Exam 2

Question 1

The payback period method is generally appropriate as a primary decision rule.

Answer 1

False

Question 2

The higher the interest rate and the farther into the future a cash flow occurs, the lower its PW is

Answer 2

True

Question 3

Equivalent Uniform Annual Cost (EUAC) reflects the annual equivalent invested capital cost of the asset

Answer 3

False

Question 4

The difference between a project’s IRR and the required return (i.e., MARR) is viewed by management as a measure of investment safety. A large difference signals a wider margin of safety (or less relative risk).

Answer 4

True

Question 5

The base alternative is the one that requires the least investment of capital.

Answer 5

True

Question 6

To select the best alternative, we can select the alternative with the largest internal rate of return.

Answer 6

False

Question 7

To be attractive, a capital project must provide a return that exceeds a minimum level established by the top management of an organization. This return is called hurdle rate.

Answer 7

False

Question 8

When comparing MEAs with unequal lives, using the coterminated assumption means that we assume that the economic consequences expected during the MEAs’ life spans will recur in succeeding life spans

Answer 8

False

Question 9

To use the coterminated assumption, the study period is either indefinitely long or equal to a common multiple of the MEAs useful lives

Answer 9

False

Question 10

Under the coterminated assumption, when the Useful Life > Study Period, we truncate the alternative at the end of the study period, using an estimated market value

Answer 10

True

Question 11

With repeatability, we can compute the AW of each alternative over its own useful life and recommend the one having the most economical value

Answer 11

True

Question 12

Under the coterminated assumption, when the Useful Life > Study Period for cost alternatives, we can

Answer 12

Contract or lease the needed job for the remaining years of the study period.

Question 13

A company can begin to depreciate a property it owns when the property is delivered to the company.

Answer 13

False

Question 14

Inventory, stock in trade, and investment property are all depreciable

Answer 14

False

Question 15

Intangible properties include

Answer 15

Franchises, patents, and copyrights

Question 16

Property is depreciable if it meets certain requirements such as

Answer 16

1. It must be used in business or held to produce income
2. It must have a determinable useful life, and the life must be longer than one year
3. It must be something that wears out, decays, gets used up, becomes obsolete, or loses value from natural causes

Question 17

Useful life is the number of years over which the basis of a property is recovered through the accounting process.

Answer 17

False

Question 18

The depreciation method that assumes constant amount of depreciation each year over the depreciable life of the asset is

Answer 18

Straight-Line (SL) Method

Question 19

Declining-Balance (DB) method never reaches a BV of zero or other specific value such as SVN

Answer 19

True

Question 20

In the DB with switchover to SL method, switchover occurs in the year in which an equal or a larger depreciation amount is obtained from the DB method

Answer 20

False

Question 21

The ADS method uses the Declining-Balance (DB) Method to depreciation deductions

Answer 21

False

Question 22

The ADS recovery period for nonresidential real property is

Answer 22

40 years

Question 23

Under the MACRS GDS method, any depreciable personal property that does not “fit” into one of the defined asset classes is depreciated as being in the

Answer 23

None of the following: Twenty-year property class, Three-year property class, Five-year property class

Question 24

Property that is placed in any tax-exempt use and property used predominantly outside the United States are examples of assets that must be depreciated under the General Depreciation System (GDS)

Answer 24

False

Question 25

Not every property that qualifies under GDS can be depreciated under ADS, if elected

Answer 25

False

Question 26

Any tangible personal property that does not fit into one of the asset classes is depreciated under a 12-year ADS recovery period

Answer 26

True

Question 27

Most tangible personal property is assigned to one of eight personal property classes (3-, 5-, 7-, 9-, 11-, 13-, 15-, and 20-year property)

Answer 27

True

Question 28

Any depreciable personal property that does not “fit” into one of the defined asset classes is depreciated as being in the ten-year property class

Answer 28

False

Question 29

If the asset is disposed of before the full recovery period is used, then only half of the normal depreciation deduction can be taken for that year.

Answer 29

True

Question 30

You need to apply the half-year time convention by dividing the recovery rates from Table 7-3 by 2 for the first and last years.

Answer 30

False

Question 31

In the ADS method, the half-year time convention extends depreciation deductions over to one more year after the recovery period at 50% of the SL amount

Answer 31

True

Question 32

What is the coterminated assumption?

Answer 32

A finite and identical study period is used for all alternatives

Question 33

What is the repeatability assumption?

Answer 33

The study period is either indefinitely long or equal to a common multiple of the lives of the MEAs. The economic consequences expected during the MEAs’ life spans will also happen in succeeding life spans (replacements).