BUAC 206 MANAGERIAL ACCOUNTING

Test Chapter 26
April 15, 2020

1) Capital investment refers to large expenditures to purchase plant assets, develop new products, or
sell more company stock.

TRUE OR FALSE

2) The acquiring of a subsidiary company by a publicly traded company would be an example of a

capital expenditure.

TRUE OR FALSE

3) Capital investments are difficult, if not impossible, to reverse once funds have been invested.

TRUE OR FALSE

4) Capital budgeting estimates often involve a considerable degree of uncertainty.

TRUE OR FALSE

5) The impact of a capital budgeting decision upon the environment is an example of a nonfinancial
consideration.

TRUE OR FALSE

6) Non-financial factors are relevant in capital budgeting.

TRUE OR FALSE

7) Nonfinancial considerations are not accounted for in capital budgeting decisions.

TRUE OR FALSE

8) Most capital budgeting techniques involve analysis of net operating profits.

TRUE OR FALSE

9) The annual net cash flow of an investment refers to the excess revenue it generates over its related
expenses.

TRUE OR FALSE

10) The payback period can be determined by multiplying the amount invested by net cash flows
received annually.

TRUE OR FALSE

11) To determine the average investment over the life of an asset, divide the total depreciation of the
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investment by two.

TRUE OR FALSE

12) The present value of a future cash flow is the amount you would pay today for the right to receive
that future amount.

TRUE OR FALSE

13) The payback period analysis fails to consider the cash flows over the entire life of the investment.

TRUE OR FALSE

14) A failure of the return on average investment method is that no consideration is given to the time
value of money.

TRUE OR FALSE

15) The present value of money is always less than its future value.

TRUE OR FALSE

16) Which of the following is not considered a capital investment?

A) The purchase of a large machine.
B) The development of a new product line.
C) The purchase of a large order of raw materials used in the production process.
D) The acquisition of a subsidiary company.

17) Capital investment decisions are not affected by:

A) Income taxes.
B) Nonfinancial considerations.
C) Depreciation methods.
D) Inventory levels.

[The following information applies to the questions displayed below.]

The Terme Corporation is contemplating the purchase of new equipment, which may potentially
increase revenues by 25%. Currently, sales are $750,000 per year and variable costs are 55% of sales.
The equipment is expected to last for 5 years with no residual value. The cash outflow expected at the
beginning of the year is $ 357,500.

18) By how much would Terme's annual gross profit increase if the investment is undertaken?
A) $750,000
B) $84,375
C) $187,500
D) $103,125

19) What is the amount of depreciation deduction the company could expense annually assuming the

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straight-line depreciation method is used?
A) $75,000
B) $41,250
C) $71,500
D) $30,250

20) Ignoring income taxes, what is the estimated annual net operating income increase/decrease?
A) $9,375 decrease
B) $12,875 increase
C) $43,125 decrease
D) $54,125 increase

21) Capital investment proposals may not be evaluated by using:

A) The payback period.
B) The return on investment method.
C) The discounted cash flow method.
D) The income statement method.

22) When management considers an investment, they look for the payback period to be:
A) Short.
B) Long.
C) Profitable.
D) Useful.

23) If an investment costs $140,000 with no residual value, an expected increase in net income of
$35,000 and a 5-year useful life, the payback period would be:
A) 2.2 years.
B) 4 years.
C) 5 years.
D) 2 years.

24) Which of the following is generally not considered a capital budgeting technique?
A) Payback period
B) Return on average investment
C) Return on stockholders' equity
D) Discounted future cash flows

25) A cost that has been incurred irrevocably by past actions is a(n):
A) Capital expenditure.
B) Incremental cost.
C) Sunk cost.
D) Fixed cost.

26) The selection of an appropriate discount rate for determining net present value of a particular
investment proposal does not depend upon:
A) The present value of the proposal's future cash flows.
B) Alternative investment opportunities available.
C) The nature of the investment proposal.
D) The investor's cost of capital.

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27) The payback period:
A) Is the length of time necessary to recover the entire cost of an investment from its resulting annual
net cash flow.
B) Is the length of time necessary to recover the entire cost of an investment from its resulting annual
net income.
C) Takes into consideration the profitability of an investment over its entire life, but ignores the
timing of its future cash flows.
D) Takes into consideration both the profitability of an investment over its entire life and the timing
of its future cash flows.

28) Which of the following factors does the payback method consider?
A) Total profitability of an investment
B) The cash flows over the entire life of an investment
C) The timing of cash flows
D) The initial investment

29) Of the following techniques of capital budgeting, which one explicitly incorporates an estimate of
an interest rate into the basic computation?
A) Payback method
B) Average rate of return
C) Discounted cash flows method
D) Accounting book value method

30) The present value of money is always:

A) Less than its future amount.
B) The same as its future amount.
C) More than its future amount.
D) More or less than its future amount depending upon the discount rate.

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