Braun

Managerial Accounting, 2e
Braun/Tietz/Harrison
Test Item File
Chapter 12: Capital Investment Decisions and the Time Value of Money
12.1-1 The process of making capital investment decisions is referred to as capital return.
Answer: False
LO: 12-1
Diff: 1
EOC: E12-15
AACSB: Reflective Thinking
AICPA Business Perspective Competencies: Critical Thinking
AICPA Functional Competencies: Reporting
12.1-2 Self-scan check-out machines are an example of capital assets.
Answer: True
LO: 12-1
Diff: 1
EOC: E12-15
12.1-3 Capital budgeting is based on job costing.
Answer: False
LO: 12-1
Diff: 1
EOC: E12-15
AACSB: Analytical Thinking
12.1-4 Choosing among alternative capital investments is called capital rationing.
Answer: True
LO: 12-1
Diff: 1
EOC: E12-15
Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 1

12.1-5 Post-audits of capital investments help determine the net cash flows generated by capital
investments.
Answer: False
LO: 12-1
Diff: 1
EOC: E12-15
12.1-6 The costs to develop a major website for a company would be considered to be a capital asset if
those costs are significant.
Answer: True
LO: 12-1
Diff: 1
EOC: E12-16
12.1-7 The cost associated with renovating a warehouse to be used as a restaurant would be considered
to be a capital asset.
Answer: True
LO: 12-1
Diff: 1
EOC: E12-16
12.1-8 The health care insurance cost of a company for its assembly-line workers would be considered
to be a capital asset.
Answer: False
LO: 12-1
Diff: 1
EOC: E12-16

12.1-9 Which of the following items would be considered to be a capital asset?
A. Purchase of office supplies to be used internally over the next year
B. Payment for this years advertising campaign
C. Donation of money to United Way
D. Construction of new store building
Answer: D
LO: 12-1
Diff: 1
EOC: E12-16
12.1-10 A capital asset has which of the following characteristics?

A. The item will be used for a long period of time.
B. The item involves a significant sum of money.
C. Both A and B are correct.
D. None of these characteristics are correct.
Answer: C
LO: 12-1
Diff: 1
EOC: E12-15
12.1-11 What is the name given to choosing among different alternative investments due to limited
resources?
A. Capital rationing
B. Capital investing
C. Resource rationing
D. Resource allocation
Answer: A
LO: 12-1
Diff: 1
EOC: E12-15

12.1-12 Which capital budgeting method uses accrual accounting, rather than net cash flows, as a basis
for calculations?
A. Payback
B. ARR
C. NPV
D. IRR
Answer: B
LO: 12-1
Diff: 1
EOC: E12-15
12.1-13 Which of the following is TRUE regarding capital rationing decisions for capital assets?
A. Companies should always choose the investment with the shortest payback
period.
B. Companies should always choose the investment with the highest NPV.
C. Companies should always choose the investment with the highest ARR.
D. None of the above are true.
Answer: D
LO: 12-1
Diff: 1
EOC: E12-15
12.1-14 After a company invests in capital assets, which of the following will it perform in order to
compare the actual to the projected net cash inflows?
A. Cash flow analysis
B. Post-audit
C. Pre and post analysis
D. Post-cash flow
Answer: B
LO: 12-1
Diff: 1
EOC: E12-15

12.1-15 Which term below is best described as a formal means of analyzing long-range investment
alternatives?
A. Time value of money
B. Capital budgeting
C. Payback period
D. Annuity
Answer: B
LO: 12-1
Diff: 1
EOC: E12-15
12.1-16 Which term below is best described as the relationship among principle, interest rate, and time?
C. Payback period
D. Annuity
Answer: A
LO: 12-1
Diff: 1
EOC: E12-15
12.1-17 Which term below is best described as a stream of equal periodic payments?
C. Payback period
D. Annuity
Answer: D
LO: 12-1
Diff: 1
EOC: E12-15

12.1-18 Which term below is best described as the length of time required to recover the cost of an
investment?
C. Payback period
D. Annuity
Answer: C
LO: 12-1
Diff: 1
EOC: E12-15
12.2-1 Investments with shorter payback periods are more desirable, all else being equal.
Answer: True
LO: 12-2
Diff: 1
EOC: E12-15
12.2-2 The payback method can only be used when the net cash inflows from a capital investment are
the same for each period.
Answer: False
LO: 12-2
Diff: 1
EOC: E12-15
12.2-3 Capital budgeting predictions must consider factors such as changing consumer preferences,
competition, and government regulations.
Answer: True
LO: 12-2
Diff: 1
EOC: E12-15

12.2-4 The accounting rate of return method of analyzing capital budgeting decisions measures the
average rate of return from using the asset over its entire life.
Answer: True
LO: 12-2
Diff: 2
EOC: E12-15
12.2-5 The accounting rate of return is a measure of liquidity computed by dividing the average annual
cash flows from an asset by the average amount invested in the asset.
Answer: False
LO: 12-2
Diff: 2
EOC: E12-15
12.2-6 Accrual-based accounting is used in determining the accounting rate of return.
Answer: True
LO: 12-2
Diff: 1
EOC: E12-15
12.2-7 The payback method primarily focuses on time and not profitability.
Answer: True
LO: 12-2
Diff: 1
EOC: E12-15
12.2-8 One advantage of the accounting rate of return is that it considers the time value of money.
Answer: False
LO: 12-2
Diff: 1
EOC: E12-15
12.2-9 One disadvantage of the payback method is that it does not consider the time value of money.
Answer: True
LO: 12-2
Diff: 1
EOC: E12-15
12.2-10 How does depreciation affect the calculation of a projects payback period?
A. Depreciation is deducted from the annual cash inflows.
B. Depreciation is added to the annual cash inflows.
C. Depreciation does not affect the payback calculation.
D. Depreciation is only deducted if the payback period exceeds five years.
Answer: C
LO: 12-2
Diff: 1
EOC: E12-15
12.2-11 How does depreciation affect the calculation of a projects accounting rate of return (ARR)?
A. Depreciation is deducted from the annual cash inflows.
B. Depreciation is added to the annual cash inflows.
C. Depreciation does not affect ARR.
D. Depreciation is only deducted if the ARR is less than the minimum required rate of return.
Answer: A
LO: 12-2
Diff: 1
EOC: E12-15
12.2-12 When computing the payback period for a capital asset with equal annual net cash inflows, which
of the following is used as the equations numerator?
A. Expected annual cash inflow
B. Amount invested
C. Total cash inflows
D. Net cash outflow
Answer: B
LO: 12-2
Diff: 1
EOC: E12-17

12.2-13 When computing the accounting rate of return for a capital asset, which of the following is used
as the equations numerator?
A. Average annual operating income from the asset
B. Average amount invested in the asset
C. Total amount invested in the asset
D. Average net cash flows from the asset
Answer: A
LO: 12-2
Diff: 1
EOC: E12-19
AICPA Functional Competencies: Decision Making
12.2-14 All else being equal, a company would choose to invest in a capital asset if which of the
following is TRUE?
A. If the payback period equals the amount invested
B. If the expected accounting rate of return is less than the required rate of return
C. If the average amount invested is equal to the net cash inflows
D. If the expected accounting rate of return is greater than the required rate of
return
Answer: D
LO: 12-2
Diff: 2
EOC: E12-15
12.2-15 Which of the following is the formula for calculating the accounting rate of return for a capital
asset?
A. Average annual net cash inflow from asset/amount invested in asset
B. Average annual operating income from asset/amount invested in asset
C. (Average annual operating income + depreciation expense)/amount invested in asset
D. (Average annual cash inflows depreciation expense)/(amount invested in asset + residual
value of asset)
Answer: B
LO: 12-2
Diff: 1
EOC: E12-19

12.2-16 Latimer Corporation is considering two alternative investment proposals with the following data:
Proposal X Proposal Y
Investment $ 812,500 $ 390,000
Useful life 8 years 8 years
Estimated annual net
cash inflows for 8 years $ 125,000 $ 78,000
Residual value $ 40,000 $ -
Depreciation method Straight-line Straight-line
Required rate of return 14% 10%
How long is the payback period for Proposal X?

A. 5.00 years
B. 6.50 years
C. 10.42 years
D. 20.31 years
Answer: B
Calculations:
Payback = Investment/annual cash flow
$812,500.00/$125,000.00 = 6.5 years
LO: 12-2
Diff: 1
EOC: E12-17

Investment $ 812,500 $ 390,000
How long is the payback period for Proposal Y?

A. 20.31 years
B. 9.75 years
C. 6.50 years
D. 5.00 years
Answer: D
Calculations:
$390,000/$78,000.00 = 5.0 years
LO: 12-2
Diff: 2
EOC: E12-17

Investment $ 812,500 $ 390,000
What is the accounting rate of return for Proposal X?

A. 3.50 %
B. 4.22 %
C. 15.38 %
D. 27.27 %
Answer: A
Calculations:
(Annual net cash flow depreciation)/Investment = Accounting rate of return
($125,000 (812,500 40000/8))/812,500
($125,000 96,562.50)/812500 = 3.50 %
LO: 12-2
Diff: 2
EOC: E12-19

Investment $ 812,500 $ 390,000
What is the accounting rate of return for Proposal Y?

A. 7.50 %
B. 8.78 %
C. 20.00 %
D. 32.50 %
Answer: A
Calculations:
($78,000 - (390,000/8)/390,000 =
($78,000 48,350)/390,000 = 7.50 %
LO: 12-2
Diff: 2
EOC: E12-19
12.2-20 Brackett Corporation is adding a new product line that will require an investment of $120,000.
The product line is estimated to generate cash inflows of $25,000
the first year, $23,000 the second year, and $18,000 each year thereafter
for ten more years. What is the payback period?
A. 4.80 years
B. 6.00 years
C. 6.32 years
D. 6.67 years
Answer: B
LO: 12-2
Diff: 2
EOC: E12-17

12.2-21 Boyle Company is evaluating two possible investments in depreciable plant assets. The company
uses the straight-line method of depreciation. The following information is available:
Investment A Investment B
Initial capital investment $100,000 $150,000
Estimated useful life 3 years 3 years
Estimated residual value $10,000 $15,000
Estimated annual net cash inflow $25,000 $40,000
For 3 years
The present value factors of $1 due 3 years from now:
8% 0.794
10% 0.751
12% 0.712
14% 0.675
16% 0.641
The annuity present value factors of $1 due at the end of each of 3 years:
8% 2.577
10% 2.487
12% 2.402
14% 2.322
16% 2.246
How long is the payback period for Investment A?

A. 2.49 years
B. 3.60 years
C. 4.00 years
D. 10.00 years
Answer: C
Calculations:
$100,000/25,000 = 4 years
LO: 12-2
Diff: 2
EOC: E12-18

12.2-22 Boyle Company is evaluating two possible investments in depreciable plant assets. The company
uses the straight-line method of depreciation. The following information is
available:
Investment A Investment B
Initial capital investment $100,000 $150,000
Estimated useful life 3 years 3 years
Estimated annual net cash inflow $25,000 $40,000
For 3 years
The present value factors of $1 due 3 years from now:
8% 0.794
10% 0.751
12% 0.712
14% 0.675
16% 0.641
The annuity present value factors of $1 due at the end of each of 3 years:
8% 2.577
10% 2.487
12% 2.402
14% 2.322
16% 2.246
How long is the payback period for Investment B?

A. 2.40 years
B. 3.38 years
C. 3.75 years
D. 10.00 years
Answer: C
Calculations:
$150,000/40,000 = 3.75 years
LO: 12-2
Diff: 2
EOC: E12-18

12.2-23 Mahtomedi Corporation is considering investing in specialized equipment costing $240,000. The
equipment has a useful life of 5 years and a residual value of $20,000.
Depreciation is calculated using the straight-line method. The expected net cash inflows
from the investment are:
Year 1 $ 60,000
Year 2 $ 90,000
Year 3 $110,000
Year 4 $ 40,000
Year 5 $ 25,000
Total cash inflows $325,000
Mahtomedi Corporations required rate of return on investments is 14%.
What is the accounting rate of return on the investment?

A. 6.67%
B. 8.75%
C. 18.33%
D. 45.42%
Answer: B
Calculations:
($325,000 - (240,000 - 20,000)/5)/240,000
($325,000 44,000)/240,000 = 8.75 %
LO: 12-2
Diff: 2
EOC: E12-19
12.2-24 Richol Corporation is considering an investment in new equipment costing $180,000. The
equipment will be depreciated on a straight-line basis over a five-year life and is
expected to generate net cash inflows of $45,000 the first year, $65,000 the
second year, and $90,000 every year thereafter until the fifth year. What is the
payback period for this investment? The equipment has no residual value.
A. 2.00 years
B. 2.37 years
C. 2.78 years
D. 4.00 years
Answer: C
LO: 12-2
Diff: 2
EOC: E12-18

12.2-25 Suppose Barnes & Noble Booksellers is considering investing in warehouse-management
software that costs $500,000, has $50,000 residual value and
should lead to cash cost savings of $120,000 per year for its five-
year life. In calculating the ARR, which of the following figures should be used
as the equations denominator?
A. $225,000
B. $500,000
C. $250,000
D. $275,000
Answer: B
Calculations: Investment = $500,000
LO: 12-2
Diff: 1
EOC: E12-18
12.2-26 Dazzle Company uses straight-line depreciation and is considering a capital expenditure for
which the following relevant cash flow data have been
estimated:
Estimated useful life: 3 years

Initial investment: $500,000
Savings year 1:
$200,000
Savings year 2: $150,000
Residual value after 3 yrs $ 20,000
Total net inflows during the useful life of the asset are:
A. $595,000.
B. $575,000.
C. $555,000.
D. $ 75,000.
Answer: B
Calculations:
Savings year 1:
$200,000
Total $575.000

LO: 12-2
Diff: 2
EOC: E12-17
estimated:

Savings year 1:
$200,000
Total operating income from the asset over the 3-year period is:
A. $ 75,000
B. $ 95,000
C. $160,000
D. $415,000
Answer: B
LO: 12-2
Diff: 2
EOC: E12-19
estimated:

Savings year 1:
$200,000
The total depreciation expense over the life of the asset is:
A. $160,000
B. $480,000
C. $520,000
D. $575,000

Answer: B
Calculations:
Investment - residual value
$500,000 - 20,000 = 480,000
LO: 12-2
Diff: 2
EOC: E12-18
estimated:

Savings year 1:
$200,000
The accounting rate of return is closest to:

A. 38.33%.
B. 32.00%.
C. 6.33%.
D. 5.51%.
Answer: C
Calculations:
((200,000 + 150,000 + 225,000) (500,000 20,000)/500,000
(575,000 - 480,000)/500,000 = 19.00
Divide by 3 years = 6.33 %
LO: 12-2
Diff: 2
EOC: E12-20

12.2-30 Williams Department Stores is considering two possible expansion plans. One proposal involves
opening 5 stores in Indiana at the cost of $1,800,000. Under the
other proposal, the company would focus on Kentucky and open 6 stores at a
cost of $2,400,000. The following information is available:
Indiana proposal Kentucky proposal

Required investment $1,800,000 $2,400,000
Estimated life 10 years 10 years
Estimated annual cash inflows over $400,000 $500,000
the next 10 years
The payback period for the Kentucky proposal is closest to:

A. 4.5 years.
B. 4.8 years.
C. 6.0 years.
D. 30.0 years.
Answer: B
Calculations:
Investment/Annual cash flows
$2,400,00/500,000 = 4.8 yrs
LO: 12-2
Diff: 2
EOC: E12-18


the next 10 years
The payback period for the Indiana proposal is closest to:

A. 3.6 years.
B. 4.5 years.
C. 4.8 years.
D. 36.0 years.
Answer: B
Calculations:
$1,800,000/400,000 = 4.5 yrs
LO: 12-2
Diff: 2
EOC: E12-18


the next 10 years
The accounting rate of return for the Kentucky proposal is closest to:
A. 10.83%.
B. 11.17%.
C. 12.50%.
D. 20.83%.
Answer: B
Calculations:
($500,000 (2,400,000 80,000)/10)/2,400,000
($500,000 - 232,000)/2,400,000 = 11.167%
LO: 12-2
Diff: 2
EOC: E12-18


the next 10 years
The accounting rate of return for the Indiana proposal is closest to:
A. 11.17%.
B. 12.22%.
C. 12.50%.
D. 22.22%.
Answer: C
Calculations:
($400,000 (1,800,000 50,000)/10)/1,800,000
($400,000 - 175,000)/1,800,000 = 12.50 %
LO: 12-2
Diff: 2
EOC: E12-18

12.2-34 Rinky Dink Family Fun Center bought new bumper boats for its recreation facility. The useful
life is 6 years. The bumper boats had a total cost $5,338 and will generate
$1,570 total cash inflows each year for the life of the boats. The residual value of the bumper boats
is $650. The payback period in years is closest to:
A. 2.40.
B. 2.99.
C. 3.40.
D. 3.81.
Answer: C
Calculations:
5,338/1570 = 3.40 yrs
LO: 12-2
Diff: 2
EOC: E12-17
AICPA Functional Competencies: Measurement
12.2-35 Sierra Discount Drugstore bought a new high-speed photo printer for customers to be able to
bring in their digital pictures to make high-quality prints. Its useful life is 6 years. The printer
cost $8,170 and will generate annual cash inflows of $2,150. The residual value
of the printer is $1,320. The payback period in years is closest to:
A. 2.35.
B. 3.19.
C. 3.80.
D. 4.41.
Answer: C
Calculations:
$8,170/2,150 = 3.8 yrs
LO: 12-2
Diff: 2
EOC: E12-17

12.2-36 Buster Corporation is evaluating a capital investment project which would require an initial
investment of $285,000 to purchase machinery. The annual revenues and expenses generated
solely by this project each year during the projects nine year life would be:
Sales $185,000
Variable expenses $ 38,000
Contribution margin $147,000
Fixed expenses:
Salaries expense $ 31,000
Rent expense $ 24,000
Depreciation expense $ 30,000
Total fixed expenses $ 85,000
Operating income $ 62,000
The residual value of the machinery at the end of the nine years would be $15,000. The payback
period of this potential project in years would be closest to:
A. 1.6.
B. 3.1.
C. 3.7.
D. 4.6.
Answer: B
Calculations:
$285,000 - (62,000 + 30,000) = 3.1 yrs
LO: 12-2
Diff: 3
EOC: E12-17

12.2-37 Sawyer & Cecil, Computer Consultants, is considering an investment in computer and network
equipment costing $254,000. This equipment would allow them
to offer new programming services to clients. The equipment will be
depreciated on the straight-line basis over an eight- year period
with an estimated residual value of $60,000. Using the accounting rate of return
model, what is the minimum average annual operating income that must be generated from this
investment in order to achieve a 12% accounting rate of return?
A. $7,200
B. $23,280
C. $30,480
D. $31,750
Answer: C
Calculations:
Annual net cash flow/254,000 = 12 %
Annual net cash flow = 12 % x 254,000 = 30,480.
LO: 12-2
Diff: 3
EOC: E12-20
12.2-38 Simone Corporation bought a new machine which cost $87,500, has a useful life of 10 years, and
will generate annual cash inflows of $25,000. The residual value of the machine is $5,500. What
is the payback period?
Answer: $87,500/$25,000 = 3.50 years
LO: 12-2
Diff: 2
EOC: E12-17

12.2-39 The Jones Company bought a new specialty machine that cost $120,000 with a 6-year life with no
residual value. The company plans to generate annual cash inflows of $32,000 each year for 6
years. Calculate the accounting rate of return.
Answer: 10.00%
Calculations: ($120,000 0)/6 years = $20,000 annual depreciation expense

$32,000 $20,000/$120,000 = $12,000/$120,000 = 10.00%
LO: 12-2
Diff: 2
EOC: E12-17
12.2-40 The Harris Corporation bought a new machine that cost $170,000 with a 15-year life and a
residual value of $20,000. They plan to generate annual cash inflows of $40,000 over 15 years.
Calculate the accounting rate of return.
Answer: 17.65%
Calculations: ($170,000 $20,000)/15 years = $10,000 annual depreciation expense

$40,000 $10,000/$170,000 = $30,000/$170,000 = 17.65%
LO: 12-2
Diff: 2
EOC: E12-17
12.2-41 Meccah, Inc., is considering investing $250,000 in a machine that will last 4 years with no
residual value. The new machine will generate annual operating income of $60,000 per year for 4
years. What is the accounting rate of return?
Answer: 24%
Calculations: $60,000/$250,000 = 24%
LO: 12-2
Diff: 2
EOC: E12-20

12.2-42 Ryan Manufacturing is considering acquiring another facility for a cost of $610,000. The
required payback period is 4.5 years. Assume annual net cash inflows are $160,000 for the first
two years and $125,000 for years 3 and 4. What must the inflow be in the fifth year to meet the
4.5 year payback period?
Answer: $80,000
Calculations: $320,000 + $250,000 + .5X = $610,000; X = $80,000
LO: 12-2
Diff: 3
EOC: 12-20
12.3-1 The net present value method incorporates the time value of money.
Answer: True
LO: 12-3
Diff: 1
EOC: S12-10
12.3-2 The principal amount and the interest rate are the only factors needed to calculate the time value
of money.
Answer: False
LO: 12-3
Diff: 1
EOC: S12-10
12.3-3 Calculating interest on the principal and on all the interest earned to date is called compound
interest.
Answer: True
LO: 12-3
Diff: 1
EOC: S12-10

12.3-4 When computing the time value of money, the interest rate must always be expressed as an
annual rate.
Answer: False
LO: 12-3
Diff: 2
EOC: S12-10
12.3-5 The Future Value of $1 table is used to calculate how much $100 would be worth in 5 years.
Answer: True
LO: 12-3
Diff: 1
EOC: S12-7
12.3-6 The three factors that affect the time value of money are principle, number of periods, and
interest rate.
Answer: True
LO: 12-3
Diff: 1
EOC: S12-10
12.3-7 Which of the following explains the time value of money?

A. Money is more valuable over time.
B. Invested money earns income over time.
C. A stream of payments is received over time.
D. Interest is always compounded over time.
Answer: B
LO: 12-3
Diff: 2
EOC: S12-10

12.3-8 Your grandmother has promised to give you $2,000 a year at the end of each of the next four
years if you earn Cs or better in all of your courses each year.
Using a discount rate of 8%, which of the following is correct for
determining the present value of the gift?
A. PV = $2,000 x 8% x 4
B. PV = $2,000 x (PV factor, i = 4%, n = 8)
C. PV = $2,000 x (Annuity FV factor, i = 8%, n = 4)
D. PV = $2,000 x (Annuity PV factor, i = 8%, n = 4)
Answer: D
LO: 12-3
Diff: 2
EOC: S12-10
12.3-9 You won the lottery and have a number of choices as to how to take the money. Which choice
yields a greater present value?
A. $12,000 a year at the end of each of the next 6 years using a 6% discount rate
B. $53,500 (lump sum) now using a 6% discount rate
C. $84,000 (lump sum) 7 years from now using a 6% discount rate
D. $92,000 (lump sum) 7 years from now using an 8% discount rate
Answer: A
LO: 12-3
Diff: 2
EOC: S12-7
12.3-10 Your rich aunt has promised to give you $3,000 a year at the end of each of the next four years to
help with college. Using a discount rate of 10%, the present
value of the gift can be stated as:
A. PV = $3,000 (PV factor, i = 4%, n = 4).
B. PV = $3,000 x 10% x 5.
C. PV = $3,000 (Annuity PV factor, i = 10%, n = 4).
D. PV = $3,000 (Annuity FV factor, i = 10%, n = 4).
Answer: C
LO: 12-3
Diff: 2
EOC: S12-10

12.3-11 Which of the following affects the present value of an investment?
A. The interest rate
B. The number of time periods (length of the investment)
C. The type of investment (annuity versus lump sum)
D. All of the above
Answer: D
LO: 12-3
Diff: 2
EOC: S12-10
12.3-12 You win the lottery and must decide how to take the payout. Use an 8% discount rate.
What is the present value of $10,000 a year received at the end of each of the next six years?
A. $ 6,300
B. $46,230
C. $49,928
D. $60,000
Answer: B
Calculations: Present value annuity @ 8 % for 6 yrs = 4.6229 x 10,000 = $46,230
LO: 12-3
Diff: 1
EOC: S12-7
12.3-13 Assuming an interest rate of 10%, the present value of $40,000 to be received 8 years from now
would be closest to:
A. $15,440.
B. $16,960.
C. $18,680.
D. $85,760.
Answer: C
Calculations: Present value @ 10 % for 8 yrs = .4665 x 40,000 = $18,660
LO: 12-3
Diff: 1
EOC: S12-7

12.3-14 Assuming an interest rate of 10%, the present value of $12,000 received at the end of each year
for 6 years would be closest to:
A. $ 6,768.
B. $52,260.
C. $72,000.
D. $92,592.
Answer: B
Calculations: Present value annuity @ 10 % for 6 yrs = 4.3553 x 12,000 = $52,264
LO: 12-3
Diff: 1
EOC: S12-7
12.3-15 Assuming an interest rate of 10%, if you invest a lump sum of $4,000 now, the balance of your
investment in 7 years will be closest to:
A. $ 7,796.
B. $10,376.
C. $19,472.
D. $28,000.
Answer: A
Calculations: Future value @ 10 % for 7 yrs = 1.9487 x 4000 = 7,796
LO: 12-3
Diff: 1
EOC: S12-7

12.3-16 If you invest $1,000 at the end of every year for five years at an interest rate of 10%, the balance
of your investment in 5 years will be closest to:
A. $1,611.
B. $3,791.
C. $5,000.
D. $6,105.
Answer: D
Calculations: Future value annuity @ 10 % for 5 yrs = 6.1051 x 1000 = 6,105
LO: 12-3
Diff: 1
EOC: S12-7
12.3-17 Assuming an interest rate of 6%, the present value of $20,000 to be received 9 years from now
would be closest to:
A. $11,840.
B. $14,940.
C. $31,880.
D. $33,784.
Answer: A
Calculations: Present value @ 6 % for 9 yrs = .592 x 20,000 = 11,840
LO: 12-3
Diff: 1
EOC: S12-7
12.3-18 Assuming an interest rate of 6%, the present value of $16,000 received at the end of each year for
6 years would be closest to:
A. $ 10,640.
B. $ 78,672.
C. $111,600.
D. $128,000.
Answer: B
Calculations: Present value annuity @ 6 % for 6 yrs = 4.917 x 16,000 = 78,672

LO: 12-3
Diff: 1
EOC: S12-7
12.3-19 Assuming an interest rate of 6%, if you invest a lump sum of $6,000 now, the balance of your
investment in 7 years will be closest to:
A. $ 9,024.
B. $10,746.
C. $33,492.
D. $36,000.
Answer: A
Calculations: Future value @ 6 % for 7 yrs = 1.504 x 6,000 = 9,024
LO: 12-3
Diff: 1
EOC: S12-7
12.3-20 If you invest $4,000 at the end of every year for nine years at an interest rate of 6%, the balance
of your investment in 5 years will be closest to:
A. $ 5,352.
B. $16,848.
C. $22,548.
D. $36,000.
Answer: C
Calculations: Future value annuity @ 6 % for 5 yrs = 5.637 x 4,000 = 22,548
LO: 12-3
Diff: 1
EOC: S12-7

12.3-21 You win the lottery and must decide how to take the payout. Use an 8% discount rate for all parts
of this question.
Required
a. What is the present value of $10,000 a year received at the end of each of the next six years?
b. What is the present value of taking a $50,000 lump sum now?
c. What is the present value of a $85,000 lump sum taken in 7 years?
Answer:
a. ($10,000 x 4.623) = $46,230
b. $50,000
c. ($85,000 x 0.583) = $49,555
LO: 9-3
Diff: 2
EOC: S12-7
12.3-22 Solve the following two cases (the cases are independent).
a. If you invest $4,000 today at 10% interest, what is the value of the investment at the end of 5
years?
b. If you invest $1,000 at the end of each of the next 5 years and the investment earns 10%
interest, what is the value of the investment at the end of 5 years?
Answer:
a. FV = $4,000 x 1.611 = $6,444
b. FVA = $1,000 x 6.105 = $6,105
LO: 12-3
Diff: 2
EOC: S12-7
12.4-1 Net present value and the payback period are examples of discounted cash flow models used in
capital budgeting decisions.
Answer: False
LO: 12-4
Diff: 2
EOC: S12-11

12.4-2 In calculating the net present value of an investment in equipment, the required investment and its
terminal residual value should be subtracted from the present value of all future cash inflows.
Answer: False
LO: 12-4
Diff: 2
EOC: S12-11
12.4-3 The profitability index equals the present value of net cash inflows from the investment divided
by the cost of the investment.
Answer: True
LO: 12-4
Diff: 1
EOC: E12-26
12.4-4 The residual value is NOT considered in a NPV computation.
Answer: False
LO: 12-4
Diff: 1
EOC: E12-26
12.4-5 A series of equal payments or deposits made at equal time intervals are called annuities.
Answer: True
LO: 12-4
Diff: 1
EOC: E12-26
12.4-6 The interest rate that makes the net present value of the investment equal to zero is the internal
rate of return.
Answer: True
LO: 12-4
Diff: 2
EOC: E12-26
12.4-7 The internal rate of return is used as the discount rate when calculating the net present value of a
project.
Answer: False
LO: 12-4
Diff: 2
EOC: E12-26
12.4-8 The net present value method assumes that all cash inflows are immediately reinvested at a rate
of return equal to the internal rate of return.
Answer: False
LO: 12-4
Diff: 2
EOC: E12-26
12.4-9 When evaluating capital investment projects, if the internal rate of return is less than the required
rate of return, the project will be rejected.
Answer: True
LO: 12-4
Diff: 2
EOC: E12-26
12.4-10 When selecting a capital investment project from three alternatives, the project with the highest
net present value will always be preferable.
Answer False
LO: 12-4
Diff: 2
EOC: E12-26

12.4-11 The payback period is the length of time it takes to recoup an investments initial cost from the
cash inflows that investment generates.
Answer: True
LO: 12-4
Diff: 2
EOC: E 12-26
12.4-12 When evaluating the cash flows from an investment, a reduction in cash outflows is treated as the
same as an increase in cash inflows.
Answer: True
LO: 12-4
Diff: 2
EOC: E12-26
12.4-13 When the profitability index is greater than 1.00 for a project, that project has a positive net
present value.
Answer: True
LO: 12-4
Diff: 2
EOC: E12-26
12.4-14 A project has an internal rate of return which is equal to the companys discount
rate. The projects profitability index:
A. would be 0.0.
B. would be 0.5.
C. would be 1.0.
D. cannot be determined from information provided.
Answer: A
LO: 12-4
Diff: 2
EOC: E 12-26

12.4-15 If the discount rate is increased from 8% to 10%, what will happen to the net present value (NPV)
of a project?
A. NPV will always increase.
B. NPV will always decrease.
C. The discount rate change will not affect NPV.
D. We cannot determine the direction of the effect on NPV from the information provided.
Answer: B
LO: 12-4
Diff: 1
EOC: E12-26
AICPA Functional Competencies: Measurement
12.4-16 If the discount rate is decreased from 9% to 7%, what will happen to the internal rate of return
(IRR) of a project?
A. IRR will always increase.
B. IRR will always decrease.
C. The discount rate change will not affect IRR.
D. We cannot determine the direction of the effect on IRR from the information provided.
Answer: C
LO: 12-4
Diff: 1
EOC: E12-26
12.4-17 The net present value method assumes that the cash inflows from a project are immediately
reinvested at the:
A. internal rate of return.
B. required rate of return.
C. market rate of return.
D. accounting rate of return.
Answer: B
LO: 12-4
Diff: 1
EOC: E12-26

12.4-18 A company finds that the residual value of $10,000 for the equipment in a capital budgeting
project has been inadvertently omitted from the calculation of the net present value (NPV) for
that project. How does this omission affect the NPV of that project?
A. The projects NPV should be $10,000 higher with the residual value included.
B. The projects NPV should be higher, but be less than $10,000 higher, with the residual value
included.
C. The projects NPV should be $10,000 lower with the residual value included.
D. The projects NPV should be lower, but be less than $10,000 lower, with the residual value
included.
Answer: B
LO: 12-4
Diff: 1
EOC: E12-26
12.4-19 A weakness of the internal rate of return (IRR) method is that it:
A. assumes that the cash inflows from the project are immediately reinvested at the minimum
required rate of return.
B. assumes that the cash inflows from the project are immediately reinvested at the internal rate
of return.
C. ignores the time value of money.
D. does not consider depreciation.
Answer: B
LO: 12-4
Diff: 1
EOC: E12-29
12.4-20 Which of the following is another name for the minimum desired rate of return?
A. Discount rate
B. Required rate of return
C. Hurdle rate
D. All of the above
Answer: D
LO: 12-4
Diff: 2
EOC: E12-29

12.4-21 In computing the IRR of an investment, a company would consider all of the following EXCEPT:
A. predicted cash inflows over the life of the project.
B. the cost of the project.
C. present value factors.
D. depreciation on the assets of the project.
Answer: D
LO: 12-4
Diff: 2
EOC: E12-29
12.4-22 (Present value tables are required.) Mansfield Motors is evaluating a capital investment
opportunity. This project would require an initial investment of $30,000 to purchase one machine
and $10,000 to purchase the other machine (both machines are required). The project equipment
will have a residual value at the end of its life of $3,000. The useful life of the equipment is 5
years. The new project is expected to generate additional net cash inflows of $12,000 per year for
each of the five years. Mansfield Motors required rate of return is 14%. The net present value
of this project is closest to:
A. ($3,994).
B. $ 1,196.
C. $ 2,753.
D. $26,386.
Answer: C
Calculations:
Annual cash flow $12,000
PFA 14% 5 yrs.3.4331 41,197
Depreciation 3,000
PV 14 % 5 yrs .5194 1,558
Less investment -40,000
Net 2,755
LO: 12-4
Diff: 3
EOC: P12-59

12.4-23 (Present value tables are required.) Stensels, a plastics processor, is considering the purchase of a
high-speed extruder as one option. The new extruder would cost $50,000 and would have a
residual value of $5,000 at the end of its 8 year life. The annual operating expenses of the new
extruder would be $8,000. The other option that Stensels has is to rebuild its existing extruder.
The rebuilding would require an investment of $30,000 and would extend the life of the existing
extruder by 8 years. The existing extruder has annual operating costs of $11,000 per year and
does not have a residual value. Stensels discount rate is 14%. Using net present value analysis,
which option is the better option and by how much?
A. Better by $4,328 to rebuild existing extruder
B. Better by $4,328 to purchase new extruder
C. Better by $6,083 to rebuild existing extruder
D. Better by $6,083 to purchase new extruder
Answer: A
LO: 12-4
Diff: 3
EOC: P12-29
12.4-24 (Present value tables are required.) Home Products, Inc. is evaluating the purchase of a new
machine to use in its manufacturing process. The new machine would cost $40,000 and have a
useful life of 6 years. At the end of the machines life, it would have a residual value of $2,500.
Annual cost savings from the new machine would be $12,400 per year for each of the six years of
its life. Home Products, Inc. has a minimum required rate of return of 16% on all new projects.
The net present value of the new machine would be closest to:
A. $ 4,669.
B. $ 5,694.
C. $ 6,719.
D. $46,719.
Answer: C
Calculations:
Cost of Equipment $40,000
Residual value 2,500

PV 16 % 6 yrs 410 -1,025
Annual Expense 12,400
PFA 16% 6 yrs3.685 -45,694

Total 6,719
LO: 12-4
Diff: 3
EOC: P12-59

12.4-25 (Present value tables are required.) Baker Enterprises is evaluating the purchase of a new
computer network system. The new system would cost $24,000 and have a useful life of 6 years.
At the end of the systems life, it would have a residual value of $3,000. Annual operating cost
savings from the new system would be $8,800 per year for each of the six years of its life. Baker
Enterprises has a minimum required rate of return of 12% on all new projects. The net present
value of the new network system would be closest to:
A. $ 10,656.
B. $ 12,177.
C. $ 13,698.
D. $ 37,698.
Answer: C
LO: 12-4
Diff: 3
EOC: P12-59
12.4-26 (Present value tables are required.) Camtash Corporation is considering the purchase of a
machine that would cost $21,628 and would have a useful life of 5 years. The machine would generate
$6,300 of net annual cash inflows per year for each of the 5 years of its life. The internal rate of
return on the machine would be closest to:
A. 8%.
B. 10%.
C. 12%.
D. 14%.
Answer: D
Calculations:
Costs $21,628/6,300 net cash flow = 3.433
Closest FVA = >14.00 %
LO: 12-4
Diff: 3
EOC: P12-59

12.4-27 (Present value tables are required.) Salvador Corporation is considering the purchase of a special
blow-molding machine that would cost $64,366 and would have a useful life of 8 years. The
machine would generate $11,200 of net annual cash inflows per year for each of the 8 years of its
life. The internal rate of return on the machine would be closest to:
A. 8%.
B. 10%.
C. 12%.
D. 14%.
Answer: A
Calculations:
Costs $64,366/11,200 net cash flow = 5.747
Closest FVA = >8.00 %
LO: 12-4
Diff: 3
EOC: P12-58
12.4-28 (Present value tables are required.) Lombard Corporation is evaluating the purchase of a new
machine that would have an initial cost of $120,000. This new machine would have a
profitability index of 1.25. The companys discount rate is 12%. What is the present value of the
net cash inflows of the new machine project?
A. $ 14,400
B. $ 96,000
C. $ 150,000
D. $1,000,000
Answer: C
Calculations: Costs 120,000 x 1.25 Profitability index = 150,000
LO: 12-4
Diff: 3
EOC: P12-58

12.4-29 Speedy Company has three potential projects from which to choose. Selected information on
each of the three projects follows:
Project A Project B Project C

Investment required $ 42,500 $ 65,800 $ 53,700
Net present value of project $ 45,700 $ 75,400 $ 70,200
Using the profitability index, rank the projects from most profitable to least profitable.
A. A, B, C
B. C, B, A
C. B, A, C
D. B, C, A
Answer: B
LO: 12-4
Diff: 3
EOC: P12-59
12.4-30 Copper Creations is evaluating a project that would require an initial investment of $36,000. The
present value of the net cash inflows associated with this project would be $43,920. The
profitability index for this project would be closest to:
A. 0.22.
B. 0.82.
C. 1.22.
D. 4.55.
Answer: C
Calculations: Net cash inflows $43,920/36,000 Invest. = 1.22
LO: 12-4
Diff: 3
EOC: P12-59

12.4-31 (Present value tables are needed.) Miami Marine Enterprises is evaluating the purchase of an
elaborate hydraulic lift system for all of its locations to use for the boats brought in for repair.
The company has narrowed their choices down to twothe B14 Model and the F54 Model.
Financial data about the two choices follows.
B14 Model F54 Model

Investment $ 320,000 $ 240,000
Useful life (years) 8 8
Estimated annual net cash inflows for useful life $ 75,000 $ 40,000
Residual value $ 30,000 $ 10,000
What is the total present value of future cash inflows from the F54 Model?
A. $(21,930)
B. $190,230
C. $213,400
D. $218,070
Answer: D
LO: 12-4
Diff: 3
EOC: E12-21
The company has narrowed their choices down to two: the B14 Model and the F54 Model.
B14 Model F54 Model
Investment $ 320,000 $ 240,000
What is the total present value of future cash inflows from the B14 Model?
A. $38,455
B. $218,070
C. $358,455
D. $410,655
Answer: C
LO: 12-4
Diff: 2
EOC: E12-21

B14 Model F54 Model

Investment $ 320,000 $ 240,000
What is the net present value of the F54 Model?

A. $21,930 negative
B. $38,455 positive
C. $178,070 positive
D. $218,070 positive
Answer: A
LO: 12-4
Diff: 2
EOC: E12-21

12.4-34 (Present value tables are needed Miami Marine Enterprises is evaluating the purchase of an
B14 Model F54 Model

Investment $ 320,000 $ 240,000
What is the net present value of the B14 Model?

A. $17,395 positive
B. $21,930 negative
C. $38,455 positive
D. $358,455 positive
Answer: C
LO: 12-4
Diff: 2
EOC: E12-21

B14 Model F54 Model

Investment $ 320,000 $ 240,000
Using the net present value model, which alternative should Miami Marine Enterprises select?
A. The B14 Model should be selected.
B. The F54 Model should be selected.
C. Both investments should be selected.
D. Neither investment should be selected.
Answer: A
LO: 12-4
Diff: 2
EOC: E12-21

12.4-36 (Present value tables are needed.) Moreno Corporation is considering investing in specialized
equipment costing $525,000. The equipment has a useful life of 5 years and a residual value of
$55,000. Depreciation is calculated using the straight-line method. The expected net cash inflows
Year 1 $ 245,000
Year 2 $ 190,000
Year 3 $ 152,000
Year 4 $ 112,000
Year 5 $ 95,000
$ 794,000
Moreno Corporations required rate of return is 14%.
The net present value of the investment is closest to:

A. $25,639 positive.
B. $54,184 positive.
C. $82,729 positive.
D. $269,000 positive.
Answer: C
LO: 12-4
Diff: 2
EOC: E12-28

12.4-37 (Present value tables are needed.) Moreno Corporation is considering investing in specialized
equipment costing $525,000. The equipment has a useful life of 5 years and a residual value of
$55,000. Depreciation is calculated using the straight-line method. The expected net cash inflows
Year 1 $ 245,000
Year 2 $ 190,000
Year 3 $ 152,000
Year 4 $ 112,000
Year 5 $ 95,000
$ 794,000
Moreno Corporations required rate of return is 14%.
Is the internal rate of return of the investment equal to, higher than, or lower than 14%?
A. Equal to 14%
B. Higher than 14%
C. Lower than 14%
D. Cannot be determined from the given data
Answer: B
LO: 12-4
Diff: 2
EOC: E12-28

12.4-38 (Present value tables are needed.) Sommer Corporation is deciding whether to automate one
phase of its production process. The equipment has a six-year life and will cost $410,000.
Projected net cash inflows from the equipment are as follows:
Year 1 $115,000
Year 2 $100,000
Year 3 $110,000
Year 4 $100,000
Year 5 $95,000
Year 6 $90,000
Sommer Corporations hurdle rate is 12%. Assume the residual value is zero.
What is the net present value of the equipment?

A. $(13,810)
B. $2,302
C. $13,810
D. $15,000
Answer: C
LO: 12-4
Diff: 3
EOC: E12-28

12.4-39 (Present value tables are needed.) Sommer Corporation is deciding whether to automate one
phase of its production process. The equipment has a six-year life and will cost $410,000.
Projected net cash inflows from the equipment are as follows:
Year 1 $115,000
Year 2 $100,000
Year 3 $110,000
Year 4 $100,000
Year 5 $95,000
Year 6 $90,000
Sommer Corporations hurdle rate is 12%.
If Sommer Corporation decides to refurbish the equipment at a cost of $50,000 at the end of
year 6, it could be used for one more year and would have a $30,000 residual value at the end
of year 7. Assume the cash inflow in year 7 is $65,000. What is the NPV of just the
refurbishment?
A. $ 4,030
B. $15,820
C. $17,590
D. $41,170
Answer: C
Calculations:
Investment (end year 6) $ 50,000

Present value of $1, n=6 r=12% 0.507
Present value of investment - Year 6 $ 25,350
Cash inflow - Year 7 $ 65,000

Present value cash flows - Year 7 $ 29,380
Residual value - Year 7 $ 30,000

Present value of residual value - Year 7 $ 13,560
Present value of investment - Year 6 $ (25,350)

Present value cash flows - Year 7 $ 29,380
Present value of residual value - Year 7 $ 13,560
Net present value of refurbishment $ 17,590
LO: 12-4
Diff: 3
EOC: E12-28

12.4-40 (Present value tables are needed.) Williams Department Stores is considering two possible
expansion plans. One proposal involves opening 5 stores in
Indiana at the cost of $1,800,000. Under the other proposal, the
company would focus on Kentucky and open 6 stores at a cost of
$2,400,000. The following information is available:

the next 10 years
The net present value of the Indiana proposal is closest to:

A. $ 461,650.
B. $ 658,000.
C. $ 677,300.
D. $1,291,800.
Answer: C
Calculations:
Cash flow $400,000 x (PVA 10yr @ 10%) 6.145 = 2,458,000
Residual 30,000 x (PV 10 yr @ 10%) .386 = 19,300
Less Cost - 1,800,000
NPV 677,300
LO: 12-4
Diff: 2
EOC: E12-26

12.4-41 (Present value tables are needed.) Williams Department Stores is considering two possible
expansion plans. One proposal involves opening 5 stores in
Indiana at the cost of $1,800,000. Under the other proposal, the
company would focus on Kentucky and open 6 stores at a cost of
$2,400,000. The following information is available:

the next 10 years
The net present value of the Kentucky proposal is closest to:

A. $672,500.
B. $677,300.
C. $684,600.
D. $703,380.
Answer: D
Calculations:
Cash flow $500,000 x (PVA 10yr @ 10%) 6.145 = 3,072,500
Residual 80,000 x (PV 10 yr @ 10%) .386 = 30,880
Less Cost -2,400,000
NPV 703,380
LO: 12-4
Diff: 2
EOC: E12-26

12.4-42 (Present value tables are needed.) Corkys Amusement Park is evaluating the purchase of a new
game to be located on its Midway. Corkys has narrowed their choices down to two: the Wacky
Water Race game and the Whack-A-Mole game. Financial data about the two choices follows.
Wacky Water Whack-A-

Race Mole
Investment $ 32,000 $ 22,000
Useful life 5 5
Depreciation method straight-line straight-line
What is the total present value of future cash inflows from the Whack-A-Mole game?
A. $18,955
B. $19,576
C. $20,586
D. $41,576
Answer: B
Calculations:
Cash flow $ 5,000 x (PVA 5yr @ 10%)3.791 = 18,955
Residual 1,000 x (PV 5 yr @ 10%) .621 = 621
Total 19,576
LO: 12-4
Diff: 3
EOC: E12-26


Race Mole
Investment $ 32,000 $ 22,000
Useful life 5 5
What is the total present value of future cash inflows from the Wacky Water Race game?
A. $ 5,299
B. $19,576
C. $35,481
D. $37,299
Answer: D
Calculations:
Cash flow $ 9,000 x (PVA 5yr @ 8%) 3.993 = 35,937
Residual 2,000 x (PV 5 yr @ 8%).681 = 1,362
Total 37,299
LO: 12-4
Diff: 2
EOC: E12-26


Race Mole
Investment $ 32,000 $ 22,000
Useful life 5 5
What is the net present value of the Whack-A-Mole game?

A. $2,424
B. ($2,424)
C. $3,937
D. ($3,937)
Answer: B
Calculations:
Cash flow $ 5,000 x (PVA 5yr @ 10%) 3.791 = 18,955
Residual 1,000 x (PV 5 yr @ 10%) 621 = 621
Total 19,576
Cost -22,000
NPV - 2,424
LO: 12-4
Diff: 2
EOC: E12-26


Race Mole
Investment $ 32,000 $ 22,000
Useful life 5 5
What is the net present value of the Wacky Water Race game?
A. $(5,299)
B. $(3,045)
C. $3,045
D. $5,299
Answer: D
Calculations:
Cash flow $ 9,000 x (PVA 5yr @ 8% ) 3.993 = 35,937
Residual 2,000 x (PV 5 yr @ 8% ) .681 = 1,362
Total 37,299
Cost -32,000
NPV 5,299
LO: 12-4
Diff: 2
EOC: E12-26


Race Mole
Investment $ 32,000 $ 22,000
Useful life 5 5
Using the net present value model, which alternative(s) should Corkys Amusement Park select?
A. The Whack-A-Mole game should be selected.
B. The Wacky Water Race game should be selected.
C. Both investments should be selected.
D. Neither investment should be selected.
Answer: B
LO: 12-4
Diff: 2
EOC: E12-26
12.4-47 Snow Mountain Sports makes snowboards. The company wants to add a new machine that
would cost $80,000 and have a useful life of 5 years and no residual value. The company expects
the machine will generate $23,000 annual cash inflows for 5 years. The discount rate is 10%.
What is the net present value of the investment?
Answer: ($23,000 x 3.791) - $80,000 = $7,193
LO: 12-4
Diff: 2
EOC: E12-27

12.4-48 John owns a golf course and wants to add some computers to the lounge. The computers would
cost $14,000 and would have a 3 year life and no residual value. John expects the computers to
generate $5,000 annual cash inflows for 3 years. The discount rate is 8%. What is the net present
value of the investment?
Answer: ($14,000 x 2.577) 14,000 = ($1,115)
LO: 12-4
Diff: 2
EOC: 12-27
12.4-49 Maxwell Company is deciding whether to automate one phase of its production process. The
equipment has a six year life and will cost $450,000. The interest rate is 12%. Net cash inflows
per year:
Year 1 $ 80,000
Year 2 $ 70,000
Year 3 $ 95,000
Year 4 $ 75,000
Year 5 $ 84,000
Year 6 $ 96,000
a. What is the present value of the net inflow for year 1?

b. What is the present value of the net inflow for year 5?
Answer:
a. $80,000 x .893 = $71,440
b. $84,000 x .567 = $47,628
LO: 12-4
Diff: 3
EOC: E12-28

12.4-50 (Present value tables are needed.) Golden Corporation is evaluating the purchase of an elaborate
hydraulic lift system for all of its locations to use for the boats brought in for repair. The
company has narrowed their choices down to two: the C23 Model and the Q12 Model. Financial
data about the two choices follows.
C23 Q12
Investment $ 360,000 $ 165,000
Required:
a. Calculate the net present value of the Q12 Model.
b. Calculate the net present value of the C23 Model.
c. Using the net present value method, which alternative should Golden Corporation select?
Answer:
Part A:
Estimated annual net cash inflows for useful life $ 25,000

Present value of an annuity factor 5.335
Cash flow present value $ 133,375
Residual value $ 12,000

Present value of $1 factor 0.467
Residual value present value $ 5,604

Investment $ (165,000)
Net present value for Q12 Model $ (26,021)
Part B:
Estimated annual net cash inflows for useful life $ 80,000

Present value of an annuity factor 4.639
Residual value $ 20,000

Present value of $1 factor 0.351

Investment $(360,000)
Net present value for C23 Model $ 18,140
Part C:
The C23 Model should be selected since it has a positive net present value. The Q12 Model
should not be selected because its net present value is negative.
LO: 12-4
Diff: 3
EOC: 12-28
12.5-1 Neither the payback period nor the ARR capital budgeting method recognizes the time value of
money.
Answer: True
LO: 12-5
Diff: 1
EOC: E12-35
12.5-2 The payback and accounting rate of return models are conceptually better than the discounted
cash flow models because they are based on cash flows, and they consider both profitability and
the time value of money.
Answer: False
LO: 12-5
Diff: 2
EOC: E12-35
12.5-3 The net present value model differs from the IRR model in that it does NOT show the projects
unique rate of return.
Answer: True
LO: 12-5
Diff: 2
EOC: E12-35

12.5-4 The discounted cash flow methods for capital budgeting are generally considered superior to the
payback period and the ARR because they consider the time value of money.
Answer: True
LO: 12-5
Diff: 2
EOC: E 12-35
12.5-5 The Internal Rate of Return and the Accounting Rate of Return are the only recognized capital
budgeting methods.
Answer: False
LO: 12-5
Diff: 1
EOC: E 12-35
12.5-6 Capital budgeting methods will not work with unequal cash flows during the capital assets life.
Other methods must be utilized in those cases.
Answer: False
LO: 12-5
Diff: 2
EOC: E12-35
12.5-7 Capital budgeting techniques such as payback method and net present value are based upon
Generally Accepted Accounting Principles (GAAP) and accrual
accounting.
Answer: False
LO: 12-5
Diff: 1
EOC: 12-35

12.5-8 A company is evaluating a variety of different capital investment opportunities. The company
can only choose one project due to limited funds. What would be the best capital budgeting
method for this company to use to select a project?
A. Payback method
B. Accounting rate of return method
C. Net present value method
D. Profitability index
Answer: D
LO: 12-5
Diff: 1
EOC: E12-35
12.5-9 Which of the following capital budgeting methods uses accrual accounting income?
A. Payback method
C. Net present value method
D. Internal rate of return method
Answer: B
LO: 12-5
Diff: 1
EOC: E12-35
12.5-10 All of the following are advantages of post-audits of capital investments EXCEPT that they:
A. indicate whether project should continue or should be abandoned.
B. help managers better make better estimates for future projects.
C. help managers to decide which project should be selected.
D. encourage managers to submit realistic net cash inflows with their project proposals.
Answer: C
LO: 12-5
Diff: 1
EOC: E12-35

12.5-11 Which one of the following capital budgeting models considers both profitability and the time
value of money?
A. Payback
B. Accounting rate of return
C. Net present value
D. Both a and c are correct
Answer: C
LO: 12-5
Diff: 1
EOC: E12-35
12.5-12 Which of the following capital budgeting models is generally the simplest to compute?
A. Payback
B. Net present value
C. Internal rate of return
D. Accounting rate of return
Answer: A
LO: 12-5
Diff: 1
EOC: E12-35
12.5-13 Which of the following capital budgeting methods is based on cash flows, profitability, and the
time value of money?
A. Payback and accounting rate of return
B. Payback and net present value
C. Accounting rate of return and internal rate of return
D. Net present value and internal rate of return
Answer: D
LO: 12-5
Diff: 2
EOC: E12-35

12.5-14 Which of the following is generally considered to be the most superior method for making
capital budgeting decisions?
A. Net present value method
C. Payback method
D. Incremental method
Answer: A
LO: 12-5
Diff: 2
EOC: E12-35
12.5-15 Which term below is best described as managements minimum desired rate of return on an
investment?
A. Payback return
B. Discount rate
D. Net present value
Answer: B
LO: 12-5
Diff: 1
EOC: E12-35
12.5-16 Which term below is best described as a measure of profitability computed by dividing
the average annual operating income by the amount of the investment?
A. Accounting rate of return
B. Discount rate
Answer: A
LO: 12-5
Diff: 1
EOC: E 12-35

12.5-17 Which term below is best described as the rate of return that makes the NPV of a capital project
equal to zero?
B. Discount rate
Answer: C
LO: 12-5
Diff: 1
EOC: E12-35
12.5-18 Which term below is best described as the decision model that computes the difference
between the present value of the investments net cash inflows, using a desired
rate of return, and the cost of the initial investment?
B. Discount rate
Answer: D
LO: 12-5
Diff: 1
EOC: E12-35

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Managerial Accounting, 2e

12.1-2 Self-scan check-out machines are an example of capital assets.

12.1-3 Capital budgeting is based on job costing.

12.1-4 Choosing among alternative capital investments is called capital rationing.

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 1

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 2

12.1-10 A capital asset has which of the following characteristics?

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 3

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 4

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 5

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 6

12.2-6 Accrual-based accounting is used in determining the accounting rate of return.

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 8

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 9

How long is the payback period for Proposal X?

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 10

How long is the payback period for Proposal Y?

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 11

What is the accounting rate of return for Proposal X?

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 12

What is the accounting rate of return for Proposal Y?

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 13

The present value factors of $1 due 3 years from now:

How long is the payback period for Investment A?

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 14

The present value factors of $1 due 3 years from now:

How long is the payback period for Investment B?

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 15

Mahtomedi Corporations required rate of return on investments is 14%.

What is the accounting rate of return on the investment?

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 16

Calculations: Investment = $500,000

Estimated useful life: 3 years

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 17

Estimated useful life: 3 years

Estimated useful life: 3 years

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 18

Estimated useful life: 3 years

The accounting rate of return is closest to:

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 19

Indiana proposal Kentucky proposal

The payback period for the Kentucky proposal is closest to:

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 20

Indiana proposal Kentucky proposal

The payback period for the Indiana proposal is closest to:

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 21

Indiana proposal Kentucky proposal

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 22

Indiana proposal Kentucky proposal

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 23

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 24

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 25

Answer: $87,500/$25,000 = 3.50 years

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 26

Calculations: ($120,000 0)/6 years = $20,000 annual depreciation expense

Calculations: ($170,000 $20,000)/15 years = $10,000 annual depreciation expense

Calculations: $60,000/$250,000 = 24%

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 27

Calculations: $320,000 + $250,000 + .5X = $610,000; X = $80,000

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 28

12.3-7 Which of the following explains the time value of money?

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 29

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall. 30

Calculations: Present value annuity @ 8 % for 6 yrs = 4.6229 x 10,000 = $46,230