Question Details

ACCOUNTING 2101 PART 4

46.	A company's cost of capital refers to the
		a.	rate the company must pay to obtain funds from creditors and stockholders.
		b.	total cost of a capital project.
		c.	cost of printing and registering common stock shares.
		d.	rate of return earned on common stock.

	47.	Intangible benefits in capital budgeting would include all of the following except increased
		a.	product quality.
		b.	employee loyalty.
		c.	salvage value.
		d.	product safety.

	48.	Intangible benefits in capital budgeting
		a.	should be ignored because they are difficult to determine.
		b.	include increased quality or employee loyalty.
		c.	are not considered because they are usually not relevant to the decision.
		d.	have a rate of return in excess of the company- cost of capital.

 
	49.	To avoid rejecting projects that actually should be accepted,
			1.	intangible benefits should be ignored.
			2.	conservative estimates of the intangible benefits' value should be incorporated into the NPV calculation.
			3.	calculate net present value ignoring intangible benefits and then, if the NPV is negative, estimate whether the intangible benefits are worth at least the amount of the negative NPV.
		a.	1
		b.	2
		c.	3
		d.	both 2 and 3 are correct.

	50.	All of the following statements about intangible benefits in capital budgeting are correct except that they
		a.	include increased quality and employee loyalty.
		b.	are difficult to quantify.
		c.	are often ignored in capital budgeting decisions.
		d.	cannot be incorporated into the NPV calculation.

	51.	In evaluating high-tech projects,
		a.	only tangible benefits should be considered.
		b.	only intangible benefits should be considered.
		c.	both tangible and intangible benefits should be considered.
		d.	neither tangible nor intangible benefits should be considered.

	52.	Using a number of outcome estimates to get a sense of the variability among potential returns is
		a.	financial analysis.
		b.	post-audit analysis.
		c.	sensitivity analysis.
		d.	outcome analysis.

	53.	If a company's required rate of return is 9%, and in using the profitability index method, a project's index is greater than 1, this indicates that the project's rate of return is
		a.	equal to 9%.
		b.	greater than 9%.
		c.	less than 9%.
		d.	unacceptable for investment purposes.

	54.	The profitability index is computed by dividing the
		a.	total cash flows by the initial investment.
		b.	present value of cash flows by the initial investment.
		c.	initial investment by the total cash flows.
		d.	initial investment by the present value of cash flows.

	55.	The capital budgeting method that takes into account both the size of the original investment and the discounted cash flows is the
		a.	cash payback method.
		b.	internal rate of return method.
		c.	net present value method.
		d.	profitability index.

	56.	The profitability index
		a.	does not take into account the discounted cash flows.
		b.	is calculated by dividing total cash flows by the initial investment.
		c.	allows comparison of the relative desirability of projects that require differing initial investments.
		d.	will never be greater than 1.

	57.	The capital budgeting method that allows comparison of the relative desirability of projects that require differing initial investments is the
		a.	cash payback method.
		b.	internal rate of return method.
		c.	net present value method.
		d.	profitability index.

	58.	The following information is available for a potential investment for Panda Company:
	Initial investment	$40,000
	Net annual cash inflow	10,000
	Net present value	18,112
	Salvage value	5,000
	Useful life	10 yrs.
		The potential investment- profitability index is
		a.	4.00
		b.	2.85
		c.	2.50
		d.	1.45

	59.	An approach that uses a number of outcome estimates to get a sense of the variability among potential returns is
		a.	the discounted cash flow technique.
		b.	the net present value method.
		c.	risk analysis.
		d.	sensitivity analysis.

	60.	Post-audits of capital projects
		a.	are usually foolproof.
		b.	are done using different evaluation techniques than were used in making the original capital budgeting decision.
		c.	provide a formal mechanism by which the company can determine whether existing projects should be supported or terminated.
		d.	all of these.

	61.	A post-audit should be performed using
		a.	a different evaluation technique than that used in making the original decision.
		b.	the same evaluation technique used in making the original decision.
		c.	estimated amounts instead of actual figures.
		d.	an independent CPA.

 
	62.	A thorough evaluation of how well a project's actual performance matches the projections made when the project was proposed is called a
		a.	pre-audit.
		b.	post-audit.
		c.	risk analysis.
		d.	sensitivity analysis.

	63.	Performing a post-audit is important because
		a.	managers will be more likely to submit reasonable data when they make investment proposals if they know their estimates will be compared to actual results.
		b.	it provides a formal mechanism by which the company can determine whether existing projects should be terminated.
		c.	it improves the development of future investment proposals because managers improve their estimation techniques by evaluating their past successes and failures.
		d.	all of these.

	64.	A capital budgeting method that takes into consideration the time value of money is the
		a.	annual rate of return method.
		b.	return on stockholders' equity method.
		c.	cash payback technique.
		d.	internal rate of return method.

	65.	The internal rate of return is the interest rate that results in a 
		a.	positive NPV.
		b.	negative NPV.
		c.	zero NPV.
		d.	positive or negative NPV.