Capital Budgeting Accounting Questions & Answers (2024)

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In equipment-replacement decisions, which one of the following does not affect the decision-making process?

Current disposal price of the old equipment.
Operating costs of the old equipment.
Original fair market value of the old equipment.
Cost of the new equipment.

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The term that refers to costs incurred in the past that are not relevant to a future decision is

Discretionary cost.
Full absorption cost.
Underallocated indirect cost.
Sunk cost.

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Which one of the following statements concerning cash flow determination for capital budgeting purposes is not correct?

Tax depreciation must be considered because it affects cash payments for taxes.
Book depreciation is relevant because it affects net income.
Sunk costs are not incremental flows and should not be included.
Net working capital changes should be included in cash flow forecasts.

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A depreciation tax shield is

An after-tax cash outflow.
A reduction in income taxes.
The cash provided by recording depreciation.
The expense caused by depreciation.

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Lawson, Inc., is expanding its manufacturing plant, which requires an investment of $4 million in new equipment and plant modifications. Lawsons sales...

$3.4 million.
$4.3 million.
$4.6 million.
$5.2 million.

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Kline Corporation is expanding its plant, which requires an investment of $8 million in new equipment. Klines sales are expected to increase by $6 mil...

$6.8 million.
$ .6 million.
$9.2 million.
$9.8 million.

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Regal Industries is replacing a grinder purchased 5 years ago for $15,000 with a new one costing $25,000 cash. The original grinder is being depreciat...

$19000
$15000
$17400
$25000

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Garfield, Inc., is considering a 10-year capital investment project with forecasted revenues of $40,000 per year and forecasted cash operating expense...

$32000
$24000
$20000
$11000

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The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90000; it will cost $6000 to transport to Moo...

$68400
$68000
$64200
$79000

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The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90000; it will cost $6000 to transport to Moo...

$100000
$91000
$68400
$63000

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Of the following decisions, capital budgeting techniques would least likely be used inevaluating the

Acquisition of new aircraft by a cargo company.
Design and implementation of a major advertising program.
Trade for a star quarterback by a football team.
Adoption of a new method of allocating nontraceable costs to product lines.

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Metrejean Industries is analyzing a capital investment proposal for new equipment to produce a product over the next 8 years. At the end of 8 years, t...

$90000
$54000
$24000
$36000

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Kore Industries is analyzing a capital investment proposal for new equipment to produce a product over the next 8 years. The analyst is attempting to ...

$45000
$27000
$12000
$18000

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The Dickins Corporation is considering the acquisition of a new machine at a cost of $180,000. Transporting the machine to Dickins’ plant will cost ...

$(170000)
$(180000)
$(192000)
$(210000)

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The Dickins Corporation is considering the acquisition of a new machine at a cost of $180000. Transporting the machine to Dickins’ plant will cost $...

$200000
$158000
$136800
$126000

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The accounting rate of return

Is synonymous with the internal rate of return.
Focuses on income as opposed to cash flows.
Is inconsistent with the divisional performance measure known as return on investment.
Recognizes the time value of money.

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What is a challenge that the long-term aspect of capital budgeting presents to the management accountant.

Activity can be tracked for a single accounting period.
Capital projects affect multiple accounting periods.
The flexibility of the capital budgeting decision.
Freedom of the organization’s financial planning.

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Which of the following is not a category of relevant cash flows?

Annual net cash flows.
Project termination cash flows.
Incremental cash flows.
Net initial investment.

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The capital budgeting process contains several stages. At which stage are financial and nonfinancial factors addressed?

Identification and definition.
Selection.
Search.
Information-acquisition.

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Book rate of return is an unsatisfactory guide to selecting capital projects becauseI. It uses accrual accounting numbers.II. It compares a single...

I only.
I & II.
III only.
I, II, & III.

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Book rate of return is an unsatisfactory guide to selecting capital projects becauseI. It uses accrual accounting numbers.II. It compares a single...

I only.
I & II.
III only.
I, II, & III.

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The maximum benefit forgone by using a scarce resource for a given purpose and not for the next-best alternative is called

Opportunity cost.
Sunk cost.
Incremental cash flow.
Net initial investment.

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Book rate of return is an unsatisfactory guide to selecting capital projects becauseI. It uses accrual accounting numbers.II. It compares a single...

I only.
I & II.
III only.
I, II, & III.

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Post-investment audits

Complete a stage in the capital budgeting process.
Serve as a control mechanism.
Allow the outcome of a project to be evaluated as soon as possible.
Deter managers from proposing profitable investments.

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Calamity Cauliflower Corporation is considering undertaking a capital project.The company would have to commit $24,000 of working capital in additio...

$100,000
$60,000
$40,000
$0

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Calamity Cauliflower Corporation is considering undertaking a capital project.The company would have to commit $24,000 of working capital in additio...

$10000
$6400
$4000
$0

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Calamity Cauliflower Corporation is considering undertaking a capital project.The company would have to commit $24,000 of working capital in additio...

$6400
$4000
$2400
$0

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Calamity Cauliflower Corporation is considering undertaking a capital project.The company would have to commit $24,000 of working capital in additio...

$110000
$64000
$60000
$56000

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Calamity Cauliflower Corporation is considering undertaking a capital project.The company would have to commit $24,000 of working capital in additio...

$100,400
$96,400
$90,000
$72,400

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A firm is considering a new capital project. A salvage company is offering the firm $800,000 for its old equipment. If the firm accepts the salvage co...

Less if the carrying amount is less than the $800,000 offer.
Greater if the carrying amount is less than the $800,000 offer.
Unaffected by whether a gain or loss is recognized on the disposal.
Not determinable from the information given.

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Assume that the old equipment, which has not yet been fully depreciated, must be sold in order to purchase the new equipment. The entity’s policy is...

Greater than that during the earlier years.
Less than that during the earlier years.
The same as that during the earlier years.
Not determinable from the information given.

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Which of the following is irrelevant in projecting the cash flows of the final year of a capital project?

Cash devoted to use in project.
Disposal value of equipment purchased specifically for project.
Depreciation tax shield generated by equipment purchased specifically for project.
Historical cost of equipment disposed of in the project’s first year.

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Capital budgeting is concerned with

Decisions affecting only capital intensive industries.
Analysis of short-range decisions.
Analysis of long-range decisions.
Scheduling office personnel in office buildings.

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Capital budgeting is used for the decision analysis of

Adding product lines or facilities.
Multiple profitable alternatives.
Lease-or-buy decisions.
All of the answers are correct.

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The tax impact of equipment depreciation affects capital budgeting decisions. Currently, the Modified Accelerated Cost Recovery System (MACRS) is used...

Straight-line.
Units-of-production.
Sum-of-the-years’-digits.
200% declining-balance.

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The tax impact of equipment depreciation affects capital budgeting decisions. Currently, the Modified Accelerated Cost Recovery System (MACRS) is used...

Equal total depreciation for both methods.
MACRS producing less total depreciation than straight line.
Equal total tax payments, after discounting for the time value of money.
MACRS producing more total depreciation than straight line.

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Which one of the following capital investment evaluation methods does not take the time value of money into consideration?

Net present value.
Discounted payback.
Internal rate of return.
Accounting rate of return.

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Capital investment projects include proposals for all of the following except

The acquisition of government mandated pollution control equipment.
The expansion of existing product offerings.
Additional research and development facilities.
Refinancing existing working capital agreements.

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Which one of the following items is least likely to directly impact an equipment replacement capital expenditure decision?

The net present value of the equipment that is being replaced.
The depreciation rate that will be used for tax purposes on the new asset.
The amount of additional accounts receivable that will be generated from increased production and sales.
The sales value of the asset that is being replaced.

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Cora Lewis is performing an analysis to determine if her firm should invest in new equipment to produce a product recently developed by her firm. The ...

I, II, III and IV.
II and III only.
IV only.
III and IV only.

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In estimating “after-tax incremental cash flows” under discounted cash flow analysis for capital project evaluations, which one of the following o...

NoNoYes
NoYesYes
NoYesNo
YesNoNo

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The stage of the capital budgeting process that has the most risk is

Identifying alternative possible projects.
Forecasting cash flow.
Raising funds to initially support the project.
Evaluating performance and learning.

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Charles Company owns a building that originally cost $400,000 and has a current book value of $250,000. The building was financed by a loan that has o...

$272,000
$292,000
$372,000
$392,000

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Which one of the following procedures would most likely help managers identify errors in their capital budgeting decisions?

Value engineering.
Scenario analysis.
Post-audits.
Monte Carlo simulations.

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The net present value (NPV) method of investment project analysis assumes that the project’s cash flows are reinvested at the

Computed internal rate of return.
Risk-free interest rate.
Discount rate used in the NPV calculation.
Firm’s accounting rate of return.

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The rankings of mutually exclusive investments determined using the internal rate of return method (IRR) and the net present value method (NPV) may be...

The lives of the multiple projects are equal and the size of the required investments are equal.
The required rate of return equals the IRR of each project.
The required rate of return is higher than the IRR of each project.
Multiple projects have unequal lives and the size of the investment for each project is different.

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Amster Corporation has not yet decided on its hurdle rate for use in the evaluation of capital budgeting projects. This lack of information will prohi...

NoNoNo
YesYesYes
NoYesYes
NoYesNo

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All of the following items are included in discounted cash flow analysis except

Future operating cash savings.
The current asset disposal price.
The future asset depreciation expense.
The tax effects of future asset depreciation.

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The use of an accelerated method instead of the straight-line method of depreciation in computing the net present value of a project has the effect of...

Raising the hurdle rate necessary to justify the project.
Lowering the net present value of the project.
Increasing the present value of the depreciation tax shield.
Increasing the cash outflows at the initial point of the project.

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The NPV of a project has been calculated to be $215,000. Which one of the following changes in assumptions would decrease the NPV?

Decrease the estimated effective income tax rate.
Decrease the initial investment amount.
Extend the project life and associated cash inflows.
Increase the discount rate.

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A disadvantage of the net present value method of capital expenditure evaluation is that it

Is calculated using sensitivity analysis.
Computes the true interest rate.
Does not provide the true rate of return on investment.
Is difficult to apply because it uses a trial-and-error approach.

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Jackson Corporation uses net present value techniques in evaluating its capital investment projects. The company is considering a new equipment acquis...

$28,840
$8,150
$36,990
$80,250

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A weakness of the internal rate of return (IRR) approach for determining the acceptability of investments is that it

Does not consider the time value of money.
Is not a straightforward decision criterion.
Implicitly assumes that the firm is able to reinvest project cash flows at the firm’s cost of capital.
Implicitly assumes that the firm is able to reinvest project cash flows at the project’s internal rate of return.

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The internal rate of return (IRR) is the

Hurdle rate.
Rate of interest for which the net present value is greater than 1.0.
Rate of interest for which the net present value is equal to zero.
Rate of return generated from the operational cash flows.

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Suzie owns a computer reselling business and is expanding it. She is presented with two options. Under Proposal A, the estimated investment for the ex...

10% and 12%.
14% and 16%.
16% and 18%.
18% and 20%.

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The net present value method of capital budgeting assumes that cash flows are reinvested at

The risk-free rate.
The cost of debt.
The rate of return of the project.
The discount rate used in the analysis.

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The net present value of a proposed investment is negative; therefore, the discount rate used must be

Greater than the project’s internal rate of return.
Less than the project’s internal rate of return.
Greater than the firm’s cost of equity.
Less than the risk-free rate.

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Dr. G invested $10,000 in a lifetime annuity for his granddaughter Emily. The annuity is expected to yield $400 annually forever. What is the anticipa...

Cannot be determined without additional information.
$4
$2.5
$8

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Which of the following statements is most likely correct for a project costing $50,000 and returning $14,000 per year for 5 years?

NPV = $36,274.
NPV = $20,000.
IRR = 1.4%.
IRR is greater than 10%.

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What is the approximate IRR for a project that costs $50,000 and provides cash inflows of $20,000 for 3 years?

10%
12%
22%
27%

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Pena Company is considering a project that calls for an initial cash outlay of $50,000. The expected net cash inflows from the project are $7,791 for ...

6%
7%
8%
9%

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Assume that the probability distribution of NPVs is normal. The firm considers true risk occurring if the project results in a NPV that is zero or les...

Less than 3%.
Greater than 3%, but less than 9%.
Greater than 9%, but less than 16%.
Greater than 16%.

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Project 1 has an expected NPV of $120,000 and a standard deviation of $200,000. Project 2 has an expected NPV of $100,000 and a standard deviation of ...

1.67
1.59
1.51
0.63

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When using the net present value method for capital budgeting analysis, the required rate of return is called all of the following except the

Risk-free rate.
Cost of capital.
Discount rate.
Cutoff rate.

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The internal rate of return for a project can be determined

If the internal rate of return is greater than the firm’s cost of capital.
Only if the project cash flows are constant.
By finding the discount rate that yields a net present value of zero for the project.
By subtracting the firm’s cost of capital from the project’s profitability index.

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Carco, Inc., wants to use discounted cash flow techniques when analyzing its capital investment projects. The company is aware of the uncertainty invo...

Prepare a direct analysis of the probability of outcomes.
Use accelerated depreciation.
Adjust the minimum desired rate of return.
Increase the estimates of the cash flows.

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The accountant of Ronier, Inc., has prepared an analysis of a proposed capital project using discounted cash flow techniques. One manager has question...

Not be in error.
Be slightly overstated.
Be unusable for actual decision making.
Be slightly understated but usable.

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The internal rate of return on an investment

Usually coincides with the company’s hurdle rate.
Disregards discounted cash flows.
May produce different rankings from the net present value method on mutually exclusive projects.
Would tend to be reduced if a company used an accelerated method of depreciation for tax purposes rather than the straight-line method.

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The internal rate of return is

The breakeven borrowing rate for the project in question.
The yield rate/effective rate of interest quoted on long-term debt and other instruments.
Favorable when it exceeds the hurdle rate.
All of the answers are correct.

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All of the following are the rates used in net present value analysis except for the

Cost of capital.
Hurdle rate.
Discount rate.
Accounting rate of return.

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In evaluating a capital budget project, the use of the net present value (NPV) model is generally not affected by the

Method of funding the project.
Initial cost of the project.
Amount of added working capital needed for operations during the term of the project.
Project’s salvage value.

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An advantage of the net present value method over the internal rate of return model in discounted cash flow analysis is that the net present value met...

Computes a desired rate of return for capital projects.
Can be used when there is no constant rate of return required for each year of the project.
Uses a discount rate that equates the discounted cash inflows with the outflows.
Uses discounted cash flows whereas the internal rate of return model does not.

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Basic time value of money concepts concernInterest FactorsRiskCost of capital

YesYesNo
YesNoYes
NoYesNo
NoNoYes

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The present value may be calculated for discounted cashInflowsOutflowsAnnuities

YesYesYes
YesNoYes
NoYesNo
NoNoYes

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Brown and Company uses the internal rate of return (IRR) method to evaluate capital projects. Brown is considering four independent projects with the ...

Projects I and II only.
Projects III and IV only.
Project IV only.
Projects I, II, III and IV.

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Depreciation is incorporated explicitly in the discounted cash flow analysis of an investment proposal because it

Is a cost of operations that cannot be avoided.
Is a cash inflow.
Reduces the cash outlay for income taxes.
Represents the initial cash outflow spread over the life of the investment.

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The method that recognizes the time value of money by discounting the after-tax cash flows over the life of a project using the company’s minimum de...

Accounting rate of return method.
Net present value method.
Internal rate of return method.
Payback method.

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A company has unlimited capital funds to invest. The decision rule for the company to follow in order to maximize shareholders’ wealth is to invest ...

Present value greater than zero.
Net present value greater than zero.
Internal rate of return greater than zero.
Accounting rate of return greater than the hurdle rate used in capital budgeting analyses.

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Future, Inc., is in the enviable situation of having unlimited capital funds. The best decision rule, in an economic sense, for it to follow would be ...

Accounting rate of return is greater than the earnings as a percent of sales.
Payback reciprocal is greater than the internal rate of return.
Internal rate of return is greater than zero.
Net present value is greater than zero.

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The technique that recognizes the time value of money by discounting the after-tax cash flows for a project over its life to time period zero using th...

Net present value method.
Payback method.
Average rate of return method.
Accounting rate of return method.

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Sarah Birdsong has prepared a net present value (NPV) analysis for a 15-year equipment modernization program. Her initial calculations include a serie...

Adjust for inflationAdjust for inflation
Adjust for inflationDo not adjust for inflation
Do not adjust for inflationAdjust for inflation
Do not adjust for inflationDo not adjust for inflation

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If the present value of expected cash inflows from a project equals the present value of expected cash outflows, the discount rate is the

Payback rate.
Internal rate of return.
Accounting rate of return.
Net present value rate.

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Bell Delivery Co. is financing a new truck with a loan of $30,000 to be repaid in five annual installments of $7,900 at the end of each year. What is ...

4%
6%
10%
16%

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All of the following are methods used to evaluate investments for capital budgeting decisions except

Accounting rate of return.
Internal rate of return
Excess present value (profitability) index.
Required rate of return.

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For a given investment project, the interest rate at which the present value of the cash inflows equals the present value of the cash outflows is call...

Hurdle rate.
Payback rate.
Internal rate of return.
Cost of capital.

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The net present value of an investment project represents the

Total actual cash inflows minus the total actual cash outflows.
Excess of the discounted cash inflows over the discounted cash outflows.
Total after-tax cash flow including the tax shield from depreciation.
Cumulative accounting profit over the life of the project.

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Wilcox Corporation won a settlement in a law suit and was offered four different payment alternatives by the defendant’s insurance company. A review...

$135,000 now.
$40,000 per year at the end of each of the next 4 years.
$5,000 now and $20,000 per year at the end of each of the next 10 years.
$5,000 now and $5,000 per year at the end of each of the next 9 years, plus a lump-sum payment of $200,000 at the end of the tenth year.

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Verla Industries is trying to decide which one of the following two options to pursue. Either option will take effect on January 1st of the next year....

$229,710 net cash outflow.
$267,620 net cash outflow.
$369,260 net cash outflow.
$434,424 net cash outflow.

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An investment decision is acceptable if the

Net present value is greater than or equal to $0.
Present value of cash inflows is less than the present value of cash outflows.
Present value of cash outflows is greater than or equal to $0.
Present value of cash inflows is greater than or equal to $0.

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Which of the following is not a shortcoming of the internal rate of return (IRR) method?

IRR assumes that funds generated from a project will be reinvested at an interest rate equal to the project’s IRR.
IRR does not take into account the difference in the scale of investment alternatives.
IRR is easier to visualize and interpret than net present value (NPV).
Sign changes in the cash flow stream can generate more than one IRR.

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A company is in the process of evaluating a major product line expansion. Using a 14% discount rate the firm has calculated the present value of both ...

Taking a closer look at the expansion’s contribution margin.
Comparing the internal rate of return versus the accounting rate of return.
Comparing the internal rate of return versus the company’s cost of capital.
Comparing the internal rate of return versus the company’s cost of capital and hurdle rate

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With regard to a capital investment project, which one of the following statements best describes the relationship between the cost of capital and the...

The internal rate of return must exceed the cost of capital for the project to be acceptable.
If the internal rate of return exceeds zero, the project will be profitable.
The cost of capital must exceed the internal rate of return for the project to be acceptable.
The internal rate of return should be compared to a pre-determined benchmark without regard to the cost of capital.

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The primary advantage of using the internal rate of return (IRR) method to evaluate capital budgeting projects is that it

Results in decisions that will maximize shareholder wealth.
Results in decisions that will maximize income.
Is easy to understand and communicate.
Assumes a conservative reinvestment rate.

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A company invested $500,000 in a new project. The project is expected to yield annual incremental cash flows of $175,000 for 4 years. What is the appr...

10%
15%
35%
40%

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One disadvantage of using internal rate of return (IRR) is that it

Provides a result that cannot be compared to other projects.
May not be used when cash flows vary from positive to negative in different years.
Is difficult for managers to understand the results of the calculation.
Can only use a limited number of years in calculating the result.

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Assume that an investment project’s assumed cash flows are not changed but the assumed weighted-average cost of capital is reduced. What impact...

NPV would increase, and IRR would increase.
NPV would decrease, and IRR would increase.
NPV would not change, and IRR would not change.
NPV would increase, and IRR would not change.

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The net present value (NPV) and the internal rate of return (IRR) capital budgeting methods make assumptions about the reinvestment rate of cash inflo...

Under both NPV and IRR, the reinvestment rate is the risk-free rate of return.
Under NPV and IRR, the reinvestment rate is the cost of capital rate and the risk-free rate of return, respectively.
Under NPV and IRR, the reinvestment rate is the cost of capital rate and the internal rate of return, respectively.
Under NPV and IRR, the reinvestment rate is the cost of capital rate and the asset risk premium rate, respectively.

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Which one of the following statements is correct regarding the net present value (NPV) and the internal rate of return (IRR) approaches to capital bud...

If the IRR of a project is equal to the company’s cost of capital the NPV of the project must be 0.
Both approaches always provide the same ranking of alternative projects.
If the NPV of a project is negative, the IRR must be greater than the company’s cost of capital.
Both approaches fail to consider the timing of the project’s cash flows.

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eGoods is an online retailer. The management of eGoods is interested in purchasing and installing a new server for a total cost of $150,000. The contr...

$15000
$22500
$37500
$60000

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Mega Power estimates that the cost to decommission its nuclear power plant in today’s dollars is $500 million. This cost is expected to escalat...

$38 million.
$26 million.
$23 million.
$20 million.