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| 1 | |
Gresswell Ltd purchased a replacement piece of equipment with the following information: useful life, five years; annual net cash inflow, $50 000; salvage value, $0; internal rate of return, 8%; cost of capital, 6%. The net present value of the piece of equipment was: |
| | A) | $210 600 |
| | B) | $(199 650) |
| | C) | $10 950 |
| | D) | $0 |
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| 2 | |
Watsonia Ltd purchased a replacement piece of machinery for $100 000 with the following information: useful life, seven years; annual net cash savings, $16 667; salvage value, $0; cost of capital, 8%. The net present value is: |
| | A) | $(13 232) |
| | B) | $6965 |
| | C) | $0 |
| | D) | $(6965) |
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| 3 | |
Watsonia Ltd purchased a replacement piece of machinery for $100 000 with the following information: useful life, seven years; annual net cash savings, $16 667; salvage value, $0; cost of capital, 8%. The internal rate of return is: |
| | A) | 4% |
| | B) | 6% |
| | C) | 8% |
| | D) | 10% |
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| 4 | |
Emma Hamilton, the Project Evaluation Manager for a large multinational food manufacturing company, has been gathering information regarding the long-term investment in a large refrigeration plant that has been operating at the company’s food processing plant in northern Tasmania for the past twelve months. Emma is comparing the actual cash flows resulting from the project with forecast cash flows. Emma is undertaking: |
| | A) | project generation |
| | B) | the estimation and analysis of project cash flows |
| | C) | the post-completion audit of the project |
| | D) | the implementation of the project |
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| 5 | |
Sometimes managers can be very negative towards new capital expenditure proposals even though they have positive NPVs. This is because: |
| | A) | managers always want to participate in the decisions regarding new capital expenditure proposals |
| | B) | managers’ performance is being assessed by discount cash flow analysis methods |
| | C) | there is a conflict between discounted cash flow methods and accrual accounting measures, especially when managers’ performance is evaluated using the accounting rate of return |
| | D) | managers receive the benefits of increased depreciation arising from new capital expenditure projects in their divisional profits |
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| 6 | |
Greensborough Company is considering the purchase of production equipment that costs $300 000. The production equipment is expected to generate annual cash flows of $75 000. The equipment is expected to have a have a useful life of six years with no salvage value. The payback on Greensborough’s equipment is: |
| | A) | 4 years |
| | B) | 3.9 years |
| | C) | 4.5 years |
| | D) | 4.8 years |
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| 7 | |
Greensborough Company is considering the purchase of production equipment that costs $300 000. The production equipment is expected to generate annual cash flows of $75 000. The equipment is expected to have a have a useful life of six years with no salvage value. The accounting rate of return on Greensborough’s equipment is: |
| | A) | 25% |
| | B) | 8.333% |
| | C) | 15% |
| | D) | 10% |
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| 8 | |
Which of the following is a disadvantage of the accounting rate of return method? |
| | A) | The screening of investment projects. |
| | B) | Consistency with financial accounting methods. |
| | C) | Consistency with profit-based performance evaluation systems. |
| | D) | The time value of money is not considered. |
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| 9 | |
The net present value and the internal rate of return methods of capital expenditure decision making are superior to the payback method and the accounting rate of return method because they: |
| | A) | are simpler to calculate |
| | B) | require fewer calculations |
| | C) | consider the time value of money |
| | D) | require less data collection |
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| 10 | |
In an organisation’s performance evaluation there is a potential conflict between: |
| | A) | the criteria for evaluating individual projects and those used to evaluate the overall performance of managers and business segments |
| | B) | the criteria for evaluating individual projects and the internal rate of return |
| | C) | the criteria for evaluating individual projects and the net present value |
| | D) | the criteria for evaluating individual projects and the payback method |
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