Accounting Capital Budgeting Questions

Capital budgeting (or investment appraisal) is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures.

Q1.For which of the following is capital budgeting not used?
a. a decision to buy a fleet of trucks b. a decision to build a new plant c. a decision to acquire more inventory d. a decision to buy earth-moving equipment

Q2.Which of the following is not a reason for budgeting for capital projects in advance of anticipated needs?
a. Late market entry may harm the company b. High demand may make equipment scarce c. Budgets, including capital project budgets, are seldom useful d. Capital is expensive to obtain on short notice

Q3.Which of the following capital budgeting projects would be an expansion into new products or markets?
a. A florist shop adds more holiday help b. A florist shop adds a gift-basket of gourmet wines and cheeses to its offerings c. A grocery store expands its produce department d. A grocery store buys more frozen food cases

Q4.The manager of a two-shift auto assembly plant pays workers $40 per hour (including benefits) to put exterior parts on cars. A robot that could do the same thing costs $80,000. Ignoring the costs of electricity and depreciation, what is the payback period on the robot?
a. 932 days b. 125 days c. 3228 days d. more than a year

Q5.Which of the following is an advantage of using payback period for capital budgeting?
a. It considers cash flows that come in after the end of the payback period b. It considers time value of money c. It can be used to determine if a project should be examined further d. None of the above

Q6.Amelia's Automatic Awnings is considering whether it should rent a booth at the home show in order to exhibit its new line of awnings for porches. The cost of the booth, which must be paid now, is $1,555. The company estimates that the exhibit will increase sales sufficiently to boost year-end profits by $2,500. Using a discount rate of 10 percent, if all additional profits from the show are booked at the end of this fiscal year, which is a year from today, and if no additional expenses are involved, what is the net present value of this project? Reminder The formula for Present Value is PV=FV/(1+k)^n

a. $1086.42 b. $718.00 c. $677.82 d. a loss

Q7.A packaging machinery company sales rep has visited Patti's Prunes and has said that their new dried fruit packaging machine can completely eliminate the packer that Patti now employs for $7,500 per year, including fringe benefits. The machine costs $10,000 and Patti can buy it for $5,000 down and $5,000 payable at the end of the first year, which includes free service. At the end of two years, the company guarantees to buy it back for $2,000. Using a discount rate of 10 percent, if the cost of electricity and any other expenses are negligible (not considered), what is the net present value of the investment?

a. $5,124 b. $7,000 c. $8,000 d. $10,124

Q8.Which of the following capital projects would justify the lowest discount rate for a company?
a. Buying machinery currently being designed b. Buying a truck needed to meet a guaranteed state contract c. Investing in a 50-50 joint venture with General Motors for a new business in a politically unstable developing country d. Investing in new product development

Q9.The Phoenix Company has 6 years remaining on a contract which produces a profit of $285,000 per year. If they are willing to sell that contract for $1,358,460, what would be its internal rate of rate of return to the buyer?
a. 6% b. 7% c. 8% d. 9%