ACCT 2113 ch11 SB
A company's sales for the year total $218,000. Cash expenses for the year were $92,000 and depreciation expense was $23,000. The company's net cash flow for the year is ______.
$126,000
A company's net operating income for the year is $118,000. Depreciation expense for the year equals $23,000. The company's net cash flow for the year is ______.
$141,000 Reason: $118,000 + $23,000 = $141,000
Using the tables from the Appendix, and an interest rate of 8% compounded annually, $5,000 to be received four years from today is equal to ______ today.
$3,675 Reason: $5,000 x 0.7350 (PV of a dollar for 4 years at 8%) = $3,675.
Using the tables in Appendix 11.A, how much interest will an investment of $10,000 today at 12% interest compounded annually earn over 20 years (rounded to the nearest dollar)?
$86,463
Calderon Kitchen Supplies is planning to invest $210,000 in a new product. The product is expected to generate a net present value of $56,700. The project profitability index is ______.
1.27
Farm Central is considering the purchase of a larger combine to increase productivity. Combine A costs $210,000 and has a useful life of 10 years. The combine will reduce labor costs by $25,000 per year. The payback period of the combine is ______ years.
8.4 Reason: $210,000 ÷ $25,000 = 8.4 years
Which of the following statements are true?
Capital budgeting techniques that use time value of money are superior to those that don't. Any capital budgeting technique can be used for screening decisions.
Which of the following is NOT an assumption of discounted cash flow methods?
Cash flow and net income will always be equal.
Capital budgeting decisions include ______.
Determining which equipment to purchase among available alternatives Purchasing new equipment to reduce cost Choosing to lease or buy new equipment Acquiring a new facility to increase capacity Deciding to replace old equipment
True or false: Assume the net present value of $1,000 to be received in four years is $645. If you have the choice of receiving $645 now or $1,000 in four years, the best option is to take the $1,000 in four years.
False
True or false: When two projects are mutually exclusive, investing in one does not eliminate the other one from consideration.
False
Which of the following statements are true?
The time value of money should be considered in capital budgeting decisions. Money is more valuable today than it will be in the future.
True or false: For capital budgeting purposes, capital assets includes item research and development projects.
True
True or false: Preference decisions are made to prioritize and select from capital budgeting alternatives.
True
Managers are evaluating two independent projects. Project X has a NPV of $282,500 and a profitability index of 2.1. Project Y has a NPV of $320,000 and a profitability index of 1.7. Which of the following statements are correct?
annuities
Discounted cash flow methods assume cash flows ______.
are immediately reinvested in another project can be projected with 100% certainty
When making a capital budgeting decision, it is most useful to calculate the payback period ______.
as part of the screening process
To determine if a project is acceptable, compare the internal rate of return to the company's ______.
cost of capital
If the interest rate earned increases, net present value will ______.
decrease
In a lease or buy decision, ______ is not relevant to the decision.
depreciation expense
Net present value is the ______.
difference between the present value of a project's cash inflows and the present value of the project's cash outflows
When two projects are ______, investing in one of the projects does not preclude investing in the other.
independent
When choosing among independent projects, ______.
investment resources must be prioritized
The weighted -average cost of capital ______.
is how much it costs a company to fund capital projects should be reflected in the company's discount rate
A screening decision ______.
is used to determine if a project is a candidate for further consideration relates to whether a proposed project meets some minimum criteria
A project's payback period is the ______.
length of time it takes for the project to recover its initial cost from the net cash inflows generated
Deciding whether to purchase or lease a vehicle is an example of a(n) ______ project decision.
mutually exclusive
When deciding between two competing alternatives, the best capital budgeting method to use is the ______.
net present value
The two types of capital investment decisions are ______ and ______ decisions.
preference screening
When prioritizing independent projects when limited investment funds are available, the best capital budgeting method to use is the ______.
profitability index
The basic premise of the payback method is ______.
projects with shorter payback periods are safer investments than projects with longer payback periods
Little Tots Gym has a required rate of return of 13%. The gym is considering the purchase of $12,500 of new equipment. The internal rate of return on the project has been calculated to be 11%. This project ______.
should be rejected
Synonyms for the accounting rate of return are the ______ rate of return and the ______ rate of return.
simple, unadjusted
Net present value is ______.
the difference between the present value of cash inflows and present value of cash outflows for a project used to determine if a project is an acceptable capital investment
The internal rate of return method indicates ______.
the discount rate that makes the present value of the cash inflows equal to the present value of the cash outflows
The time value of money is the idea that ______.
the value of a dollar changes over time
The cost of capital is the ______.
weighted average after tax cost of debt and cost of equity
