ACCT 245 Chapter 26 Book Quiz

What is the second step of capital budgeting?
a. Gathering the money for the investment
b. Identifying potential projects
c. Getting the accountant involved
d. All of the above

b

Which of the following methods does not consider the investment’s profitability?
a. ARR
b. Payback
c. NPV
d. IRR

b

Suppose Francine Dunkelberg’s Sweets is considering investing in warehouse-management software that costs $550,000, has $75,000 residual value, and should lead to cost savings of $130,000 per year for its five-year life. In calculating the ARR, which of the following figures should be used as the equation’s denominator (average amount invested in the asset)
a. $275,000
b. $237,500
c. $625,000
d. $312,500

d

Your rich aunt has promised to give you $2,000 per year at the end of each of the next four years to help you pay for college. Using a discount rate of 12%, the present value of the gift can be stated as
a. PV = $2,000 (PV factor, i = 12%, n = 12)
b. PV = $2,000 (Annuity PV factor, i = 12%, n = 4)
c. PV = $2,000 (Annuity FV Factor, i = 12%, n = 4)
d. PV = $2,000 <b> 12% </b> 4

b

Which of the following affects the present value of an investment
a. The type of investment (annuity versus single lump sum)
b. The number of time periods (length of the investment)
c. The interest rate
d. All of the above

d

Which of the following is true regarding capital rationing decisions
a. Companies should always choose the investment with the highest NPV
b. Companies should always choose the investment with the highest ARR
c. Companies should always choose the investment with the shortest payback
d. None of the above

d

In computing the IRR on an expansion at Mountain Creek Resort, Vernon Valley would consider all of the following except
a. Present value factors
b. Depreciation on the assets built in the expansion
c. Predicted cash inflows over the life of the expansion
d. The cost of the expansion

b

The IRR is
a. The interest rate at which the NPV of the investment is zero
b. The firm’s hurdle rate
c. The same as ARR
d. None of the above

a

Which of the following if the most reliable method for making capital budgeting decisions
a. ARR method
b. Post-audit method
c. NPV method
d. Payback method

c

Ian Corp. is considering two expansion projects. The first project streamlines the company’s warehousing facilities. The second project automates inventory utilizing bar code scanners. Both projects generate positive NPV, yet Ian Corp. only chooses the bar coding project. Why?
a. The payback is greater than the warehouse project’s life
b. The internal rate of return of the warehousing project is less than the company’s requires rate of return for capital projects
c. The company is practicing capital rationing
d. All of the above are true

c