# St. Leo ACC 202 Principles of Accounting II Accounting Test 8

1.Question : A company is considering the purchase of new equipment costing $91,000. The machine has a useful life of 4 years and no salvage value. The company requires a 12% return on its investments. The factors for the present value of an annuity of 1 for different periods follow:Assuming all revenue is to be received at the end of each year, what are the net cash flows for this investment if net present value equals ($11,790)? $78,210. $10,920. $25,750. $237,547. $33,513.2. Question : A company wishes to buy new equipment for $9,000. The equipment is expected to generate an additional $2,800 in cash inflows for six years. All cash flows occur at year-end. A bank will make an $9,000 loan to the company at a 10% interest rate so that the company can purchase the equipment. Use the table below to determine break-even time for this equipment. Student Answer: Break-even time is between 2 and 3 years. Break-even time is between 3 and 4 years. Break-even time is between 4 and 5 years. Break-even time is between 5 and 6 years. This project will never break-even.3. Question : The time expected to pass before the net cash flows from an investment would return its initial cost is called the: Student Answer: Amortization period. Payback period. Interest period. Budgeting period. Discounted cash flow period.4. Question : Which of the following is an objective of capital budgeting? Student Answer: To eliminate all risk. To discount all future and past cash flows. To earn a satisfactory return on investment. To reverse past decisions. To reduce the number of investment activities.5. Question : A company wishes to buy new equipment for $85,000. The equipment is expected to generate an additional $35,000 in cash inflows for four years. All cash flows occur at year-end. A bank will make an $85,000 loan to the company at a 10% interest rate so that the company can purchase the equipment. Use the table below to determine break-even time for this equipment. Student Answer: Break-even time is longer than 4 years. Break-even time is between 3 and 4 years. Break-even time is between 2 and 3 years. Break-even time is between 1 and 2 years. This project will never break-even. 6. Question : The following data concerns a proposed equipment purchase.Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is: Student Answer: 24.13%. 20.98%. 22.95%. 59.00%. 25.45%.7. Question : A company is considering the purchase of a new machine for $48,000. Management predicts that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. The company’s tax rate is 40%. What is the payback period for the new machine? Student Answer: 3.0 years. 6.0 years. 7.5 years. 12.0 years. 20.0 years.8. Question : If a manager were concerned with the time value of money, from which two capital budgeting methods should the manager choose? IRR or Payback. BET or IRR. BET or Payback. NPV or ARR. NPV or Payback.9. Question : The process of analyzing alternative investments and deciding which assets to acquire or sell is known as: : Planning and control. Capital budgeting. Variance analysis. Master budgeting. Managerial accounting.10. Question : A company is considering the purchase of a new machine for $72,000. Management predicts that the machine can produce sales of $21,000 each year for the next 8 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $5,000 per year plus depreciation of $9,000 per year. The company’s tax rate is 40%. What is the payback period for the new machine? Student Answer: 5.45 years. 17.14 years. 10.29 years. 4.50 years. 6.00 years. 11. Question : Which methods of evaluating a capital investment project ignore the time value of money? Net present value and accounting rate of return. Accounting rate of return and internal rate of return. Internal rate of return and payback period. Payback period and accounting rate of return. Net present value and payback period.12. Question : A given project requires a $25,000 investment and is expected to generate end-of-period annual cash inflows as follows: Assuming a discount rate of 10%, what is the net present value of this investment? Selected present value factors for a single sum are shown in the table below. $6,217.50 ($4,459.80) ($6,217.50) $8,275.00 $0.0013. Question : The internal rate of return method is not subject to the limitations of the net present value method when comparing projects with different amounts invested because: Student Answer: The internal rate of return is expressed as a percent rather than the absolute dollar value of present value. The internal rate of return is expressed as an absolute dollar value rather than the percent of net present value. The internal rate of return reflects the time value of money rather than the absolute dollar value of present value. The internal rate of return is expressed as an absolute dollar value rather than the time value of money used in net present value. The internal rate of return is expressed as a percent rather than the accrual income method used in net present value.14. Question : A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from this investment are $36,000 (year 1), $30,000 (year 2), $18,000 (year 3), $12,000 (year 4) and $6,000 (year 5). The payback period is: 4.50 years. 4.25 years. 3.50 years. 3.00 years. 2.50 years.15. Question : Monterey Corporation is considering the purchase of a machine costing $36,000 with a 6-year useful life and no salvage value. Monterey uses straight-line depreciation and assumes that the annual cash inflow from the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is Monterey’s average investment? $ 6,000. $ 7,000. $18,000. $21,000. $36,000.