Accounting True/False Multiple Choice Answers Only

One criticism of the payback method is that it ignores cash flows that occur after the payback point has been reached. True False The simple rate of return focuses on accounting net operating income rather than on cash flows. True False If two projects require the same amount of investment, then the preference ranking computed using either the project profitability index or the net present value will be the same. True False Projects with shorter payback periods are always more profitable than projects with longer payback periods. True False In comparing two investment alternatives, the difference between the net present values of the two alternatives obtained using the total cost approach will be the same as the net present value obtained using the incremental cost approach. True False The simple rate of return method places its focus on cash flows instead of on accounting net operating income. True False Which one of the following statements about the payback method of capital budgeting is correct? The payback method does not consider the time value of money. The payback method considers cash flows after the payback has been reached. The payback method uses discounted cash flow techniques. The payback method will lead to the same decision as other methods of capital budgeting. If investment A has a payback period of 3 years and investment B has a payback period of 4 years, then: A has a higher net present value than B. A has a lower net present value than B. A and B have the same net present value. the relation between investment A's net present value and investment B's net present value cannot be determined from the given information. The capital budgeting method that recognizes the time value of money by discounting cash flows over the life of the project, using the company's required rate of return as the discount rate is called the: simple rate of return method. net present value method. financing method. payback method. (Ignore income taxes in this problem.) A piece of new equipment will cost $70,000. The equipment will provide a cost savings of $15,000 per year for ten years, after which it will have a $3,000 salvage value. If the required rate of return is 14%, the equipment's net present value is closest to: $8,240 $(8,240) $23,888 $9,050 Ignore income taxes in this problem.) Sam Weller is thinking of investing $70,000 to start a bookstore. Sam plans to withdraw $15,000 from the business at the end of each year for the next five years. At the end of the fifth year, Sam plans to sell the business for $110,000 cash. At a 12% discount rate, what is the net present value of the investment? (closest to:) (Use exhibit11b-1, exhibit11b-2) rev: 12_14_2012, 12_21_2012 $54,075 $62,370 $46,445 $70,000 (Ignore income taxes in this problem.) The following data pertain to an investment proposal: The net present value of the proposed investment is closest to: $1,720 $6,064 $2,154 $2,025 (Ignore income taxes in this problem.) The following data pertain to an investment proposal: The working capital would be released for use elsewhere when the project is completed. What is the net present value of the project (closest to), using a discount rate of 8 percent? $2,566 $(251) $251 $5,251 (Ignore income taxes in this problem.) Mcclam, Inc., is considering the purchase of a machine that would cost $100,000 and would last for 9 years. At the end of 9 years, the machine would have a salvage value of $23,000. The machine would reduce labor and other costs by $19,000 per year. Additional working capital of $2,000 would be needed immediately. All of this working capital would be recovered at the end of the life of the machine. The company requires a minimum pretax return of 13% on all investment projects. The net present value of the proposed project is closest to: (Use exhibit11b-1, exhibit11b-2) rev: 12_14_2012, 12_21_2012 $3,833 $5,167 -$2,492 $11,514 (Ignore income taxes in this problem.) The Gage Company purchased a machine which will be depreciated by the straight-line method over its estimated 6 year life. The machine will have no salvage value. It will generate cash inflows of $7,000 each year over the next 6 years. Gage Company's required rate of return is 14%. If the net present value of this investment is $12,016, the purchase price of the machine was closest to: $30,016 $15,207 $17,916 $18,000 (Ignore income taxes in this problem.) Girman Corporation is considering three investment projects: K, L, and M. Project K would require an investment of $27,000, Project L of $59,000, and Project M of $88,000. No other cash outflows would be involved. The present value of the cash inflows would be $31,860 for Project K, $66,080 for Project L, and $95,040 for Project M. Rank the projects according to the profitability index, from most profitable to least profitable. K,M,L K,L,M L,M,K L,K,M Perkins Company is considering several investment proposals, as shown below: Rank the proposals in terms of preference using the project profitability index: D, B, C, A B, D, C, A B, D, A, C A, C, B, D Blanding Company is considering several investment proposals, as shown below: Using the project profitability index, the ranking would be: D, B, A, C D, C, A, B C, D, A, B C, A, D, B (Ignore income taxes in this problem.) The Jackson Company has invested in a machine that cost $70,000, that has a useful life of seven years, and that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have a payback period of four years. Given these data, the simple rate of return on the machine is closest to: 7.1% 8.2% 10.7% 39.3%