Financial And Managerial Accounting Ch 12 Flashcards
The following information is available for a potential capital investment:
Initial investment: 60 000 EUR
Net annual cash flow: 15 400
Net present value: 3143
Useful life: 5 years
The potential investment’s internal rate of return is approximately:
a. 5%
b. 10%
c. 4%
d. 9%
The following information is available for a potential capital investment:
Initial investment: 60 000 EUR
Net annual cash flow: 15 400
Net present value: 3143
Useful life: 5 years
The potential investment’s internal rate of return is approximately:
d. 9%
60 000 / 15 400 = 3,8961, which corresponds with approximately 9% in the table.
Jigger Ltd is considering undertaking project X, which will involve an initial outlay of £600k. The project has the following cash inflows associated with it:
Year 1: 100k
Year 2: 200k
Year 3: 300k
Year 4: 400k
What is the NPV of project X if a 12% discount rate is used?
Jigger Ltd is considering undertaking project X, which will involve an initial outlay of £600k. The project has the following cash inflows associated with it:
Year 1: 100k
Year 2: 200k
Year 3: 300k
Year 4: 400k
What is the NPV of project X if a 12% discount rate is used?
Answer: 116 700
100 000 x 0,893 = 89 300
200 000 x 0,797 = 159 400
300 000 x 0,712 = 213 600
400 000 x 0,636 = 254 400
Total: 716 700
NPV: 716 700 - 600 000 = 116 700
Best Taste Foods is considering investing in new equipment to produce fat-free snack foods. Compute the net present value of annual cash flows.
Initial investment 1 000 000 USD
Cost of equipment overhaul in 5 years 200 000
Salvage value of equipment in 10 years 20 000
Cost of capital (discount rate) 15%
Estimated annual cash flows:
Cash inflows from sales 500 000
Cash outflows from COGS 200 000
Maintenance costs 30 000
Other direct operating costs 40 000
Best Taste Foods is considering investing in new equipment to produce fat-free snack foods. Compute the net present value of annual cash flows.
Initial investment 1 000 000 USD
Cost of equipment overhaul in 5 years 200 000
Salvage value of equipment in 10 years 20 000
Cost of capital (discount rate) 15%
Estimated annual cash flows:
Cash inflows from sales 500 000
Cash outflows from COGS 200 000
Maintenance costs 30 000
Other direct operating costs 40 000
Answer: 59 825 EUR.
Net annual cash flow: 500 000 - 200 000 - 30 000 - 40 000 = 230 000.
Equipment purchase (per 0) (1 000 000)
Equipment overhaul (per 5) (99 436)
Net annual cash flow (per 1-10) 1 154 317
Salvage value 4944
Net present value 59 825
Watertown Paper Corporation is considering adding another machine for the manufacture of corrugated cardboard. The machine would cost $900,000. It would have an estimated life of 6 years and no salvage value. The company estimates that annual revenues would increase by $400,000 and that annual expenses excluding depreciation would increase by $190,000. It uses the straight-line method to compute depreciation expense. Management has a required rate of return of 9%. Compute the annual rate of return
Watertown Paper Corporation is considering adding another machine for the manufacture of corrugated cardboard. The machine would cost $900,000. It would have an estimated life of 6 years and no salvage value. The company estimates that annual revenues would increase by $400,000 and that annual expenses excluding depreciation would increase by $190,000. It uses the straight-line method to compute depreciation expense. Management has a required rate of return of 9%. Compute the annual rate of return
Answer: 13,3%
Estimated cash inflow 400 000
Estimated cash outflow 190 000
Depreciation 900 000 / 6 = 150 000
Annual net income 400 000 - 190 000 + 150 000 = 60 000
Average investment (900 000 + 0) / 2 = 450 000
Annual rate of return: 60 000 / 450 000 = 13,3%
The following information is available for a potential capital investment.
Initial investment 80 000 EUR
Residual value 10 000
Net annual cash flow 14 820
Present value of net annual cash flows 98 112
Net present value 18 112
Useful life 10 years
The potential investment’s profitability index is:
a. 5,4
b. 1,19
c. 1,23
d. 1,4
The following information is available for a potential capital investment.
Initial investment 80 000 EUR
Residual value 10 000
Net annual cash flow 14 820
Present value of net annual cash flows 98 112
Net present value 18 112
Useful life 10 years
The potential investment’s profitability index is:
c. 1,23
98 112 / 80 000 = 1,23
Taz Corporation has decided to invest in renewable energy sources to meet part of its energy needs for production. It is considering solar power versus wind power. After considering cost savings as well as incremental revenues from selling excess electricity into the power grid, it has determined the following.
Present value of annual cash flows
Solar: $78,580. Wind: $168,450.
Initial investment
Solar: $45,500. Wind: $125,300.
Determine the net present value and profitability index of each project. Which energy source should it choose?
Taz Corporation has decided to invest in renewable energy sources to meet part of its energy needs for production. It is considering solar power versus wind power. After considering cost savings as well as incremental revenues from selling excess electricity into the power grid, it has determined the following.
Answer: Solar.
While the investment in wind power generates the higher net present value, it also requires a substantially higher initial investment. The profitability index favors solar power, which suggests that the additional net present value of wind is outweighed by the cost of the initial investment. The company should choose solar power.
Which of the following is not an alternative name for the discount rate?
a. Hurdle rate
b. Required rate of return
c. Cutoff rate
d. All of these are alternative names for the discount rate
Which of the following is not an alternative name for the discount rate?
d. All of these are alternative names for the discount rate
a. Hurdle rate
b. Required rate of return
c. Cutoff rate
Shep Ltd is considering a possible four-year project. Details are as follows:
Initial outlay 200 000
Years 1-4 annual profit before depreciation 45 000
Years 1-4 annual profit after depreciation 27 500
Residual value of project at the end of 4 years 30 000
Calculate annual rate of return.
Shep Ltd is considering a possible four-year project. Details are as follows:
Initial outlay 200 000
Years 1-4 annual profit before depreciation 45 000
Years 1-4 annual profit after depreciation 27 500
Residual value of project at the end of 4 years 30 000
Calculate annual rate of return.
Answer: 23,9%
27 500 / ((200 000 + 30 000)/2) = 23,9%
What is the order of involvement of the following parties in the capital budgeting authorization process.
a. Plant managers, officers, capital budget committee, board of directors.
b. Board of directors, plant managers, officers, capital budgeting committee
c. Plant managers, capital budget committee, officers, board of directors
d. Officers, plant managers, capital budget committee, board of directors
What is the order of involvement of the following parties in the capital budgeting authorization process.
c. Plant managers, capital budget committee, officers, board of directors
Assume Project A has a present value of net cash inflows of $79,600 and an initial investment of $60,000. Project B has a present value of net cash inflows of $82,500 and an initial investment of $75,000. Assuming the projects are mutually exclusive, which project should management select?
a. Project A
b. Project B
c. Project A or B
d. There is not enough data to answer this question.
Assume Project A has a present value of net cash inflows of $79,600 and an initial investment of $60,000. Project B has a present value of net cash inflows of $82,500 and an initial investment of $75,000. Assuming the projects are mutually exclusive, which project should management select?
a. Project A
If an asset costs HK$240,000 and is expected to have a HK$40,000 salvage value at the end of its ten-year life, and generates annual net cash inflows of HK$40,000 each year, the cash payback period is:
a. 7 years
b. 6 years
c. 5 years
d. 4 years
If an asset costs HK$240,000 and is expected to have a HK$40,000 salvage value at the end of its ten-year life, and generates annual net cash inflows of HK$40,000 each year, the cash payback period is:
b. 6 years
Which of these is not a capital budgeting decision:
a. Decision to buy a new plant
b. Decision to renovate an existing facility
c. Decision to buy a piece of machinery
d. All of these are capital budgeting decisions.
Which of these is not a capital budgeting decision:
d. All of these are capital budgeting decisions
a. Decision to buy a new plant
b. Decision to renovate an existing facility
c. Decision to buy a piece of machinery
An example of intangible benefit provided by a capital budgeting project is:
a. The residual value of capital investment
b. A positive net present value
c. A decrease in customer complaints due to poor quality
d. An internal rate of return greater than zero
An example of intangible benefit provided by a capital budgeting project is:
c. A decrease in customer complaints due to poor quality
What is the weakness of the cash payback approach?
a. It uses accrual-based accounting numbers
b. It ignores the time value of money
c. It ignores the useful life of alternative projects
d. Both b and c are true
What is the weakness of the cash payback approach?
d. Both b and c are true
b. It ignores the time value of money
c. It ignores the useful life of alternative projects
Watertown Paper Corporation is considering adding another machine for the manufacture of corrugated cardboard. The machine would cost $900,000. It would have an estimated life of 6 years and no salvage value. The company estimates that annual cash inflows would increase by $400,000 and that annual cash outflows would increase by $190,000. Compute the cash payback period.
Watertown Paper Corporation is considering adding another machine for the manufacture of corrugated cardboard. The machine would cost $900,000. It would have an estimated life of 6 years and no salvage value. The company estimates that annual cash inflows would increase by $400,000 and that annual cash outflows would increase by $190,000. Compute the cash payback period.
Answer: 4,3 years.
Estimated annual cash outflows: 190 000.
Net annual cash flow: 400 000 - 190 000 = 210 000.
Cash payback period: 900 000 / 210 000 = 4,3 years.
A post-audit of an investment project should be performed:
a. On all significant capital expenditure projects
b. On all projects the management feels might be financial failures
c. On randomly selected projects
d. Only on projects that enjoy tremendous success
A post-audit of an investment project should be performed:
a. On all significant capital expenditure projects
A post-audit should be performed on all significant capital expenditure projects, because the feedback gained will help to improve the process in the future and also will give managers an incentive to be more realistic in preparing capital expenditure proposals.
Which of the following is incorrect about the annual rate of return technique?
a. The calculation is simple
b. The accounting terms are familiar to the management
c. The timing of cash inflows is not considered
d. The time value of money is considered
Which of the following is incorrect about the annual rate of return technique?
d. The time value of money is considered
Which of the following is an advantage of using the payback period?
a. It takes no account of the time value of money
b. It ignores the actual timing of cash flows
c. It ignores cash inflows after the payback point has been reached
d. It is a useful measure of the speed with which a project will pay back its initial costs
Which of the following is an advantage of using the payback period?
d. It is a useful measure of the speed with which a project will pay back its initial costs
What does the accounting rate of return measure?
a. The total profits expected from the project, expressed as a percentage of the initial outlay
b. The total profits expected from the project, expressed as a percentage of the average annual investment in the project
c. The average annual expected profit expressed as a percentage of the initial outlay
d. The average annual expected profit expressed as a percentage of the average funds invested in it
What does the accounting rate of return measure?
d. The average annual expected profit expressed as a percentage of the average funds invested in it
Which is a true statement regarding using a higher discount rate to calculate the net present value of a project?
a. It will make it less likely that the project will be accepted
b. It will make it more likely that the project will be accepted.
c. It is appropriate to use a higher rate if the project is perceived as being less risky than other projects being considered
d. It is appropriate to use a higher rate if the project will have a short useful life relative to other projects being considered
Which is a true statement regarding using a higher discount rate to calculate the net present value of a project?
a. It will make it less likely that the project will be accepted
If a higher discount rate is used calculating the net present value of a project, the resulting net present value will be lower and the project will be less likely to be accepted. The other choices are therefore incorrect
The following information is available for a potential capital investment.
Initial investment: 120 000 EUR
Annual net income: 15 000
Net annual cash flow: 27 500
Residual value: 20 000
Useful life: 8 years
The potential investment’s annual rate of return is approximately:
a. 21%
b. 15%
c. 30%
d. 39%
The following information is available for a potential capital investment.
Initial investment: 120 000 EUR
Annual net income: 15 000
Net annual cash flow: 27 500
Residual value: 20 000
Useful life: 8 years
The potential investment’s annual rate of return is approximately:
a. 21%
15 000 / ((120 000 + 20 000) / 2) = 21%
A business can either receive £200 now or an agreed amount in two years’ time. If the business requires a return of 12% on sums invested, what is the minimum amount the business should agree to receive in two years’ time?
A business can either receive £200 now or an agreed amount in two years’ time. If the business requires a return of 12% on sums invested, what is the minimum amount the business should agree to receive in two years’ time?
Answer: 250,88
200 x (1 + 12%)^2 = 250,88
If a 10% discount rate is used, what is the present value of the following two cash inflows?
£1,600 received in one year’s time, plus
£2,000 received in two years’ time.
If a 10% discount rate is used, what is the present value of the following two cash inflows?
£1,600 received in one year’s time, plus
£2,000 received in two years’ time.
Answer: 3116
1600 x 0,91 = 1456
2000 x 0,83 = 1660
1454,4 + 1652 = 3116
Xie Industries is considering two capital budgeting projects. Project A requires an initial investment of 480 000 yen. It is expected to produce net annual cash flows of 70 000 yen. Project B requires an initial investment of 750 000 yen and is expected to produce net annual cash flows of 120 000 yen. Using the cash payback technique to evaluate two projects, Xie should accept:
a. Project A because it has a shorter cash payback period
b. Project B because it has a shorter cash payback period
c. Project A because it requires a smaller initial investment
d. Project B because it produces larger net annual cash flow
Xie Industries is considering two capital budgeting projects. Project A requires an initial investment of 480 000 yen. It is expected to produce net annual cash flows of 70 000 yen. Project B requires an initial investment of 750 000 yen and is expected to produce net annual cash flows of 120 000 yen. Using the cash payback technique to evaluate two projects, Xie should accept:
b. Project B (750 000 / 120 000) has a shorter cash payback period than Project A (480 000 / 70 000). The other choices are therefore incorrect.
