1) For capital budgeting decisions, the use of the accrual accounting rate of return for evaluating

performance is often a stumbling block to the implementation of the:

1)

A) most effective goal-congruence choice

B) discounted cash flow method for capital budgeting

C) most effective tax strategy

D) net cash flow

Answer the following questions using the information below:

Footscray Hospital is considering purchasing a new x-ray machine. The existing machine is operable for five more years and

will have a zero disposal price. The machine may be sold for $45 000 now. The new machine will cost $325 000 and an

additional cash investment in working capital of $10 000 will be required. The new machine will reduce the average time

required to take x-rays and will allow additional business to be done at the hospital. The investment is expected to net $30

000 in additional cash inflows during the year of acquisition and $120 000 each additional year of use. The new machine has a

five-year life, and zero disposal value. These cash flows will occur throughout the year but are recognised at the end of each

year. Ignore income taxes. The working capital investment will not be recovered at the end of the asset's life.

2) If the net cash inflows were $20 000 in the first year and $100 000 in the following years, should the

X-ray machine be purchased? What is the net present value of the investment, assuming the

required rate of return is 14%? Would the hospital want to purchase the new machine?

2)

A) $16 960; yes B) $(16 960); no C) $25 350; yes D) $(16 960); yes

3) If the net cash inflows were $20 000 in the first year and $110 000 in the following years, should the

X-ray machine be purchased? What is the net present value of the investment, assuming the

required rate of return is 14%? Would the hospital want to purchase the new machine?

3)

A) $(8590); yes B) $8590; yes C) $25 350; yes D) $8590; no

4) The definition of an ANNUITY is: 4)

A) an investment product whose funds are invested in the stock market

B) similar to the definition of a life insurance policy

C) a series of equal cash flows at regular intervals

D) Both A and B are correct.

5) Comparison of the actual results for a project to the costs and benefits expected at the time the

project was selected is called:

5)

A) a cost-benefit analysis B) a post-investment audit

C) the audit trail D) management control

6) All of the following are major categories of cash flows in capital investment decisions EXCEPT: 6)

A) depreciation expense reported on the income statement

B) the initial working capital investment

C) the initial investment in machines and working capital

D) recurring operating cash flows

7) An example of a sunk cost in a capital budgeting decision for new equipment is: 7)

A) the necessary transportation costs on the new equipment

B) an increase in working capital required by a particular investment choice

C) the book value of the old equipment

D) All of these answers are correct.

8) The capital budgeting method which calculates the expected monetary gain or loss from a project

by discounting all expected future cash inflows and outflows to the present point in time using the

required rate of return is the:

8)

A) accrual accounting rate-of-return method

B) sensitivity method

C) payback method

D) net present value method

9) Alice Springs Tailors wants to purchase a new cutting machine for its sewing plant. The investment

is expected to generate annual cash inflows of $400 000. The required rate of return is 12% and the

current machine is expected to last for four years. What is the maximum dollar amount Alice

Springs Tailors would be willing to spend for the machine, assuming its life is also four years?

Ignore income taxes.

9)

A) $820 600 B) $991 740 C) $607 000 D) $1 214 800

Answer the following questions using the information below:

Cronulla Cleaners is considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for

three more years and will have a zero disposal price. The machine may be sold for $50 000 now. The new machine will cost

$200 000 and an additional cash investment in working capital of $50 000 will be required. The new machine will reduce the

average time required to wash clothing and will decrease labour costs. The investment is expected to net $45 000 in

additional cash inflows during the year of acquisition and $135 000 each additional year of use. The new machine has a

three-year life, and zero disposal value. These cash flows will occur throughout the year but will be recognised at the end of

each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end

of the asset's life.

10) What is the net present value of the investment, assuming the required rate of return is 10%?

Would the company want to purchase the new machine?

10)

A) $53 800; yes B) $(53 800); no C) $45 000; no D) $(45 000); yes