Indicate the best answer for each question in the space provided. 1 Which of the
ID: 2530452 • Letter: I
Question
Indicate the best answer for each question in the space provided.
1 Which of the following is nota capital budgeting decision?
a Whether to acquire a subsidiary company.
b Whether to expand a product line.
c Whether to fill a special order.
d Whether to purchase a fleet of trucks.
2 Which of the following is an example of a nonfinancial consideration in capital budgeting?
a Will an investment generate adequate cash flows to promptly recover its cost?
b Will an investment generate an acceptable rate of return?
c Will an investment have a positive net present value?
d Will an investment have an adverse effect on the environment?
3 Which of the following is notconsidered when using the payback period to evaluate an investment?
a The profitability of the investment over its entire life.
b The annual net cash flow of the investment.
c The cost of the investment.
d The expected life of the investment.
Use the following data for questions 4 and 5.
Stone Mfg. is considering expanding operations by investing $300,000 in equipment. The equipment has a useful life of eight years, with no salvage value. Straight-line depreciation is used. Stone predicts that net income will increase $37,500 per year as a result of this strategy.
4 Refer to the above data. The payback period for this investment is:
a 8 years.
b 4 years.
c Over 13 years.
d 2.5 years.
5 Refer to the above data. Return on average investment for this investment is:
a 25%.
b 20%.
c 12 1/2%.
d 15%.
Explanation / Answer
Answer 1
Option C- Whether to fill a special order.
Answer 2
An example of a non-financial consideration in capital budgeting - Option D " Will an investment have an adverse effect on the environment"
Answer 3
Option A " The profitability of the investment over its entire life."
Answer 4
Net Income will increase by $ 37,500. Net Income is derived after deducting depreciation expense. Depreciation expense is $ 37,500. Hence net increase in annual cash inflow is $ 37500+37500 = 75,000
Payback Period = Intial Investment / Annual Cash Inflow = 300,000 / 75,000 = 4 Years
Answer 5
Return on Average Investment = Net Income / Initial Investment *100 = 37,500/300,000*100 = 12.50%