INTRODUCTION TO MANAGEMENT ACCOUNTING 16TH EDITION By HORNGREN – TEST BANK

Chapter 11 Capital Budgeting

11.1 Questions

1) Investments of large amounts of cash in plant assets are called ________.
A) cash outflows
B) capital budgeting
C) capital projects
D) capital outlays
Answer: D
Diff: 1
LO: 11-1
AACSB: Reflective thinking skills
Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

2) The most widely used capital budgeting models are ________.
A) payback method
B) accounting rate of return
C) return on investment
D) discounted cash flow methods
Answer: D
Diff: 1
LO: 11-1
AACSB: Reflective thinking skills
Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

3) Which of the following statements is FALSE?
A) Discounted cash flow models focus on future cash inflows and outflows.
B) Discounted cash flow models consider the time value of money.
C) Discounted cash flow models focus on net income.
D) Discounted cash flow models compare cash outflows today to the present value of future cash flows.
Answer: C
Diff: 1
LO: 11-1
AACSB: Reflective thinking skills
Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

4) Steps used in applying the net present value method to a proposed capital investment do NOT include ________.
A) identify the amount and timing of relevant expected cash inflows and outflows
B) find the present value of each expected future cash inflow and outflow
C) find the sum of the present values of each expected future cash inflow and outflow
D) find the future value of the cash outflow that occurs at the present time.
Answer: D
Diff: 1
LO: 11-1
AACSB: Reflective thinking skills
Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

5) Which of the following statements is FALSE?
A) The higher the minimum desired rate of return, the lower the present value of each future cash flow.
B) Higher required rates of return lead to lower net present values for capital investments.
C) Higher required rates of return lead to higher net present values for capital investments.
D) The net present value for a project can be negative or positive depending on the minimum desired rate of return used.
Answer: C
Diff: 1
LO: 11-1
AACSB: Reflective thinking skills
Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

6) When using the Net Present Value model, which of the following assumptions is/are used?
A) We assume the predicted cash inflows and outflows are certain to occur at the times specified.
B) We assume perfect capital markets.
C) The Net Present Value model meets the cost-benefit criterion.
D) A and B
Answer: D
Diff: 1
LO: 11-1
AACSB: Reflective thinking skills
Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

7) A capital investment has a net present value of $1,000.00 at a required rate of return of 10%. At a 12% required rate of return, the net present value of the investment is $100.00. At a 14% required rate of return, the net present value of the investment is $0. The capital investment should be rejected if ________.
A) the required rate of return exceeds 14%
B) the required rate of return exceeds 12%
C) the required rate of return is less than 14%
D) the required rate of return is less than 12%
Answer: A
Diff: 2
LO: 11-1
AACSB: Analytic skills
Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

8) Dolly Madison Company is considering two investments. The relevant data follows:

Project A Project B
Cost $200,000 $300,000
Annual cash savings(end of year) $50,692 $60,995
Terminal salvage value $50,000 $70,000
Estimated useful life in years 5 5
Minimum desired rate of return 10% 10%
Method of depreciation Straight-line Straight-line

Present Value Present Value
Of $1 of Ordinary
for 5 periods Annuity of $1
for 5 periods
5% 0.7835 4.3295
6% 0.7473 4.2124
7% 0.713 4.1002
8% 0.6806 3.9927
10% 0.6209 3.7908
12% 0.5674 3.6048
14% 0.5194 3.4331

Ignoring taxes, the internal rate of return for Project A is approximately ________.
A) 8%
B) 10%
C) 12%
D) 14%
Answer: D
Diff: 2
LO: 11-1
AACSB: Analytic skills
Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

9) New Jersey Company is considering two investments. The relevant data follows:

Project A Project B
Cost $200,000 $300,000
Annual cash savings (end of year) $50,692 $60,995
Terminal salvage value $50,000 $70,000
Estimated useful life in years 5 5
Minimum desired rate of return 10% 10%
Method of depreciation Straight-line Straight-line

Present Value Present Value
Of $1 of Ordinary
for 5 periods Annuity of $1
for 5 periods
5% 0.7835 4.3295
6% 0.7473 4.2124
7% 0.713 4.1002
8% 0.6806 3.9927
10% 0.6209 3.7908
12% 0.5674 3.6048
14% 0.5194 3.4331

Ignoring taxes, the internal rate of return for Project B is approximately ________.
A) 6%
B) 7%
C) 8%
D) 10%
Answer: B
Diff: 2
LO: 11-1
AACSB: Analytic skills
Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts

10) New Hampshire Company is considering two investments. The relevant data follows:

Project A Project B
Cost $200,000 $300,000
Annual cash savings(end of year) $50,692 $60,995
Terminal salvage value $50,000 $70,000
Estimated useful life in years 5 5
Minimum desired rate of return 10% 10%
Method of depreciation Straight-line Straight-line

Present Value Present Value
Of $1 of Ordinary
for 5 periods Annuity of $1
for 5 periods
5% 0.7835 4.3295
6% 0.7473 4.2124
7% 0.713 4.1002
8% 0.6806 3.9927
10% 0.6209 3.7908
12% 0.5674 3.6048
14% 0.5194 3.4331

Ignore taxes. Using the net present value method, which project should be accepted?
A) Project A only
B) Project B only
C) both Project A and Project B
D) neither Project A nor Project B
Answer: A
Diff: 2
LO: 11-1
AACSB: Analytic skills
Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts