ACC 350 Topic 6 Quiz with Answers (CORRECT NUMBERS)

1. Gamma Company is considering an investment proposal that would require an initial outlay of $800,000, and would yield yearly cash flows of $200,000 for 9 years. The company uses a discount rate of 10%. What is the NPV of the investment? 2. True or False: Net present value and internal rate of return consider the time value of money, so they are appropriate for longer term capital investments 3. True or False: An annuity refers to a series of equal cash flows received or paid annually. 4. A company is evaluating three possible investments. Following information is provided by the company. What is the payback period for Project A? Assume that company uses the straight line depreciation method.) 5. Which of the following best describes the profitability index? 6. Which of the following is true of discounted cash flow methods like NPV and IRR? 7. Which capital budgeting method uses accrual accounting, rather than net cash flows, as a basis for calculations? 8. Canbera Company is considering investing $450,000 in telecommunications equipment which would have an estimated life of 5 years with zero residual value. The cash flows are shown below: The present value of $1 factors are given below: The IRR of the project would be: 9. If $15,000 is invested annually in an account with 9% interest compounding yearly, what will the balance of the account be after five years? Refer to the following Future Value table: Future value of annuity of $1: 10. Which of the following two methods are typically used for initial screening of investments, rather than for detailed, in depth analysis? 11. True or False: The payback method is the most thorough and comprehensive way to choose the best investment among alternatives, than any other capital budgeting methods. 12. True or False: The NPV method of evaluating capital investments suggests that a project with positive net cash inflows that exceed the cost of the investment should be accepted. 13. True or False: An operational asset used for a long period of time is known as a capital asset. 14. Clapton Corporation is considering an investment in new equipment costing $900,000. The equipment will be depreciated on a straight line basis over a ten year life and is expected to have a salvage value of $90,000. The equipment is expected to generate net cash flows of $140,000 for each of the first five years and $100,000 for each of the last five years. What is the accounting rate of return associated with the equipment investment? 15. Zane has received a prize which entitles him to receive annual payments of $10,000 for the next 10 years. Which of the following is to be referred to in order to calculate the total value of the prize today? 16. True or False: The payback method and the accounting rate of return method are often used to perform an initial screening of investments, rather than a detailed, in depth analysis. 17. True or False: Net cash inflows from a capital investment arise from an increase in revenues, a decrease in expenses, or both. 18. True or False: When evaluating a potential investment, managers should use more than one measure for making a sound investment decision. 19. Logy Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight line method of depreciation. The following information is available: Calculate the payback period of Investment A. 20. Paramount Company is considering purchasing new equipment costing $700,000. Company’s management has estimated that the equipment will generate cash flows as follows: Present value of $1: The company’s required rate of return is 9%. Using the factors in the table, calculate the present value of the cash flows.