what is the annual net cash flow? A. $25,000 B. $35,000 C. $165,000 D. $175,000

C. $165,000

T/F The net present value method compares a project's future net income to the initial investments

FALSE

T/F The internal rate of return is the rate of return that yields a zero net present value

TRUE

T/F The payback period method ignores the time value of money

TRUE

If a project has a positive net present value, it means the project is expected to provide returns that are ____ the cost of capital. a) greater than b) less than c) equal to d) not connected to

a) greater than

When cash flows are equal each year, the payback period is calculated as: a) initial investment x annual net cash flow b) initial investment/annual net cash flow c) annual net cash flow/initial investment d) annual net cash flow - initial investment/project life

b) initial investment/annual net cash flow

A decision that occurs when managers evaluate a proposed capital investment to determine whether it meets some minimum criteria is a(n): a) preference decision b) capital decision c) screening decision d) incremental decision

c) screening decision

Which of the following statements is correct about capital assets? a) For managerial accounting purposes, "capital assets" are defined more narrowly than for the financial accounting purposes. b) Human capital and research and development are both considered capital assets for financial accounting purposes, but not for managerial accounting purposes. c) Capital assets are only those that can be depreciated, whether using managerial or financial accounting. d) For managerial accounting purposes, "capital assets" are defined more broadly than for financial accounting purposes.

d) For managerial accounting purposes, "capital assets" are defined more broadly than for financial accounting purposes.

The method that compares the present value of a project's future cash lows to the initial investment. a) accounting rate of return b) payback period c) net present value d) internal rate of return

d) internal rate of return

The total time to recover an original investment is the: a) net present value b) internal rate of return c) accounting rate of return d) payback period

d) payback period