L-NU AA-23-02-01-18

LYCEUM-NORTHWESTERN UNIVERSITY
Tapuac District, Dagupan City

COLLEGE OF BUSINESS EDUCATION

FINALS EXAMINATION – ACCTG 11 Management Accounting Part 2

1st Semester, AY 2020– 2021

Prepared by: Amie Jane R. Miranda, CPA

Name:_____________________________________ Score:____________________

Student No.: _______________ Year/Section:___________ Date of Exam: ____________

I. MULTIPLE CHOICES. Choose the best answer from the choices and encircle your answer. Strictly “NO
ERASURES”.

1. What does the term capital budgeting mean in the context of making capital expenditure
decisions?
a. The process of choosing assets.
b. The process of allocating the funds among assets.
c. The process of acquiring the funds to finance the business.
d. None of the given choices.
2. The long-term planning process for making and financing investments that affects a company’s
financial results over a number of years is referred to as:
a. Capital budgeting
b. Strategic planning
c. Master budgeting
d. Long-range planning
3. Capital budgeting is the process:
a. Used in a sell or process further decision.
b. Of determining how much capital stock to issue
c. Of making capital expenditure decisions.
d. Of eliminating unprofitable product line.
4. Competing investment projects where accepting one project eliminates the possibility of taking
the remaining projects is referred to as:
a. Common projects
b. Mutually-exclusive projects
c. Mutually-inclusive projects
d. Independent projects
5. A project that when accepted or rejected will not affect the cash flows of another project refers
to:
a. Independent projects
b. Dependent projects
c. Mutually exclusive projects
d. Sustaining project
6. A capital investment decision is essentially a decision to exchange current:
a. Assets for current liabilities
b. Cash outflows for the promise of receiving future cash inflows
c. Cash flows from operating activities for future cash inflows from investing activities
d. Cash inflows for future cash outflows
7. The higher the risk elements in a project, the
a. More attractive the investment is.
b. Higher the net present value is.
c. Higher the cost of capital is.
d. Higher the discount rate required is.
8. The normal methods of analyzing investments
a. Cannot be used by non-for-profit entities.

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 b. Do not apply if the projects will not produce revenues.
c. Cannot be used if the company plans to finance the project with funds already available
internally
d. Require forecasts of cash flows expected from the project.
9. Deciding whether or not an investment meets a predetermined company standard is called a
a. Screening decision
b. Payback decision
c. Profitability decision
d. Preference decision
10. The primary capital budgeting method that uses discounted cash flow techniques is the:
a. Net present value method
b. Cash payback technique
c. Annual rate of return method
d. Profitability index method
11. Cost of capital is the:
a. Amount the company must pay for its plant assets.
b. Dividends a company must pay on its equity securities.
c. Cost the company must incur to obtain its capital resources.
d. Cost the company is charged by investment bankres who handle the issuance of equity or
long-term debt securities.
12. The only future costs that are relevant to deciding whether to accept an investment are those
that will
a. Be different if the project is accepted rather than rejected
b. Be saved is the project is accepted rather than rejected
c. Be deductible for tax purposes
d. Affect net income in the period that they are incurred
13. Arbitrary company uses IRR to evaluate long-term decisions and establishes a cutoff rate of
return. Such a cutoff rate is
a. At least equal to its cost of capital
b. At least equal to the rate used by similar companies
c. Greater than the IRR on projects accepted in the past
d. Greater than the current book rate of return
14. In capital budgeting, sensitivity analysis is used to:
a. Determine whether an investment is profitable.
b. See how a decision would be affected by changes in variables.
c. Test the relationship of the IRR and NPV.
d. Evaluate mutually exclusive investments
15. How should the following projects be listed in their order of increasing risk?
a. New venture, replacement, expansion
b. Replacement, new venture, expansion
c. Replacement, expansion, new venture
d. Expansion, replacement, new venture
16. An approach that uses a number of outcome estimates to get a sense of the variability among
potential return is
a. The discounted cash flow technique
b. The net present value method
c. Risk analysis
d. Sensitivity analysis
17. The NPV and IRR methods give
a. The same decision (accept or reject) for any single investment
b. The same choice from among mutually exclusive investments
c. Different rankings of projects with unequal lives
d. The same rankings of projects with different required investments
18. The net present value (NPV) model can be used to evaluate and rank two or more proposed
projects. The approach that computes the total impact on cash flows for each option and then
converts these total cash flows to their present value is called the
a. Differential approach
b. Incremental approach

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 c. Contribution approach
d. Total project approach
19. Which statement is most correct concerning depreciation in a capital budgeting analysis?
a. Depreciation is not a cash flow and does not affect the tax cash flow.
b. Depreciation is not a cash flow but does not affect the tax cash flow.
c. Depreciation is a cash flow but does not affect the tax cash flow.
d. Depreciation is a cash flow and does not affect the tax cash flow.
20. If there were no income taxes,
a. Depreciation would be ignored in capital budgeting.
b. The NPV method would not work.
c. Income would be discounted instead of cash flow.
d. All potential investments would be desirable.
21. Bravado Company is considering toreplace its old equipment with a new one. The old
equipment had a net book value of 100,000 and 4 remaining useful years with 25,000
depreciation each year. The old equipment can be sold at 80,000. The new equipment cost
160,000, have a 4-year life. Cash savings on perating expenses before 40% taxes amount to
50,000 per year.
What is the amount of investment in the new equipment?
a. 160,000
b. 72,000
c. 80,000
d. 68,000
22. Myriad Company is considering replacing its old machine with a new and more efficient one. The
old machine has book value of 100,000, a remaining useful life of 4 years, and annual straight-
line depreciation of 25,000. The existing machine has a current market value of 80,000. The
replacement machine would cost 160,000, have a 4-year life, and will save 50,000 per year in
cash operating costs. If the replacement machine would be depreciated using the staright-line
method and the tax rate is 40%, what should be the increase in annual income taxes?
a. 14,000
b. 28,000
c. 40,000
d. 4,000
23. If an asset costs 35,000 and is expected to have a 5,000 salvage value at the end of its ten-year
life, and generates annual net cash inflows of 5,000 each year, the cash payback period is
a. 8 years
b. 7 years
c. 6 years
d. 5 years
24. Umali Corporation is considering an investment in a new cheese cutting machine to replace its
existing cheese cutter. Information on the existing machine and the replacement machine
follow:
Cost of the new machine 400,000
Net annual savings in operating costs 90,000
Salvage value now of the old machine 60,000
Salvage value of the old machine in 8 years 0
Salvage value of the new machine in 8 years 50,000
Estimated life of the new machine 8 years
What is the expected payback period for the new machine?
a. 4.44 years
b. 8.50 years
c. 2.67 years
d. 3.78 years
25. Consider a project that requires cash outflow of 50,000 with a life of eight years and a salvage
value of 5,000. Annual before-tax cash inflow amounts to 10,000. Salvage value is ignored in
computing depreciation.
Assuming a tax rate of 30% and a required rate of return of 8%, what is the payback period for
the project?
a. 5.0 years

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 b. 5.6 years
c. 6.0 years
d. 6.6 years
26. Machine Manufacturing Company considers a project that will require an initial investment of
500,000 and is expected to generate future cash flows of 200,000 for years 1 through 3 and
100,000 for years 4 through 7. The project’s payback period is:
a. 2.50 years
b. 3.50 years
c. 1.67 years
d. 3.33 years
27. The Dwilight Company plans to invest in a duplicating machine that costs 120,000. The following
are the expected annual cash inflows that are evenly received each month and the estimated
salvage value at any point of each year.
Year Cash Inflows Salvage Value
1 40,000 50,000
2 36,000 40,000
3 32,000 28,000
4 28,000 20,000
5 25,000 5,000
What is the bail-out period for this project?
a. 2.50 years
b. 2.43 years
c. 2.57 years
d. 1.83 years
28. Consider a project that requires an initial cash outflow of 500,000 with a life of eight years and a
salvage value of 20,000 upon its retirement. Annual cash inflow before tax amounts to 100,000
and a tax rate of 30 percent will be applicable. The required minimum rate of return for this type
of investment is 8 percent. The present value of 1 and the annuity of 1, discounted at 8 percent
for 8 periods are 0.54 and 5.747, respectively. Salvage value is ignored in computing
depreciation. The net present value amounts to
a. 7,560
b. 10,050
c. 17,606
d. 20,050
29. Vendo Company is planning to buy a coin-operated machine costing 400,000. For book and tax
purposes, this machine will be depreciated 80,000 each year for 5 years. Vendo estimated that
this machine will yield an annual inflow, net of depreciation and income taxes, of 120,000.
Vendo’s desired rate of return on its investments is 12%. At the following discount rates, the
NPVs of the investment in this machine are:
Discount Rate NPV
12% +3,258
14% +1,197
16% -708
18% -2,474
Vendo’s expected IRR on its investment in this machine is
a. 3.25%
b. 12.00%
c. 16.00%
d. 15.30%
30. Camel Company invests in a machine with a useful life of six years and no salvage value. The
machine will be depreciated using the straight-line method. It is expected to produce annual
cash inflow from operations, net of income taxes of 6,000. The present value of an ordinary
annuity of 1 for six periods at 10% is 4.355. The present value of 1 for six periods at 10% is 0.564.
Assuming that Camel uses a time-adjusted rate of return of 10%, how much is the original
investment?
a. 10,640
b. 29,510
c. 22,750

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 d. 26,130
31. A company is considering putting up 50,000 in a three-year project. The company’s expected
rate of return is 12%. The present value of 1.00 at 12% for one year is 0.893, for two years is
0.797, and for three years is 0.712. The cash flows, net of income taxes are 18,000 (present
value of 16,074) for the first year and 22,000 (present value of 17,534) for the second year.
Assuming that the rate of return is exactly 12%, the cash flow, net of income taxes, for the third
year would be
a. 23,022
b. 7,120
c. 10,000
d. 16,392
32. The Miracle Company is planning to purchaes a new machine which it will depreciate, for book
purposes, on a straight-line basis over a ten-year period with no salvage value and a full year’s
depreciationtaken in the year of acquisition. The new machine is expected to produce cash
flows from operations, net of income taxes, of 66,000 a year in each of the next ten years. The
accounting (book value) rate of return on the initial investment is expected to be 12 percent.
How much will the new machine cost?
a. 300,000
b. 660,000
c. 550,000
d. 792,000
For questions 33-36 will be based on the following data:
The management of Queen Company is considering the purchase of a new machine costing
400,000. The company’s desired rate of return is 10%. The present value of 1 at compound
interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively, and
the present value of annuity of 1 for 5 periods at 10 percent is 3.79. In addition to the foregoing
information, use the following data in determining the acceptability in this situation:
Year Income from Operations Net Cash Flow
1 100,000 180,000
2 40,000 120,000
3 20,000 100,000
4 10,000 90,000
5 10,000 90,000

33. The average rate of return for this investment is:

a. 18 percent
b. 6 percent
c. 58 percent
d. 10 percent
34. The net present value for this investment is:
a. Positive 36,400
b. Positive 55,200
c. Negative 99,600
d. Negative 126,800
35. The present value index for this investment is:
a. 0.88
b. 1.45
c. 1.14
d. 0.70
36. The cash payback period for this investment is:
a. 4 years
b. 5 years
c. 20 years
d. 3 years
37. A five year 1,000 par value bond pays a 6.5% annual coupon. Given a YTM of 8.0%, what is the
price of the bond today?
a. 1,040
b. 860

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 c. 940
d. 1,000
38. Paramount Company’s stock is expected to generate a dividend and terminal value one year
from now of 57.00. The stock has a beta of 1.3, the risk free interest rate is 6 percent, and the
expected return market return is 11 percent. What should the equilibrium price of Investor’s
stock in the market now?
a. 50.67
b. 43.85
c. 53.77
d. 41.22
39. What is the expected YTM on a bond that pays a 150 coupon annually, has a 1,000 par value,
and matures is six years if the current price of the bond is 978?
a. 18.99%
b. 36.7%
c. 15.6%
d. 13.9%
40. The lakeview Company’s bonds have 4 years remaining to maturity. Interest is paid annually; the
bonds have a 1,000 face value and the coupon interest rate is 9 percent.
What is the estimated yieldto maturity of the bonds at their current market price of 829?
a. 8.23%
b. 13.10%
c. 10.86%
d. 14.80%
41. You are considering the purchase of a bond with a 13% coupon rate paid and compounded
semiannually. The bond will mature in 8 years, and has a 1,000 face value. The bond currently
sells for 867. Calculate the annual yield to maturity for this bond. (Round to nearest percentage)
a. 8%
b. 9%
c. 13%
d. 16%
42. What is the yield to maturity of a bond with the following characteristics?
Coupon rate: 8% with semi-annual payments
Current price: 960
Maturity: three years until maturity
a. 4.78%
b. 5.48%
c. 9.57%
d. 12.17%
43. What is the rate of return for an investor who pays 1,054.47 for a three-year bond with a 7%
coupon and sells the bond one year later for 1,037.17?
a. 5.00%
b. 5.33%
c. 6.46%
d. 7.00%
44. A project has an initial investment of 100,000 and a profitability index of 1.15. The firm’s cost of
capital is 12 percent. The net present value of the project is
a. 15,000
b. 115,000
c. 215,000
d. 112,000
45. The company expects an after-tax income of 2,400 per year over the life of an investment that
will cost 25,000, has a 5-year service life, and has no salvage value. The average return on
investment (accounting rate of retuen) is:
a. 19.2%
b. 9.2%
c. 10.4%
d. 9.6%

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II. PROBLEM SOLVING: Solve the following questions with complete solution. Double rule your final
answer.
46. A new machine is expected to provide service over the next four years. It will cost 500,000,
generates annual cash revenues of 290,000, and requires cash operating expenses of 70,000
each year. This new machine will replace existing equipment with a carrying value of 50,000 but
with a current market value of 75,000. Assume tax rate of 30%. The company requires a 24%cut-
off rate of return. The PV factor for an annuity of 1 @ 24% for 4 years- 2.404.
Required:
What is the net present value? (5 pts)

ajmiranda
------END-----
Goodluck and Godbless

Reviewed and Checked by:

Dr. Genoveva Y. Reyes, CPA, FRIAcc

Dean, College of Business Education

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