ACC 115: Periodical Exam 2

Total points51/70
 
Test I. Multiple Choice. Choose the best answer among the choices.
27 of 30 points
 
1. Capital budgeting methods are often divided into two classifications: project screening and
project ranking. Which one of the following is considered a ranking method rather than a screening
method?
1/1
A. Accounting rate of return.
B. Net present value.
C. Profitability index.
 
D. Time-adjusted rate of return.
 
2. Several proposed capital projects which are economically acceptable may have to be ranked due
to constraints in financial resources. In ranking these projects, the least pertinent is this statement.
1/1
A. If the internal rate of return method is used in the capital rationing problem, the higher the rate, the better the
project.
B. If the net present value method is used, the profitability index is calculated to rank the projects. The lower the
index, the better the project.
 
C. In selecting the required rate of return, one may either calculate the organization’s cost of capital or use a rate
generally acceptable in the industry
D. A ranking procedure on the basis of quantitative criteria may be established by specifying a minimum desired
rate of return, which rate is used in calculating the net present value of each project.
 
3. An optimal capital budget is determined by the point where the marginal cost of capital is
1/1
A. Minimized.
B. Equal to the average cost of capital.
C. Equal to the rate of return on total assets.
D. Equal to the marginal rate of return on investment.
 
 
4. If a payback period for a project is greater than its expected useful life, the
1/1
a. project will always be profitable
b. entire initial investment will not be recovered
 
c. project would only be acceptable if the company’s cost of capital was low
d. project’s return will always exceed the company’s cost of capital
 
5. The payback method, as a capital budgeting technique, assumes that all intermediate cash
inflows are reinvested to yield a return equal to:
1/1
a. zero
 
b. the time adjusted rate of return
c. the discount rate
d. the cost of capital
 
6. Which of the following capital budgeting methods is the least theoretically correct?
1/1
a. payback method
 
b. net present value
c. internal rate of return
d. none of the given choices
 
7. Why do NPV method and IRR method sometimes give different rankings of mutually exclusive
investment projects?
1/1
a. The NPV method does not assume reinvestment of cash flows while the IRR method assumes the cash flows
will be reinvested at the internal rate of return.
b. The NPV method assumes a reinvestment rate equal to the discount rate while the IRR method assumes a
reinvestment rate equal to the internal rate of return.
 
c. The IRR method does not assume reinvestment of the cash flows while the NPV assumes the reinvestment
rate is equal to the discount rate.
d. The NPV method assumes a reinvestment rate equal to the bank loan interest rate while the IRR method
assumes a reinvestment rate equal to the discount rate
 
8. The primary advantages of the average of return method are its ease of computation and the fact
that:
1/1
a. It is useful to managers whose primary concern is liquidity
b. There is less possibility of loss from changes in economic conditions and obsolescence when the
commitment is short-term.
c. It emphasizes the amount of income earned over the life of the proposal
 
d. Rankings of proposals are necessary
 
9. When evaluating depreciation methods, the managers who are concerned about capital
investment decisions most likely
1/1
a. Choose straight line depreciation so there is minimum impact on the decision.
b. Use units of production so more depreciation expense will be allocated to the later years.
c. Use accelerated methods to have as much depreciation in the early years of an asset’s life
 
d. Assume that the choice of depreciation method has no impact on the capital investment decision
 
10. A weakness of internal rate of return method for screening investment projects is that it:
1/1
a. does not consider the time value of money
b. implicitly assumes that the company is able to reinvest cash flows from the project at the company’s discount
rate
c. implicitly assumes that the company is able to reinvest cash flows from the project at internal rate of return
 
d. fails to consider the timing of cash flows
 
11. If the internal rate of return on an investment is zero:
0/1
a. its NPV is positive
b. its annual cash flows equal its required investment
c. it is generally a wise investment
d. its cash flows decrease over its life
 
12. Which of the following would decrease the net present value of a project?
1/1
a. a decrease in the income tax rate
b. a decrease in initial investment
c. an increase in the useful life of the project
d. an increase in the discount rate
 
 
13. The length of time needed for a long-term project to recapture its initial investment amount is
called the
1/1
a. discount period
b. present value
c. payback period
 
d. internal rate of return
 
14. Which of the following is not a typical cash outflow associated with a capital investment?
1/1
a. repairs and maintenance needed for purchased equipment
b. additional operating costs resulting from the capital investment
c. salvage value received when the newly purchased equipment is sold
 
d. purchase price of the new equipment
 
15. The internal rate of return method assumes that intermediate cash flows are immediately
reinvested at:
1/1
a. the actual rate of return earned by the project
 
b. the company’s discount rate
c. the lower of the company’s discount rate or internal rate of return
d. an average of the internal rate of return and the discount rate
 
16. When using the net present value method, the interest rate used to discount cash flows should
not be thought of as the:
1/1
a. hurdle rate
b. minimum required rate of return
c. internal rate of return
 
d. discount rate
 
17. Which of the following statements is false regarding the interest rate used in net present value
calculations?
1/1
a. Some companies use their cost of capital as the discount rate
b. It may be adjusted for uncertainty
c. It should be equal to the maximum required rate of return needed to make the investment profitable
 
d. It may be higher or lower than the investment’s actual internal rate of return
 
18. When using the net present value method for a particular investment decision, if the net present
value of all cash inflows is greater than the present value of all cash outflows, then:
0/1
a. the discount rate used was too high
b. the investment provides an actual rate of return greater than the discount rate
c. the investment provides an actual rate of return equal to the discount rate
 
d. the discount rate was too low
 
19. All other things being equal, as cost of capital decreases:
1/1
a. more capital projects will probably be acceptable
 
b. fewer capital projects will probably be acceptable
c. the number of capital projects that are acceptable will change but the direction of the change is not
determinable just by knowing the direction of the change in the cost of capital
d. the company will probably want to borrow money rather than issue stock
 
20. Depreciation charges indirectly affect the after-tax cash flow because the company
0/1
a. can deduct depreciation expenses on their financial statements, reducing reported income before tax
b. can deduct depreciation expenses on their financial statements, increasing cash inflows
 
c. can deduct depreciation expenses on their income tax returns, reducing cash outflow for taxes
d. cannot deduct depreciation expenses on their income tax returns
 
21. The manner of determining whether favorable results of an alternative are sufficient to justify
the cost of taking that alternative
1/1
A. Cost behavior analysis
B. Cost benefit analysis
 
C. Cost center analysis
D. Cost control analysis
 
22. In the development of accounting data for decision-making, relevant costs are
1/1
A. Budgetary costs authorized for the administrative year.
B. Standard costs developed by time and motion experts.
C. Future costs which will differ under each alternative course of action.
 
D. Historical costs which are the best available basis for estimating future costs.
 
23. The relevance of a particular cost to a decision is determined by
1/1
A. Amount of the cost.
B. Number of decision variables.
C. Potential effect on the decision.
 
D. Riskiness of the decision.
 
24. The term relevant cost applies to all of the following decision situations except the
1/1
A. Replacement of equipment.
B. Determination of product price.
 
C. Acceptance of special product order.
D. Manufacture or purchase of a component part.
 
25. Management accountants are concerned with incremental unit costs. These costs are similar to
the following except
1/1
A. The cost to produce an additional unit.
B. The economic marginal cost.
C. The manufacturing unit cost.
 
D. The variable cost
 
26. A fixed cost is relevant if it is
1/1
A. a future cost.
B. a product cost.
C. avoidable.
 
D. sunk.
 
27. The distinction between avoidable and unavoidable costs is similar to the distinction between
1/1
A. discretionary costs and committed costs.
 
B. step-variable costs and fixed costs.
C. variable costs and fixed costs.
D. variable costs and mixed costs.
 
28. The type of cost vital to decision making but not recorded in the accounting records
1/1
A. Direct costs
B. Opportunity costs
 
C. Out of pocket costs
D. Sunk costs
 
29. What is the opportunity cost of making a component part in a factory given no alternative use of
the capacity?
1/1
A. Zero.
 
B. The total variable cost of the component.
C. The total manufacturing cost of the component.
D. The variable manufacturing cost of the component.
 
30 If a cost is irrelevant to a decision, the cost could not be
1/1
A. a future cost.
B. a sunk cost.
C. a variable cost.
D. an incremental cost.
 
Test II. Problems. All answers must be rounded off to two decimal point. Negative answers must be
enclosed in a parenthesis.
24 of 40 points
 
1. Refer to Problem 1-1, the cost of investment in the new equipment is
2/2
1,622,800
 
 
2. Refer to Problem 1-1, the new equipment is expected to generate annual cash inflows net of
income taxes of
2/2
354,000
 
 
3. Refer to Problem 1-1, the present value of cash inflows is
···/2
124,200
 
 
4. Refer to Problem 1-1, what is the net present value?
···/2
119,916
 
 
5. Refer to Problem 1-1, what is the NPV index?
···/2
340,000
 
 
6. Refer to Problem 1-2, determine the allocated machine hours for Product 4.
2/2
750
 
 
7. Refer to Problem 1-2, determine the allocated units for Product 2.
2/2
90
 
 
8. Refer to Problem 1-2, determine the allocated machine hours for Product 3.
2/2
0
 
 
9. Refer to Problem 1-3, what is the payback period of this investment?
2/2

3
 
 
10. Refer to Problem 1-3, the net present value of this investment is
···/2
837,200
 
 
11. Refer to Problem 1-3, what is the profitability index for the investment?
2/2
1.05
 
 
12. Refer to Problem 1-4, what is the breakeven point in units if the company opted to establish their
own sales outlet?
···/2

160,000
 
 
13. Refer to Problem 1-4, what is the breakeven point in units if the company opted to enter into
contract with existing dealers?
···/2
28,000
 
 
14. Refer to Problem 1-4, what is the indifference point in units
···/2
12,500
 
 
15. Refer to Problem 1-5, the number of years to recover the amount of investment is.
2/2
3.65
 
 
16. Refer to Problem 1-5, what is the amount of after-tax cash flow in year 5?
···/2
48,000
 
 
17. Refer to Problem 1-5, what is the amount of after-tax cash flow in year 7?
2/2
34,000
 
 
18. Refer to Problem 1-5, what is the net present value?
2/2
8,559
 
 
19. Refer to Problem 1-5, what is the NPV index?
2/2
0.03
 
 
20. Refer to Problem 1-5, what is the Profitability index?
2/2
1.03
 
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