Managerial Accounting An Introduction To Concepts Methods and Uses 11th Edition Maher Test Bank

Managerial Accounting An Introduction
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Chapter 8--Capital Expenditure Decisions
Student: ___________________________________________________________________________
1. Which of the following involves deciding which long-term investments to undertake and how to finance
them?
A. Operational planning.
B. Capital budgeting.
C. Investment planning.
D. Continuous budgeting.
2. What is the process by which a firm considering acquiring a new plant or new equipment must decide
whether to make the investment, then decide how to raise the funds required for the investment?
A. zero-based budgeting.
B. capital budgeting.
C. annual budgeting.
D. management by objectives.
3. In making long-term decisions about investing and financing, a firm should do which of the following?
A. decide whether to make the investment, then decide how to raise the funds required for the investment.
B. decide how to raise the funds required for the investment, then decide whether to make the investment.
C. decide how to raise the funds required for the investment at the same time as deciding whether to make the
investment.
D. None of the above.
4. What does the term capitalmean in the context of making capital expenditure decisions?
A. long-term assets.
B. the funds with which a firm acquires assets.
C. the source of funds typically reported as long-term liabilities and owners’ equity.
5. What does the term capital budgetingmean in the context of making capital expenditure decisions?
A. the process of choosing assets.
B. the process of allocating the funds among assets.
C. the process of acquiring the funds to finance the business.
6. Which of the following is an assumption of capital budgeting?
A. The firm can raise new funds at the same opportunity costs as the opportunity cost of the funds it already has
on hand.
B. The firm can raise new funds at the 30-year Federal funds rate.
C. The firm can raise new funds at the prime interest rate.
D. The firm can raise new funds at the same interest rate as the mean of the interest rates of the funds it already
has on hand.
7. What is the process by which an organization decides on its major programs and the approximate resources to
devote to them?
A. capital budgeting.
B. strategic planning.
C. program planning and budgeting.
D. zero-based budgeting.
8. Organizational policies, procedures, and performance measures should support accurate estimations, and
should consider the effect these factors have on planners when evaluating which of the following?
A. capital investment projects.
B. raw material purchases.
C. hiring temporary labor.
D. indirect material purchases.
9. Which statement is true concerning environmental investments such as installing pollution control devices?
A. These investments may provide many social benefits, not leading to quantifiable cash flows for the company.
B. These investments may provide cash flow benefits by eliminating fines, legal costs, and cleanups.
C. These investments are never undertaken unless required by Federal regulations.
D. Both “a” and “b”.
10. Which of the following is a capital investment decision method that in evaluating investments involving
cash flows over time where there is a significant time difference between cash payment and receipt?
A. zero-based budgeting
B. linear programming.
C. discounted cash flow.
D. program planning and review.
11. In making capital budgeting decisions, the discounted cash flow method aids in evaluating investments
involving cash flows over time where there is a significant time difference between cash payment and receipt.
Analysts use which two discounted cash flow methods?
A. the future value method and the internal rate of return method.
B. the net present value method and the external rate of return method.
C. the net present value method and the internal rate of return method.
D. the future value method and the external rate of return method.
12. Which interest rate is used by analysts when computing the present value of future cash flows?
A. prime interest rate
B. Federal funds rate
C. discount rate
D. real rate
13. The appropriate discount rate that analysts use in computing the present value of future cash flows is
comprised of which of the following?
A. an increase reflecting the inflation expected to occur over the life of the project.
B. a risk factor reflecting the riskiness of the project
C. a pure rate of interest reflecting the productive capability of capital assets
D. all of the above.
14. Which term describes the interest rate used in computing the present value of future cash flows?
A. applicable treasury rate
B. discount rate
C. income tax rate
D. borrowing rate.
15. Which of the following best identifies the reason for using probabilities in the capital-budget decision?
A. Uncertainty.
B. Cost of capital.
C. Time value of money.
D. Projects with unequal lives.
16. Competing investment projects where accepting one project eliminates the possibility of taking the
remaining projects is referred to as
A. common projects.
B. mutually exclusive projects.
C. joint projects.
D. opportunity costs.
17. When is the discount rate used?
A. When determining the applicable treasury rate.
B. When computing the present value of future cash flows.
C. To reduce the price of an investment.
D. When determining the future value of the firm’s cash inflows and outflows.
composed of an increase reflecting the inflation expected to occur over the life of the project. Thus,
A. the higher the expected inflation, the higher should be the discount rate.
B. the higher the expected inflation, the lower should be the discount rate.
C. the lower the expected inflation, the higher should be the discount rate.
composed of a risk factor reflecting the riskiness of the project. Thus,
A. the greater a projects risk, the higher the discount rate.
B. the Federal government has the lowest probability of default, so government bodies usually have the lowest
risk premiums.
C. a different discount rate would be used to invest a company’s funds in a high-risk research and development
project rather than low-risk bonds.
composed of a pure interest rate increased to reflect expected inflation. What is this pure rate called?
A. risk-free rate.
B. real interest rate.
C. nominal interest rate.
D. none of the above.
composed of a pure interest rate and a premium for the risk of the investment, but no increase to reflect
expected inflation. What is this rate called?
A. risk-free rate.
composed of a pure interest rate, a premium for the risk of the investment, an increase to reflect expected
inflation. What is this rate is called?
A. risk-free rate.
23. Which of the following is used to compute the present value of future cash flows when evaluating
investments involving cash flows over time where time elapses between cash payment and receipt?
A. prime rate plus 1 point.
B. United States Federal Reserve Interest Rate.
C. firm's cost of capital.
D. short-term United States Treasury Bill rate.
24. What is the appropriate decision to make it the present value of the future cash inflows exceeds the present
value of the future cash outflows for a proposal?
A. accept the alternative.
B. reject the alternative.
C. find a better alternative.
D. decrease the firm's cost of capital.
25. If the firm must choose one from a set of mutually exclusive alternatives with the same life span, which
alternative should be selected?
A. Select the alternative with the largest net present value of cash flows.
B. Select the alternative with the smallest net present value of cash flows.
C. Select the alternative with the largest net present value of cash inflows.
D. Select the alternative with the smallest net present value of cash outflows.
26. The cash flows associated with an investment project include which of the following?
A. initial cash flows
B. periodic cash flows
C. terminal cash flows.
27. What would the initial cash flows associated with an investment project include?
A. asset, freight and installation costs.
B. cash proceeds from disposing of existing assets made redundant or unnecessary by the new project.
C. income tax effect of gain(loss) on disposal of existing assets.
28. What would the periodic cash flows associated with an investment project include?
A. receipts from sales.
B. opportunity costs of undertaking this particular project.
C. expenditures for fixed and variable production costs.
A. savings for fixed and variable production costs
B. selling, general, and administrative expenditures and savings in selling, general, and administrative
expenditures
C. income tax effects resulting from other periodic cash flows
30. Which of the following would not be included as part of the periodic cash outflows associated with an
investment project?
B. selling, general, and administrative expenditures
C. opportunity costs of undertaking this particular project.
D. expenditures for fixed and variable production costs.
31. Which of the following would not be included as part of the periodic cash inflows associated with an
investment project?
B. savings in selling, general, and administrative expenditures
C. receipts from sales
D. opportunity costs of undertaking this particular project.
32. The periodic cash flows associated with an investment project include which of the following?
A. savings in taxes caused by deductibility of depreciation on tax return.
B. income tax effect of gain(loss) on disposal of existing assets.
C. asset and freight costs.
33. The periodic cash outflows associated with an investment project do not include which of the following?
B. expenditures for fixed production costs.
C. expenditures for variable production costs.
D. selling, general, and administrative expenditures.
34. The terminal cash flows associated with an investment project include which of the following?
A. income tax effects resulting from periodic cash flows.
B. loss in tax savings from lost depreciation.
C. tax loss on disposal of equipment.
35. Which of the following are steps needed for using the net present value method for making long-term
decisions using discounted cash flows?
A. estimate the amounts of future cash inflows and future cash outflows in each period for each alternative
under consideration.
B. discount the future cash flows to the present using the project’s discount rate.
C. accept or reject the proposed project, or select one from a set of mutually exclusive projects.
36. Which of the following would not be considered a periodic cash flow?
A. Receipts from sales.
B. Expenditures for heat, light, and electricity.
C. Income taxes paid on taxable income.
D. Initial lump-sum investment in a project.
37. If the net present value of a proposed project is positive, then the actual rate of return
A. is higher than the cost of capital.
B. is lower than the cost of capital.
C. is equal to the cost of capital.
D. is negative.
38. Because the cost of capital includes a premium reflecting inflation expected to occur over the life of the
asset, what should decision-makers do?
A. Ignore anticipated inflation on cash flows.
B. Consider inflation-adjusted receipts but not expenditures.
C. Consider inflation adjusted expenditures but not receipts.
D. Consider inflation-adjusted receipts and expenditures.
39. Project A has an expected cash flow of $500,000 at the end of year 5. Project B has an expected cash flow
of $100,000 to be received at the end of each year for the next five years. What can be said of the net present
value of project A compared to project B?
A. They are the same because both cash flows total $500,000 over the lives of the projects.
B. Project A is preferred because of the largest lump-sum payment in year 5.
C. Project B is preferred because of the periodic payments made consistently throughout the years and are made
earlier.
D. The both have the same internal rate of return and either should be accepted.
40. A company purchased an asset at a cost of $80,000. Annual operating cash flows are expected to be $30,000
each year for 4 years. At the end of the asset life, there will be no residual (salvage) value. What is the net
present value if the cost of capital is 12 percent? (Ignore income taxes.)
A. $40,000.
B. $24,400.
C. $11,120.
D. $5,650.
41. A not-for-profit company purchased an asset at a cost of $60,000. Annual operating cash flows are expected
to be $20,000 each year for 4 years. At the end of the asset life, there will be no residual (salvage) value. Ignore
income taxes. What is the net present value if the cost of capital is 10 percent?
A. $(1,960.)
B. $3,397.
C. $12,400.
D. $23,400.
42. The steps of the net present value method for making long-term decisions include
B. requiring the use of the applicable treasury rate as the discount rate in computing the present value of future
cash flows.
C. if the present value of the future cash inflows exceeds the present value of the future cash outflows for a
proposal, reject the alternative.
D. ignore depreciation because it is not a cash flow and does not affects the after-tax cash flow.
43. Which of the following is a likely errors in the calculation of net present value?
A. the amount of cash flows
B. the timing of cash flows
C. the discount rate.
D. all of the above
44. Which errors will likely have the largest effect on the net present value of changes in assumptions and
estimates?
A. Errors in predicting the amounts of future cash flows.
B. Errors in predicting the timing of future cash flows.
C. Errors in predicting the discount rate.
D. Errors in sensitivity analysis.
45. The calculation of the net present value of a proposed project does not require estimates of which of the
following?
A. the amount of future cash flows.
B. the timing of future cash flows.
C. the cost of capital rate.
D. the amount of sunk costs already incurred.
46. A planned factory expansion project has an estimated initial cost of $500,000. Using a discount rate of 20
percent, the present value of the future cost savings from the expansion is $520,000. To yield exactly the 20
percent time-adjusted rate of return, the actual investment expenditure should not exceed the $500,000 estimate
by more than
A. $160,000.
B. $20,000.
C. $1,075.
D. $43,000.
47. Which statement is true concerning depreciation?

A. Depreciation is not a cash flow and does not affect the tax cash flow.
B. Depreciation is not a cash flow and does affect the tax cash flow.
C. Depreciation is a cash flow and does not affect the tax cash flow.
D. Depreciation is a cash flow and does affect the tax cash flow.

A. Depreciation affects the tax cash flow because it is a deductible expense that affects taxable income.
B. Depreciation should be considered in the cash flow analysis.
C. Depreciation is affected by income tax laws which specify the allowable methods.
A. Depreciation does not affect after-tax cash flow.
C. Depreciation is not affected by income tax laws which specify the allowable methods.
D. Depreciation is a method used in financial accounting to allocate the cost of an asset over its useful life, but
has no application for managerial accounting purposes.

A. Depreciation does not affect taxable income.
C. Depreciation is never relevant for decision making.
D. Depreciation is never affected by income tax laws.
51. How would income tax laws affect investment decisions?

A. Through their effect on the discount rate allowed.
B. Through their effect on the type of investments allowed.
C. Through their effect on the internal rate of return allowed.
D. Through their effect on the type of depreciation method allowed.
52. Which statement is true concerning depreciation charges?

A. Depreciation charges directly affects cash flows.
B. Depreciation charges directly affect the after-tax cash flow.
C. Depreciation charges can be deducted from a firm’s tax return.
53. A firm will depreciate a computer costing $10,000 over five years using the straight-line methods for
financial reporting. For tax purposes, the company will use an accelerated method as follows:
Year 1 .20
Year 2 .32
Year 3 .192
Year 4 .115
Year 5 .115
Year 6 .058
Assuming a tax rate of 40 percent, what is the relevant cash flow for present value analysis associated with the tax savings related to depreciation for
Year 2?
A. $1,280.
B. $1,667.
C. $1,920.
D. $3,200.
54. When is the only time an investment analysis needs working capital?
A. when the firm must let cash sit idle as a condition of undertaking an investment.
B. whenever a capital expenditure decision is made.
C. when a firm makes cash payments
D. when a firm must show cash received from sales when it collects the cash.
55. In which area will analysts likely err when making capital investment decisions?
A. predicting or estimating amounts.
56. In which area will analysts will likely err when making capital investment decisions?
A. the amount of future cash flows
57. Which of the following is a useful feature of spreadsheet programs?

A. Spreadsheet programs reduce the errors in predicting the amounts of future cash flows.
B. Spreadsheet programs reduce the errors in predicting the timing of future cash flows.
C. Spreadsheet programs reduce the errors in predicting the discount rate.
D. Spreadsheet programs help the user see the effect on the net present value of changes in assumptions and
estimates.
58. At the end of a five-year life, a company will dispose of an asset and recognize a gain of $6,000. If the
company's cost of capital is 15 percent and its tax rate is 30 percent, what is the present value of the future cash
flow?
A. $14,078.
B. $6,000.
C. $2,087.
D. $895.
59. Which of the following statements is correct regarding capital investments?

A. Capital investments should be funded out of excess cash reserves.
B. Capital investments should have a positive internal rate of return.
C. Capital investments should achieve short-term objectives.
D. Capital investments should implement a company's strategy.
60. For the internal rate of return to rank projects the same way as the net present value rule, which condition
must exist?
A. The cutoff rate used for the internal rate equals the cost of capital.
B. Projects are mutually exclusive.
C. Projects have different lives.
D. There must be more than one internal rate of return.
61. Which of the following is the discount rate that equates the net present value of a series of cash flows to
zero?
A. investment rate of return.
B. external rate of return.
C. internal rate of return.
D. international rate of return.
62. Which of the following is the discount rate that discounts the future cash flows to a present value just equal
to the initial investment?
63. Which of the following can be calculated using built-in functions in spreadsheet programs?
A. external rate of return.
B. internal rate of return.
C. investment rate of return.
64. When using the internal rate of return to evaluate investment alternatives, what rate would an analyst need
to specify?
A. cutoff rate.
B. Federal funds rate.
C. prime interest rate.
D. time-adjusted rate.
65. When using the internal rate of return to evaluate investment alternatives, which rate would analysts
specify?
A. hurdle rate.
66. The Information Technology Club, Inc. is considering an investment that requires $20,000 and promises to
return $28,090 in 3 years. The company's income tax rate is 40 percent. What is the approximate internal rate of
return?
A. 8 percent.
B. 10 percent.
C. 12 percent.
D. 15 percent.
67. A project requires an initial investment of $43,000 and has the following expected stream of cash flows:
Year 1 $20,000
Year 2 $30,000
The internal rate of return for the project is closest to

A. 0 percent.
B. 10 percent.
C. 15 percent.
D. 20 percent.
68. What is true concerning the internal rate of return (IRR) method?
A. The IRR method determines the discount rate that equates the net present value of the series to the initial
investment.
B. The IRR method determines the discount rate that equates the net present value of the series to hurdle rate.
C. The IRR method determines the discount rate that equates the net present value of the series to cut-off rate.
D. The IRR method determines the discount rate that equates the net present value of the series to zero.
69. When using the internal rate of return to evaluate investment alternatives, analysts specify which of the
following?
A. applicable federal rate.
B. cut-off rate.
C. risk-free rate.
D. prime rate.
70. The decision to accept or reject an investment proposal that computes the investment’s net present value,
using the organization’s adjusted cost of capital as the discount rate and undertakes the investment if its net
present value is positive, or rejects the investment if its net present value is negative is called the
A. net present value method.
B. future value method.
C. internal rate of return method.
D. external rate of return method.
71. The decision to accept or reject an investment proposal can be made using either the internal rate of return
method or the net present value method under most circumstances. The following is/are circumstance(s) that
may arise where the two methods need not give the same answer and the net present value method’s answer is
always the correct one.
A. mutually exclusive projects.
B. projects with different lifetimes.
C. projects with intermixing of inflows and outflows.
D. all of the above are possible circumstances.
72. Managers are often correct that the company would benefit from advanced manufacturing technology.
However, the present value of future cash flows analysis usually results in a negative net present value for the
investment because of the
A. hurdle rate being set too high and there is a bias toward incremental projects.
B. uncertainty about operating cash flows.
C. exclusion of benefits that are difficult to quantify.
investment because of the exclusion of benefits that are difficult to quantify such as
A. greater flexibility in the production process.
B. shorter cycle times and lead times.
C. reduction of non-value-added costs.
74. Justification of investments in advanced manufacturing systems by using discounted cash flow analysis is
A. required by generally accepted accounting principles.
B. easy.
C. a difficult problem.
D. based on quantifiable benefits, only.
75. Justification of investments in advanced manufacturing systems by using discounted cash flow analysis
results in rejection of the proposal because the present value of future cash flows are negative. What is/are
possible reason(s) for adopting the proposal, anyway?
A. to inject new technology into the company’s manufacturing operations
B. improved quality, greater flexibility, and lower inventories that lead to long-term cash flows.
C. intangible benefits in addition to quantifiable benefits should be considered.
76. What is a general type of long-term capital investment that companies make?
A. replacement and minor improvements
B. training and development of employees
C. advertising campaigns
D. all of the above
77. What should a firm do to justify or reject investments in advanced manufacturing systems?
A. only uses discounted cash flow analysis.
B. only use perfect estimates of tangible costs and benefits.
C. establish a high discount or cut-off rate
D. make a judgement that recognizes both quantifiable and nonquantifiable benefits.
78. Justification of investments in advanced manufacturing systems is a(n)

A. easy problem.
B. moderately-easy problem.
C. moderately-difficult problem.
D. difficult problem.
79. Systematic feedback to planners based on audits creates an environment in which planners will find less
temptation to
A. deflate their estimates of the benefits associated with their pet projects.
B. inflate their estimates of the benefits associated with their pet projects.
C. inflate their estimates of the costs associated with their pet projects.
D. inflate their estimates of the prestige associated with their pet projects.
80. Which of the following is a behavioral issue that influences capital investment project planners objectivity
when making estimates?
A. desire to implement a project.
B. performance evaluation measures.
C. organizational policies and procedures.
81. Audits that compare the estimates made in the capital budgeting process with the actual results
A. identify what estimates were wrong.
B. can serve as the basis to identify and reward good planners.
C. create an environment in which planners will not be tempted to inflate their estimates of the benefits
associated with the project to get it approved.
82. What is true of audits of the capital investment process?

A. Audits of the capital investment process compare the estimates made in the capital budgeting process with
the actual results.
B. Audits of the capital investment process should never be conducted because of the effect on employee
morale.
C. Audits of the capital investment process should never be used to identify and reward good planners
D. Audits of the capital investment process create an environment in which planners will be tempted to inflate
their estimates of the benefits associated with the project to get it approved.
83. What should a firm do to reduce the temptation for planners to inflate their estimates of the benefits
associated with the project to get it approved?
A. conduct regular capital investment post-audits.
B. fire all managers who miss their cost or benefit estimates by more than 10 percent.
C. recognize that the capital budgeting process is based on subjective estimates and that managers cannot
control the actual project implementation.
D. promote project managers that have the largest project(s) or number of employees.
84. Which of the following is not a capital expenditure decision?

A. Purchasing a new piece of equipment
B. Building a new factory
C. Purchasing a computer system
D. Issuing common stock
85. The XYZ Company is evaluating a capital budgeting proposal for the current year. The initial investment
would be $50,000. It would be depreciated on a straight-line basis over five years with no salvage value. The
before-tax annual cash inflow due to this investment is $5,000, and the income tax rate is 40 percent paid in the
same year as incurred. The desired after-tax rate of return is 15 percent. All cash flows occur at year-end.
What is the net present value of XYZ's capital-budgeting proposal? Should the proposal be accepted?
86. Mercken Industries
Mercken Industries is contemplating four projects: Project P, Project Q, Project R, and Project S. The capital
costs and estimated after-tax net cash flows of each mutually exclusive project are listed below. Mercken's
desired after-tax opportunity cost is 12 percent, and the company has a capital budget for the year of $450,000.
Idle funds cannot be reinvested at greater than 12 percent.
Project P Project Q Project R Project S

Initial cost $200,000 $235,000 $190,000 $210,000
Annual Cash Flows
Year 1 $ 93,000 $ 90,000 $ 45,000 $ 40,000
Year 2 93,000 85,000 55,000 50,000
Year 3 93,000 75,000 65,000 60,000
Year 4 0 55,000 70,000 65,000
Year 5 0 50,000 75,000 75,000
Net present value $23,370 $29,827 $27,233 $(7,854)

Internal rate of return 18.7% 17.6% 17.2% 10.6%
Excess present value index 1.12 1.13 1.14 0.95
Refer to Mercken Industries. Which project(s) will the company choose?


Initial cost $200,000 $235,000 $190,000 $210,000
Annual Cash Flows
Year 1 $ 93,000 $ 90,000 $ 45,000 $ 40,000
Year 2 93,000 85,000 55,000 50,000
Year 3 93,000 75,000 65,000 60,000
Year 4 0 55,000 70,000 65,000
Year 5 0 50,000 75,000 75,000

Refer to Mercken Industries. If Merken can only accept one project, which will the company choose?
88. Yipann Corporation is reviewing an investment proposal. The initial costs as well as other related data for
each year are presented in the schedule below. The cash flows are all assumed to take place at the end of the
year. All salvage value of the investment at the end of each year is equal to its net book value, and there will be
no salvage value at the end of the investment's life.
Investment Proposal
Year Initial Cost and Book Value Annual Net Annual Net Income
After-Tax Cash Flows
0 $105,000 $0 $0
1 70,000 50,000 15,000
2 42,000 45,000 17,000
3 21,000 40,000 19,000
4 7,000 35,000 21,000
5 0 30,000 23,000
Yipann uses a 24 percent after-tax target rate of return for new investment proposals. The discount figures for a 24 percent rate of return are given
below:
Present Value of $1.00 Received at the End of Period Present Value of $1.00 Received at the End of Each
Period
1 .81 .81
2 .65 1.46
3 .52 1.98
4 .42 2.40
5 .34 2.74
6 .28 3.02
7 .22 3.24
What is the net present value of the investment proposal?
89. Use this information to answer the following questions:
An investment of $20,000 today will yield $8,000 a year at the end of the next three years.
Refer to the above information. Will the project be accepted at a cost of capital of 10 percent?
92. Johnson Enterprises has three possible projects. Each project requires the same initial investment of
$1,000,000. The cash flows are as follows:
Year Project X Project Y Project Z
1 $1,250,000 $ 0 $ 500,000
2 1,250,000 0 2,000,000
3 1,250,000 0 2,000,000
4 1,250,000 $5,000,000 500,000
Ignoring taxes, compute the net present value of each project at a 15 percent cost of capital. Which project should be chosen? Be sure to show your
supporting calculations.
93. Crown Corporation
Crown Corporation has agreed to sell some used computer equipment to Bob Parsons, one of the company's
employees, for $5,000.
Refer to Crown Corporation. If Crown offers to accept a $1,000 down payment and set up a note receivable for
Bob Parsons that calls for four $1,000 payments at the end of each of the next 4 years and Crown uses a 6
percent discount rate, what is the present value of the note?
Refer to Crown Corporation. What would the present value of the note be if Parsons agreed to the immediate
down payment of $1,000 but would like the note for $4,000 to be payable in full at the end of the fourth year?
The increased risk associated with the terms of this note changes the discount rate to 8 percent.
95. Eastchester Products
Eastchester Products is considering a project that requires an initial investment of $400,000 and will generate
the following cash inflows for the next 4 years:
Year Cash Inflow at End of Year

1 $150,000
2 $130,000
3 $180,000
4 $150,000
Refer to Eastchester Products. Ignoring tax effects, calculate the net present value of this project if Eastchester's cost of capital is 20
percent. Should the project be accepted or rejected?

1 $150,000
2 $130,000
3 $180,000
4 $150,000
Refer to Eastchester Products. Ignoring tax effects, calculate the net present value of this project if Eastchester's cost of capital is 12 percent?

1 $150,000
2 $130,000
3 $180,000
4 $150,000
Refer to Eastchester Products. Should the company accept the project if the cost of capital is 12 percent? Explain.
98. Feed the Hungry Foundation
Feed the Hungry Foundation is a non-profit organization that has a cost of capital of 10 percent. The foundation
is considering the replacement of a piece of equipment. The old machine has a book value of $3,000 and a
remaining estimated life of 5 years with no salvage value at that time. The salvage value of the old machine is
currently $1,500. The new equipment will cost $10,000. It has an estimated life of 5 years with no salvage value
then. Annual cash operating costs are $4,000 for the old machine and $2,000 for the new machine.
Refer to Feed the Hungry Foundation. What is the present value of the operating cash outflows for the old
machine?
Refer to Feed the Hungry Foundation. What is the present value of the operating cash outflows for the new
machine?
Refer to Feed the Hungry Foundation. What is the present value of salvage value of the old machine if it is
replaced now?
Refer to Feed the Hungry Foundation. Would you advise the organization to replace the machine?
102. Latway Company is considering opening a new sales territory. Management expects the initial investment
to be $150,000 and subsequent investments of $100,000 and $50,000 at the end of the first and second years.
Net cash flow from the sales territory is expected to yield after-tax cash inflow for 5 more years: $75,000 for the
first two years and $60,000 for the remaining years. The company's cost of capital is 12 percent. Calculate the
net present value of this project.
103. The Nova Company is considering replacing a machine that will cost $240,000. It expects to realize cost
savings of $70,000 a year before taxes for each of the next five years. The company will use an accelerated
method of depreciation as follows:
Year 1 .20
Year 2 .32
Year 3 .192
Year 4 .115
Year 5 .115
Year 6 .058
At the end of five years, the company expects the machine will have no salvage value. The company has a tax rate of 45 percent and has determined
that 12 percent is the appropriate discount rate to use. Prepare an analysis showing the net present value. Indicate what salvage value is necessary of
the old machine in order to justify the purchase of the new machine.
104. What is the role of capital expenditure decisions in the strategic planning process?
105. What behavioral issues are involved in capital budgeting?
106. Why does the capital investment process require audits?
107. Explain the problem of just using cash flow analysis in justifying or rejecting an investment in advanced
manufacturing systems.
108. Explain the application of the internal rate of return method of assessing investment alternatives.
109. Describe the steps of the net present value method for making long-term decisions using discounted cash
flows. Analyze the effect of income taxes on cash flows.
110. Discuss the advantages of using spreadsheets including sensitivity analysis.
111. What is the reasoning behind the separation of the investing and financing aspects of making long-term
decisions?
flows, and explain the effect of income taxes on cash flows.
113. How does depreciation affect investment decisions?
114. Explain how spreadsheets help the analyst to conduct sensitivity analyses of capital budgeting.
115. Describe the internal rate of return method of assessing investment alternatives.
116. Explain why analysts will need more than cash flow analysis to justify or reject an investment.
117. Explain how you might analyze a capital budgeting decision where the cash flow data
are nominal (including expected inflation of, say, 4 percent per year) but the quoted
cost of capital of 12 percent per year is real (excluding anticipated inflation).
119. Island Grills considering purchasing a new machine for $1 million at the end of Year 0 to be put into
operation at the beginning of Year 1. The new machine will save $250,000, before taxes, per year from the cash
outflows generated by using the old machine. For tax purposes, Island will depreciate the new machine in the
following amounts: $100,000 in Year 1, $300,000 in Year 2, and $200,000 per year thereafter until fully
depreciated or sold. The new machine will have no salvage value at the end of Year 5. Island expects the new
machine to have a market value of $400,000 at the end of three years. If Island acquires the new machine at the
end of Year 0, it can sell the old one for $200,000 at that time. The old machine has a tax basis of $300,000 at
the end of Year 0. If Island keeps the old machine, the company will depreciate it for tax purposes in the
amount of $100,000 per year for three years, when it will have no market value. Island pays taxes at the rate of
40 percent of taxable income and uses a cost of capital of 12 percent in evaluating this possible acquisition.
Island has sufficient otherwise-taxable income in Year 0 to save income taxes for each dollar of loss it may
incur if it sells the old machine at the end of Year 0.
Required:
a. Compute the net present value of cash flows from each of the alternatives facing Island Grills.
b. Make a recommendation to Island Grills.
c. Assume that the cash flows described in the problem for Years 2 through 5 are real, not nominal, amounts,
but the 12 percent cost of capital includes an allowance for inflation of 6 percent. Describe how this will affect
your analysis. You need not perform new computations.
120. An investment that costs $79,100 will reduce operating costs by $14,000 per year for 10 years.
Required:
Determine the internal rate of return of the investment (ignoring taxes). Should the investment be undertaken if
the required rate of return is 18 percent?
121. An investment that costs $50,000 will return $22,000 per year for five years.
Required:
Determine the net present value of the investment if the required rate of return is 14 percent (ignoring taxes).
Should the investment be undertaken?
122. Jackson Company is considering the investment in a computer system. The company estimates that it will
require an initial outlay of $1,200,000. Other cash flows will be as follows:
Year 1 ($600,000)
Year 2 150,000
Year 3 620,000
Year 4 725,000
Year 5 800,000
Required:
Assuming the company limits its analysis to five years, should the company consider this investment if the required rate of return is 12 percent?
123. Rainer Company is considering a project that will require an initial investment of $750,000 and will return
$200,000 each year for five years. If taxes are ignored and the required rate of return is 9%, what is the
project’s net present value? Based on this analysis, should the company proceed with the project?
124. Falcon Company’s most recent capital expenditure project will require an initial investment of $600,000
and is expected to generate the following cash flows:
Year 1 $100,000
Year 2 $250,000
Year 3 $250,000
Year 4 $200,000
Year 5 $100,000
Required:
If the required rate of return is 20% and taxes are ignored, what is the project’s net present value?
125. Berringer Company is considering an investment that will generate cash revenues of $100,000 per year for
8 years, and have cash expenses of $70,000 per year for 8 years. The cost of the asset is $80,000, and it will be
depreciated using straight-line depreciation over its 8 year life. Berringer pays income taxes at a rate of
30%. The cost of capital is 12%
Required:
a. Prepare an analysis showing the annual after tax cash flow associated with this asset.
b. Compute the net present value of this investment using the cash flow you computed in a above.
126. Wilcox Company is considering an investment that will generate cash revenues of $120,000 per year for 8
years, and have cash expenses of $60,000 per year for 8 years. The cost of the asset is $120,000, and it will be
Required:
Chapter 8--Capital Expenditure Decisions Key
1. Which of the following involves deciding which long-term investments to undertake and how to finance
them?
A. Operational planning.
B. Capital budgeting.
C. Investment planning.
D. Continuous budgeting.
2. What is the process by which a firm considering acquiring a new plant or new equipment must decide
whether to make the investment, then decide how to raise the funds required for the investment?
A. zero-based budgeting.
B. capital budgeting.
C. annual budgeting.
D. management by objectives.
3. In making long-term decisions about investing and financing, a firm should do which of the following?
A. decide whether to make the investment, then decide how to raise the funds required for the investment.
B. decide how to raise the funds required for the investment, then decide whether to make the investment.
C. decide how to raise the funds required for the investment at the same time as deciding whether to make the
investment.
4. What does the term capitalmean in the context of making capital expenditure decisions?
A. long-term assets.
B. the funds with which a firm acquires assets.
C. the source of funds typically reported as long-term liabilities and owners’ equity.
5. What does the term capital budgetingmean in the context of making capital expenditure decisions?
A. the process of choosing assets.
B. the process of allocating the funds among assets.
C. the process of acquiring the funds to finance the business.
6. Which of the following is an assumption of capital budgeting?
A. The firm can raise new funds at the same opportunity costs as the opportunity cost of the funds it already has
on hand.
B. The firm can raise new funds at the 30-year Federal funds rate.
C. The firm can raise new funds at the prime interest rate.
D. The firm can raise new funds at the same interest rate as the mean of the interest rates of the funds it already
has on hand.
7. What is the process by which an organization decides on its major programs and the approximate resources to
devote to them?
A. capital budgeting.
B. strategic planning.
C. program planning and budgeting.
D. zero-based budgeting.
8. Organizational policies, procedures, and performance measures should support accurate estimations, and
should consider the effect these factors have on planners when evaluating which of the following?
A. capital investment projects.
B. raw material purchases.
C. hiring temporary labor.
D. indirect material purchases.
9. Which statement is true concerning environmental investments such as installing pollution control devices?
A. These investments may provide many social benefits, not leading to quantifiable cash flows for the company.
B. These investments may provide cash flow benefits by eliminating fines, legal costs, and cleanups.
C. These investments are never undertaken unless required by Federal regulations.
D. Both “a” and “b”.
10. Which of the following is a capital investment decision method that in evaluating investments involving
cash flows over time where there is a significant time difference between cash payment and receipt?
A. zero-based budgeting
B. linear programming.
C. discounted cash flow.
D. program planning and review.
11. In making capital budgeting decisions, the discounted cash flow method aids in evaluating investments
involving cash flows over time where there is a significant time difference between cash payment and receipt.
Analysts use which two discounted cash flow methods?
A. the future value method and the internal rate of return method.
B. the net present value method and the external rate of return method.
C. the net present value method and the internal rate of return method.
D. the future value method and the external rate of return method.
12. Which interest rate is used by analysts when computing the present value of future cash flows?
A. prime interest rate
B. Federal funds rate
C. discount rate
D. real rate
comprised of which of the following?
A. an increase reflecting the inflation expected to occur over the life of the project.
B. a risk factor reflecting the riskiness of the project
C. a pure rate of interest reflecting the productive capability of capital assets
14. Which term describes the interest rate used in computing the present value of future cash flows?
A. applicable treasury rate
B. discount rate
C. income tax rate
D. borrowing rate.
15. Which of the following best identifies the reason for using probabilities in the capital-budget decision?
A. Uncertainty.
B. Cost of capital.
C. Time value of money.
D. Projects with unequal lives.
16. Competing investment projects where accepting one project eliminates the possibility of taking the
remaining projects is referred to as
A. common projects.
B. mutually exclusive projects.
C. joint projects.
D. opportunity costs.
17. When is the discount rate used?
A. When determining the applicable treasury rate.
B. When computing the present value of future cash flows.
C. To reduce the price of an investment.
D. When determining the future value of the firm’s cash inflows and outflows.
composed of an increase reflecting the inflation expected to occur over the life of the project. Thus,
A. the higher the expected inflation, the higher should be the discount rate.
B. the higher the expected inflation, the lower should be the discount rate.
C. the lower the expected inflation, the higher should be the discount rate.
composed of a risk factor reflecting the riskiness of the project. Thus,
A. the greater a projects risk, the higher the discount rate.
B. the Federal government has the lowest probability of default, so government bodies usually have the lowest
risk premiums.
C. a different discount rate would be used to invest a company’s funds in a high-risk research and development
project rather than low-risk bonds.
composed of a pure interest rate increased to reflect expected inflation. What is this pure rate called?
A. risk-free rate.
composed of a pure interest rate and a premium for the risk of the investment, but no increase to reflect
expected inflation. What is this rate called?
A. risk-free rate.
composed of a pure interest rate, a premium for the risk of the investment, an increase to reflect expected
inflation. What is this rate is called?
A. risk-free rate.
23. Which of the following is used to compute the present value of future cash flows when evaluating
investments involving cash flows over time where time elapses between cash payment and receipt?
A. prime rate plus 1 point.
B. United States Federal Reserve Interest Rate.
C. firm's cost of capital.
D. short-term United States Treasury Bill rate.
24. What is the appropriate decision to make it the present value of the future cash inflows exceeds the present
value of the future cash outflows for a proposal?
A. accept the alternative.
B. reject the alternative.
C. find a better alternative.
D. decrease the firm's cost of capital.
25. If the firm must choose one from a set of mutually exclusive alternatives with the same life span, which
alternative should be selected?
A. Select the alternative with the largest net present value of cash flows.
B. Select the alternative with the smallest net present value of cash flows.
C. Select the alternative with the largest net present value of cash inflows.
D. Select the alternative with the smallest net present value of cash outflows.
26. The cash flows associated with an investment project include which of the following?
A. initial cash flows
B. periodic cash flows
C. terminal cash flows.
27. What would the initial cash flows associated with an investment project include?
A. asset, freight and installation costs.
B. cash proceeds from disposing of existing assets made redundant or unnecessary by the new project.
C. income tax effect of gain(loss) on disposal of existing assets.
A. receipts from sales.
B. opportunity costs of undertaking this particular project.
C. expenditures for fixed and variable production costs.
B. selling, general, and administrative expenditures and savings in selling, general, and administrative
expenditures
C. income tax effects resulting from other periodic cash flows
30. Which of the following would not be included as part of the periodic cash outflows associated with an
investment project?
B. selling, general, and administrative expenditures
C. opportunity costs of undertaking this particular project.
D. expenditures for fixed and variable production costs.
31. Which of the following would not be included as part of the periodic cash inflows associated with an
investment project?
B. savings in selling, general, and administrative expenditures
C. receipts from sales
D. opportunity costs of undertaking this particular project.
32. The periodic cash flows associated with an investment project include which of the following?
B. income tax effect of gain(loss) on disposal of existing assets.
C. asset and freight costs.
33. The periodic cash outflows associated with an investment project do not include which of the following?
B. expenditures for fixed production costs.
C. expenditures for variable production costs.
D. selling, general, and administrative expenditures.
34. The terminal cash flows associated with an investment project include which of the following?
A. income tax effects resulting from periodic cash flows.
B. loss in tax savings from lost depreciation.
C. tax loss on disposal of equipment.
35. Which of the following are steps needed for using the net present value method for making long-term
decisions using discounted cash flows?
B. discount the future cash flows to the present using the project’s discount rate.
C. accept or reject the proposed project, or select one from a set of mutually exclusive projects.
36. Which of the following would not be considered a periodic cash flow?
A. Receipts from sales.
B. Expenditures for heat, light, and electricity.
C. Income taxes paid on taxable income.
D. Initial lump-sum investment in a project.
37. If the net present value of a proposed project is positive, then the actual rate of return
A. is higher than the cost of capital.
B. is lower than the cost of capital.
C. is equal to the cost of capital.
D. is negative.
38. Because the cost of capital includes a premium reflecting inflation expected to occur over the life of the
asset, what should decision-makers do?
A. Ignore anticipated inflation on cash flows.
B. Consider inflation-adjusted receipts but not expenditures.
C. Consider inflation adjusted expenditures but not receipts.
D. Consider inflation-adjusted receipts and expenditures.
39. Project A has an expected cash flow of $500,000 at the end of year 5. Project B has an expected cash flow
of $100,000 to be received at the end of each year for the next five years. What can be said of the net present
value of project A compared to project B?
A. They are the same because both cash flows total $500,000 over the lives of the projects.
B. Project A is preferred because of the largest lump-sum payment in year 5.
C. Project B is preferred because of the periodic payments made consistently throughout the years and are made
earlier.
D. The both have the same internal rate of return and either should be accepted.
40. A company purchased an asset at a cost of $80,000. Annual operating cash flows are expected to be $30,000
each year for 4 years. At the end of the asset life, there will be no residual (salvage) value. What is the net
present value if the cost of capital is 12 percent? (Ignore income taxes.)
A. $40,000.
B. $24,400.
C. $11,120.
D. $5,650.
41. A not-for-profit company purchased an asset at a cost of $60,000. Annual operating cash flows are expected
to be $20,000 each year for 4 years. At the end of the asset life, there will be no residual (salvage) value. Ignore
income taxes. What is the net present value if the cost of capital is 10 percent?
A. $(1,960.)
B. $3,397.
C. $12,400.
D. $23,400.
42. The steps of the net present value method for making long-term decisions include
B. requiring the use of the applicable treasury rate as the discount rate in computing the present value of future
cash flows.
C. if the present value of the future cash inflows exceeds the present value of the future cash outflows for a
proposal, reject the alternative.
D. ignore depreciation because it is not a cash flow and does not affects the after-tax cash flow.
43. Which of the following is a likely errors in the calculation of net present value?
A. the amount of cash flows
D. all of the above
44. Which errors will likely have the largest effect on the net present value of changes in assumptions and
estimates?
A. Errors in predicting the amounts of future cash flows.
B. Errors in predicting the timing of future cash flows.
C. Errors in predicting the discount rate.
D. Errors in sensitivity analysis.
45. The calculation of the net present value of a proposed project does not require estimates of which of the
following?
A. the amount of future cash flows.
B. the timing of future cash flows.
C. the cost of capital rate.
D. the amount of sunk costs already incurred.
46. A planned factory expansion project has an estimated initial cost of $500,000. Using a discount rate of 20
percent, the present value of the future cost savings from the expansion is $520,000. To yield exactly the 20
percent time-adjusted rate of return, the actual investment expenditure should not exceed the $500,000 estimate
by more than
A. $160,000.
B. $20,000.
C. $1,075.
D. $43,000.

A. Depreciation is not a cash flow and does not affect the tax cash flow.
B. Depreciation is not a cash flow and does affect the tax cash flow.
C. Depreciation is a cash flow and does not affect the tax cash flow.
D. Depreciation is a cash flow and does affect the tax cash flow.

A. Depreciation affects the tax cash flow because it is a deductible expense that affects taxable income.
C. Depreciation is affected by income tax laws which specify the allowable methods.
A. Depreciation does not affect after-tax cash flow.
C. Depreciation is not affected by income tax laws which specify the allowable methods.
D. Depreciation is a method used in financial accounting to allocate the cost of an asset over its useful life, but
has no application for managerial accounting purposes.

A. Depreciation does not affect taxable income.
C. Depreciation is never relevant for decision making.
D. Depreciation is never affected by income tax laws.
51. How would income tax laws affect investment decisions?

A. Through their effect on the discount rate allowed.
B. Through their effect on the type of investments allowed.
C. Through their effect on the internal rate of return allowed.
D. Through their effect on the type of depreciation method allowed.
52. Which statement is true concerning depreciation charges?

A. Depreciation charges directly affects cash flows.
B. Depreciation charges directly affect the after-tax cash flow.
C. Depreciation charges can be deducted from a firm’s tax return.
53. A firm will depreciate a computer costing $10,000 over five years using the straight-line methods for
financial reporting. For tax purposes, the company will use an accelerated method as follows:
Year 1 .20
Year 2 .32
Year 3 .192
Year 4 .115
Year 5 .115
Year 6 .058
Assuming a tax rate of 40 percent, what is the relevant cash flow for present value analysis associated with the tax savings related to depreciation for
Year 2?
A. $1,280.
B. $1,667.
C. $1,920.
D. $3,200.
54. When is the only time an investment analysis needs working capital?
A. when the firm must let cash sit idle as a condition of undertaking an investment.
B. whenever a capital expenditure decision is made.
C. when a firm makes cash payments
D. when a firm must show cash received from sales when it collects the cash.
55. In which area will analysts likely err when making capital investment decisions?
A. predicting or estimating amounts.
56. In which area will analysts will likely err when making capital investment decisions?
A. the amount of future cash flows
57. Which of the following is a useful feature of spreadsheet programs?

A. Spreadsheet programs reduce the errors in predicting the amounts of future cash flows.
B. Spreadsheet programs reduce the errors in predicting the timing of future cash flows.
C. Spreadsheet programs reduce the errors in predicting the discount rate.
D. Spreadsheet programs help the user see the effect on the net present value of changes in assumptions and
estimates.
58. At the end of a five-year life, a company will dispose of an asset and recognize a gain of $6,000. If the
company's cost of capital is 15 percent and its tax rate is 30 percent, what is the present value of the future cash
flow?
A. $14,078.
B. $6,000.
C. $2,087.
D. $895.
59. Which of the following statements is correct regarding capital investments?

A. Capital investments should be funded out of excess cash reserves.
B. Capital investments should have a positive internal rate of return.
C. Capital investments should achieve short-term objectives.
D. Capital investments should implement a company's strategy.
60. For the internal rate of return to rank projects the same way as the net present value rule, which condition
must exist?
A. The cutoff rate used for the internal rate equals the cost of capital.
B. Projects are mutually exclusive.
C. Projects have different lives.
D. There must be more than one internal rate of return.
61. Which of the following is the discount rate that equates the net present value of a series of cash flows to
zero?
62. Which of the following is the discount rate that discounts the future cash flows to a present value just equal
to the initial investment?
63. Which of the following can be calculated using built-in functions in spreadsheet programs?
A. external rate of return.
B. internal rate of return.
C. investment rate of return.
64. When using the internal rate of return to evaluate investment alternatives, what rate would an analyst need
to specify?
A. cutoff rate.
65. When using the internal rate of return to evaluate investment alternatives, which rate would analysts
specify?
A. hurdle rate.
66. The Information Technology Club, Inc. is considering an investment that requires $20,000 and promises to
return $28,090 in 3 years. The company's income tax rate is 40 percent. What is the approximate internal rate of
return?
A. 8 percent.
B. 10 percent.
C. 12 percent.
D. 15 percent.
67. A project requires an initial investment of $43,000 and has the following expected stream of cash flows:
Year 1 $20,000
Year 2 $30,000
The internal rate of return for the project is closest to

A. 0 percent.
B. 10 percent.
C. 15 percent.
D. 20 percent.
68. What is true concerning the internal rate of return (IRR) method?
A. The IRR method determines the discount rate that equates the net present value of the series to the initial
investment.
B. The IRR method determines the discount rate that equates the net present value of the series to hurdle rate.
C. The IRR method determines the discount rate that equates the net present value of the series to cut-off rate.
D. The IRR method determines the discount rate that equates the net present value of the series to zero.
69. When using the internal rate of return to evaluate investment alternatives, analysts specify which of the
following?
A. applicable federal rate.
B. cut-off rate.
C. risk-free rate.
D. prime rate.
70. The decision to accept or reject an investment proposal that computes the investment’s net present value,
using the organization’s adjusted cost of capital as the discount rate and undertakes the investment if its net
present value is positive, or rejects the investment if its net present value is negative is called the
A. net present value method.
B. future value method.
C. internal rate of return method.
D. external rate of return method.
71. The decision to accept or reject an investment proposal can be made using either the internal rate of return
method or the net present value method under most circumstances. The following is/are circumstance(s) that
may arise where the two methods need not give the same answer and the net present value method’s answer is
always the correct one.
A. mutually exclusive projects.
B. projects with different lifetimes.
C. projects with intermixing of inflows and outflows.
D. all of the above are possible circumstances.
investment because of the
A. hurdle rate being set too high and there is a bias toward incremental projects.
B. uncertainty about operating cash flows.
C. exclusion of benefits that are difficult to quantify.
investment because of the exclusion of benefits that are difficult to quantify such as
A. greater flexibility in the production process.
B. shorter cycle times and lead times.
C. reduction of non-value-added costs.
74. Justification of investments in advanced manufacturing systems by using discounted cash flow analysis is
A. required by generally accepted accounting principles.
B. easy.
C. a difficult problem.
D. based on quantifiable benefits, only.
75. Justification of investments in advanced manufacturing systems by using discounted cash flow analysis
results in rejection of the proposal because the present value of future cash flows are negative. What is/are
possible reason(s) for adopting the proposal, anyway?
A. to inject new technology into the company’s manufacturing operations
B. improved quality, greater flexibility, and lower inventories that lead to long-term cash flows.
C. intangible benefits in addition to quantifiable benefits should be considered.
76. What is a general type of long-term capital investment that companies make?
A. replacement and minor improvements
B. training and development of employees
C. advertising campaigns
D. all of the above
77. What should a firm do to justify or reject investments in advanced manufacturing systems?
A. only uses discounted cash flow analysis.
B. only use perfect estimates of tangible costs and benefits.
C. establish a high discount or cut-off rate
D. make a judgement that recognizes both quantifiable and nonquantifiable benefits.
78. Justification of investments in advanced manufacturing systems is a(n)

A. easy problem.
B. moderately-easy problem.
C. moderately-difficult problem.
D. difficult problem.
79. Systematic feedback to planners based on audits creates an environment in which planners will find less
temptation to
A. deflate their estimates of the benefits associated with their pet projects.
B. inflate their estimates of the benefits associated with their pet projects.
C. inflate their estimates of the costs associated with their pet projects.
D. inflate their estimates of the prestige associated with their pet projects.
80. Which of the following is a behavioral issue that influences capital investment project planners objectivity
when making estimates?
A. desire to implement a project.
B. performance evaluation measures.
C. organizational policies and procedures.
81. Audits that compare the estimates made in the capital budgeting process with the actual results
A. identify what estimates were wrong.
B. can serve as the basis to identify and reward good planners.
C. create an environment in which planners will not be tempted to inflate their estimates of the benefits
associated with the project to get it approved.
82. What is true of audits of the capital investment process?

A. Audits of the capital investment process compare the estimates made in the capital budgeting process with
the actual results.
B. Audits of the capital investment process should never be conducted because of the effect on employee
morale.
C. Audits of the capital investment process should never be used to identify and reward good planners
D. Audits of the capital investment process create an environment in which planners will be tempted to inflate
their estimates of the benefits associated with the project to get it approved.
83. What should a firm do to reduce the temptation for planners to inflate their estimates of the benefits
associated with the project to get it approved?
A. conduct regular capital investment post-audits.
B. fire all managers who miss their cost or benefit estimates by more than 10 percent.
C. recognize that the capital budgeting process is based on subjective estimates and that managers cannot
control the actual project implementation.
D. promote project managers that have the largest project(s) or number of employees.
84. Which of the following is not a capital expenditure decision?

A. Purchasing a new piece of equipment
B. Building a new factory
C. Purchasing a computer system
D. Issuing common stock
85. The XYZ Company is evaluating a capital budgeting proposal for the current year. The initial investment
would be $50,000. It would be depreciated on a straight-line basis over five years with no salvage value. The
before-tax annual cash inflow due to this investment is $5,000, and the income tax rate is 40 percent paid in the
same year as incurred. The desired after-tax rate of return is 15 percent. All cash flows occur at year-end.
What is the net present value of XYZ's capital-budgeting proposal? Should the proposal be accepted?
After-tax cash flow $13,000

Factor
3.352
Present value $43,576
Since the investment is $50,000, the net present value is negative.
The project should be rejected.

Initial cost $200,000 $235,000 $190,000 $210,000
Annual Cash Flows
Year 1 $ 93,000 $ 90,000 $ 45,000 $ 40,000
Year 2 93,000 85,000 55,000 50,000
Year 3 93,000 75,000 65,000 60,000
Year 4 0 55,000 70,000 65,000
Year 5 0 50,000 75,000 75,000

Refer to Mercken Industries. Which project(s) will the company choose?
Only two of the projects can be selected because three would require more than $450,000 of capital. Project S
can immediately be dismissed because it has a negative net present value (NPV). Using the NPV and the
profitability index methods, the best investments appear to be Q and R. The internal rate of return (IRR) method
indicates that P is preferable to R. However, it assumes a reinvestment of funds during years 4 and 5 at the IRR
(18 percent). Given that reinvestment will be at the rate of at most 12 percent, the IRR decision criterion
appears to be unsound. Thus, projects Q and R should be selected.

Initial cost $200,000 $235,000 $190,000 $210,000
Annual Cash Flows
Year 1 $ 93,000 $ 90,000 $ 45,000 $ 40,000
Year 2 93,000 85,000 55,000 50,000
Year 3 93,000 75,000 65,000 60,000
Year 4 0 55,000 70,000 65,000
Year 5 0 50,000 75,000 75,000
Refer to Mercken Industries. If Merken can only accept one project, which will the company choose?
Project Q because it has the highest internal rate of return. Because unused funds cannot be invested at a rate
greater than 12 percent, the company should select the investment with the highest net present value. Project Q
is preferable to Project R because its return on the incremental $45,000 invested ($235,000 cost of Q - $190,000
cost of R) is greater than 12 percent.
88. Yipann Corporation is reviewing an investment proposal. The initial costs as well as other related data for
each year are presented in the schedule below. The cash flows are all assumed to take place at the end of the
year. All salvage value of the investment at the end of each year is equal to its net book value, and there will be
no salvage value at the end of the investment's life.
Investment Proposal
Year Initial Cost and Book Value Annual Net Annual Net Income
After-Tax Cash Flows
0 $105,000 $0 $0
1 70,000 50,000 15,000
2 42,000 45,000 17,000
3 21,000 40,000 19,000
4 7,000 35,000 21,000
5 0 30,000 23,000
Yipann uses a 24 percent after-tax target rate of return for new investment proposals. The discount figures for a 24 percent rate of return are given
below:
Present Value of $1.00 Received at the End of Period Present Value of $1.00 Received at the End of Each
Period
1 .81 .81
2 .65 1.46
3 .52 1.98
4 .42 2.40
5 .34 2.74
6 .28 3.02
7 .22 3.24
What is the net present value of the investment proposal?
$10,450 calculated as follows:

$50,000 ´ .81 = $ 40,500
$45,000 ´ .65 = $ 29,250
$40,000 ´ .52 = $ 20,800
$35,000 ´ .42 = $ 14,700
$30,000 ´ .34 = $ 10,200
Total $115,450
Less investment 105,000
$ 10,450
No, the net present value is -80 ((-20,000) + (8,000 ´ 2.49)).
Yes, the net present value is +640 ((-20,000) + (8,000 ´ 2.58)).
Yes, the net present value is +1360 ((20,000) + (8,000 ´ 2.67)).

92. Johnson Enterprises has three possible projects. Each project requires the same initial investment of
$1,000,000. The cash flows are as follows:
Year Project X Project Y Project Z
1 $1,250,000 $ 0 $ 500,000
2 1,250,000 0 2,000,000
3 1,250,000 0 2,000,000
4 1,250,000 $5,000,000 500,000
Ignoring taxes, compute the net present value of each project at a 15 percent cost of capital. Which project should be chosen? Be sure to show your
supporting calculations.
Project X, net present value is $2,562,500 (-$1,000,000 + ($1,250,000 ´ 2.85)).

Project Y, net present value is $1,850,000 (-$1,000,000 + ($5,000,000 ´ .57)).
Project Z, net present value is $2,560,000.
500,000 ´ .87 = $435,000

2,000,000 ´ .76 = 1,520,000
2,000,000 ´ .66 = 1,320,000
500,000 ´ .57 = 285,000
Total $3,560,000
Investment -$1,000,000
Net Present Value $2,560,000
Project X is superior because it has the greatest net present value.
Refer to Crown Corporation. If Crown offers to accept a $1,000 down payment and set up a note receivable for
Bob Parsons that calls for four $1,000 payments at the end of each of the next 4 years and Crown uses a 6
percent discount rate, what is the present value of the note?
Given a discount rate of 6 percent, the appropriate present value is $3,465 ($1,000 payment ´ 3.465).
Refer to Crown Corporation. What would the present value of the note be if Parsons agreed to the immediate
down payment of $1,000 but would like the note for $4,000 to be payable in full at the end of the fourth year?
The increased risk associated with the terms of this note changes the discount rate to 8 percent.
$2,940 (.735 ´ $4,000)

1 $150,000
2 $130,000
3 $180,000
4 $150,000
Refer to Eastchester Products. Ignoring tax effects, calculate the net present value of this project if Eastchester's cost of capital is 20
percent. Should the project be accepted or rejected?
$150,000 ´ .833 = $124,950

$130,000 ´ .694 = 90,220
$180,000 ´ .579 = 104,220
$150,000 ´ .482 = 72,300
Net present value $ (8,310)
Since NPV is negative, the investment should be rejected.

1 $150,000
2 $130,000
3 $180,000
4 $150,000
Refer to Eastchester Products. Ignoring tax effects, calculate the net present value of this project if Eastchester's cost of capital is 12 percent?
$150,000 ´ .893 = $133,950

$130,000 ´ .797 = 103,610
$180,000 ´ .712 = 128,160
$150,000 ´ .636 = 95,400
Less Investment 400,000
Net Present Value $ 61,120

1 $150,000
2 $130,000
3 $180,000
4 $150,000
Refer to Eastchester Products. Should the company accept the project if the cost of capital is 12 percent? Explain.

NPV $ 61,120
Since the NPV is positive, the investment should be accepted.
Refer to Feed the Hungry Foundation. What is the present value of the operating cash outflows for the old
machine?
$4,000 ´ 3.791 = $15,164.

Refer to Feed the Hungry Foundation. What is the present value of the operating cash outflows for the new
machine?
$2,000 ´ 3.791 = $7,582.
Refer to Feed the Hungry Foundation. What is the present value of salvage value of the old machine if it is
replaced now?
As given, $1,500.
Refer to Feed the Hungry Foundation. Would you advise the organization to replace the machine?
Net cash outflow associated with keeping: $15,164
Net cash outflow associated with replacing:
Cash operating costs $ 7,582

Initial cash outlay 10,000
Salvage value - old -1,500
Net cash outflow - replacing $16,082
Since the net cash outflow of keeping is less than replacing, the Foundation should keep the machine.
102. Latway Company is considering opening a new sales territory. Management expects the initial investment
to be $150,000 and subsequent investments of $100,000 and $50,000 at the end of the first and second years.
Net cash flow from the sales territory is expected to yield after-tax cash inflow for 5 more years: $75,000 for the
first two years and $60,000 for the remaining years. The company's cost of capital is 12 percent. Calculate the
net present value of this project.
Initial investment $150,000 1.000 $150,000

End of year 1 100,000 .893 89,300
End of year 2 50,000 .797 39,850
Present value of cash outflows $279,150
Cash inflows:
Year 1 & 2 $75,000 1.690 $126,750
Year 3 60,000 .712 42,720
Year 4 60,000 .636 38,160
Year 5 60,000 .567 34,020
Present value of cash inflows $241,650
Net present value ($241,650 - 279,150) ($37,500)
103. The Nova Company is considering replacing a machine that will cost $240,000. It expects to realize cost
savings of $70,000 a year before taxes for each of the next five years. The company will use an accelerated
method of depreciation as follows:
Year 1 .20
Year 2 .32
Year 3 .192
Year 4 .115
Year 5 .115
Year 6 .058
At the end of five years, the company expects the machine will have no salvage value. The company has a tax rate of 45 percent and has determined
that 12 percent is the appropriate discount rate to use. Prepare an analysis showing the net present value. Indicate what salvage value is necessary of
the old machine in order to justify the purchase of the new machine.
Cash Savings Tax Deprec Taxable Income Tax Cash Flow Discount Factor Present Value
$70,000 $48,000 $22,000 $9,900 $60,100 .893 $53,669
70,000 76,800 - 6,800 -3,060 73,060 .797 58,229
70,000 46,080 23,920 10,764 59,236 .712 42,176
70,000 27,600 42,400 19,080 50,920 .636 32,385
70,000 27,600 42,400 19,080 50,920 .567 28,872
13,920 -13,920 -6,264 -6,264 .507 3,176
The net present value is $218,507 - $240,000 = ($21,493).
Thus, the salvage value of the old machine must be at least $21,493 after tax in order to justify the investment.
104. What is the role of capital expenditure decisions in the strategic planning process?
Strategic planning provides the context for capital investments. For capital investments to make sense, they
must implement a company's strategy.
105. What behavioral issues are involved in capital budgeting?
Planners cannot help but be influenced by their environment. Factors such as desire to implement a project and
performance evaluation measures may influence their objectivity in making estimates. Therefore, it is important
that organizational policies, procedures, and performance measures support accurate estimations, and that the
effect these factors have on planners be considered when evaluating capital investment projects.
106. Why does the capital investment process require audits?
Comparing the estimates made in the capital budgeting process with the actual results provides several
advantages. Audits identify what estimates were wrong. Managers can use audits to identify and reward good
planners. Audits create an environment in which planners will not be tempted to inflate their estimates of the
benefits associated with the project to get it approved.
107. Explain the problem of just using cash flow analysis in justifying or rejecting an investment in advanced
manufacturing systems.
Justification of investments in advanced manufacturing systems is a difficult problem. Discounted cash flow
analysis is the appropriate method for analyzing investments in advanced manufacturing systems, but
implementing the analysis presents a challenge. Managers should strive to make the best possible estimates of
costs and benefits and ultimately make a judgement that recognizes the nonquantifiable benefits as well.
108. Explain the application of the internal rate of return method of assessing investment alternatives.
The internal rate of return (IRR) method, sometimes called the time-adjusted rate of return method, of a series
of cash flows is the discount rate that equates the net present value of the series to zero. The calculation of the
internal rate can be done with many calculators or with the use of a spreadsheet. When using the internal rate of
return to evaluate investment alternatives, analysts specify a cut-off rate.
flows. Analyze the effect of income taxes on cash flows.
Discounted cash flow methods aid in evaluating investments involving cash flows over time where there is a
time difference between cash payment and receipt. Estimate the amounts of future cash inflows and future cash
outflows in each period for each alternative under consideration. The discount rate is the interest rate used in
computing the present value of future cash flows. If the present value of the future cash inflows exceeds the
present value of the future cash outflows for a proposal, except the alternative.
Although depreciation is not a cash flow, it affects the tax cash flow because it is a deductible expense that
affects taxable income, and should be considered in the cash flow analysis. Income tax laws affect investment
decisions through their effect on the type of depreciation method allowed.
110. Discuss the advantages of using spreadsheets including sensitivity analysis.
Some error is likely in the amount predicted or estimated for the amount or timing of cash flows or the discount
rate. Errors in predicting the amounts of future cash flows will likely have the largest impact of the three items.
In general, if a project appears marginally desirable for a given discount rate, it will ordinarily not be grossly
undesirable for slightly higher rates. A useful feature of spreadsheet programs is that they help the user see the
effect on the net present value of changes in assumptions and estimates.
111. What is the reasoning behind the separation of the investing and financing aspects of making long-term
decisions?
Capital budgeting involves deciding which long-term, or capital, investments to undertake and how to finance
them. A firm considering acquiring a new plant or new equipment must first decide whether to make the
investment then decide how to raise the funds required for the investment.
flows, and explain the effect of income taxes on cash flows.
Discounted cash flow (DCF) methods aid in evaluating investments involving cash flows over time where time
elapses between cash payment and receipt. Estimate the amounts of future cash inflows and future cash
outflows in each period for each alternative under consideration. Use for the discount rate-that is, the interest
rate used in computing the present value of future cash flows-the firm's cost of capital. If the present value of
the future cash inflows exceeds the present value of the future cash outflows for a proposal, accept the
alternative.
113. How does depreciation affect investment decisions?
Although depreciation charges do not directly affect cash flows, the indirectly affect the after-tax cash flow
because firms can deduct depreciation expenses on their tax returns, reducing cash outflow for taxes. Hence, the
analyst should consider depreciation in any after-tax cash flow analysis. Income tax laws affect investment
decisions through their effect on the type of depreciation method allowed.
114. Explain how spreadsheets help the analyst to conduct sensitivity analyses of capital budgeting.
Analysts will likely err in predicting or estimating amounts, or the timing of cash flows, or the discount rate.
Errors in predicting the amounts of future cash flows will likely have the largest impact of the three items. In
general, if a project appears marginally desirable for a given discount rate, it will ordinarily not be grossly
undesirable for slightly higher rates. Spreadsheet programs help the user see the effect on the net present value
of changes in assumptions and estimates.
115. Describe the internal rate of return method of assessing investment alternatives.
The internal rate of return (IRR), sometimes called the time-adjusted rate of return, of a series of cash flows is
the discount rate that equates the net present value of the series to zero. Spreadsheet programs have built-in
functions to calculate the internal rate of return. When using the internal rate of return to evaluate investment
alternatives, analysts specify a cutoff rate.
116. Explain why analysts will need more than cash flow analysis to justify or reject an investment.
Justification of investments in advanced manufacturing systems is a difficult problem. Discounted cash flow
analysis is the appropriate method for analyzing such an investment, but implementing the analysis presents a
challenge. Managers should strive to make the best possible estimates of costs and benefits and ultimately make
a judgment that recognizes the nonquantifiable benefits as well.
Increase the quoted cost of capital from 12 percent to 16.5 [= (1.12 X 1.04)
– 1] percent per year.
Increase the quoted cost of capital from 11 percent to 16.6 [= (1.11 X 1.05)
– 1] percent per year.
119. Island Grills considering purchasing a new machine for $1 million at the end of Year 0 to be put into
operation at the beginning of Year 1. The new machine will save $250,000, before taxes, per year from the cash
outflows generated by using the old machine. For tax purposes, Island will depreciate the new machine in the
following amounts: $100,000 in Year 1, $300,000 in Year 2, and $200,000 per year thereafter until fully
depreciated or sold. The new machine will have no salvage value at the end of Year 5. Island expects the new
machine to have a market value of $400,000 at the end of three years. If Island acquires the new machine at the
end of Year 0, it can sell the old one for $200,000 at that time. The old machine has a tax basis of $300,000 at
the end of Year 0. If Island keeps the old machine, the company will depreciate it for tax purposes in the
amount of $100,000 per year for three years, when it will have no market value. Island pays taxes at the rate of
40 percent of taxable income and uses a cost of capital of 12 percent in evaluating this possible acquisition.
Island has sufficient otherwise-taxable income in Year 0 to save income taxes for each dollar of loss it may
incur if it sells the old machine at the end of Year 0.
Required:
a. Compute the net present value of cash flows from each of the alternatives facing Island Grills.
b. Make a recommendation to Island Grills.
c. Assume that the cash flows described in the problem for Years 2 through 5 are real, not nominal, amounts,
but the 12 percent cost of capital includes an allowance for inflation of 6 percent. Describe how this will affect
your analysis. You need not perform new computations.
a. Analysis of Alternatives
1. First alternative is to use the old machinery for three more years, disposing of it at the end of Year 3.
End of Year
Cash Flow Item 0 1 2 3
Income Taxes Saved because of $40,000 $40,000 $40,000
Depreciation of $100,000
each Year
Sum of Above $0 $40,000 $40,000 $40,000
End of Year 0 Present Value Factor at 12 Percent 1.00000 0.89286 0.79719 0.71178
Present Value Factor X Cash $0 $35,714 $31,888 $28,471
Flow
Present Value at End of Year 0 $96,073
2. Second alternative is to acquire the new machinery and sell the old machinery at the end of Year 0.
End of Year
Cash Flow Item 0 1 2 3
Investment in New $ (1,000,000)
Machinery
Sell Old Machinery 200,000
Taxes Saved at 40 Percent 40,000
Caused by Loss
(= $300,000 –
$200,000) on Sale of
Old Machinery
Operating Cash Flows $250,000 $250,000 $ 250,000
(Savings of Outflows).
Income Taxes on Above (100,000) (100,000) (100,000)
at 40 Percent
Income Taxes Saved 40,000 120,000 80,000
because of Depreciation
each Year
Cash Proceeds of Disposal 400,000
of New Machine
at End of Year 3
No Gain or Loss on Disposal; 0
Hence Taxes
Paid on Gain/Loss
at Disposal
Sum of Above $ (760,000) $ 190,000 $ 270,000 $ 630,000
End of Year 0 Present 1.00000 0.89286 0.79719 0.71178
Value Factor at 12
Percent
Present Value Factor X $ (760,000) $169,643 $215,241 $ 448,421
Cash Flow
Present Value at End of $ 73,305
Year 0
b. Recommendation: Use old machinery, do not buy new machinery.
c. If the 12-percent figure includes an allowance for inflation, but the cash flows used in the second alternative do not, then we should reduce the
discount rate used in the second alternative to remove the inflation component of 6 percent. The correct rate to use is 5.66 percent [= (1.12/1.06) – 1].
If we reduce the discount rate to 5.66 percent, then the net present value of the second alternative increases to $185,267 and the new equipment
becomes worthwhile.
120. An investment that costs $79,100 will reduce operating costs by $14,000 per year for 10 years.
Required:
Determine the internal rate of return of the investment (ignoring taxes). Should the investment be undertaken if
the required rate of return is 18 percent?
The investment should not be undertaken because the internal rate of return of 12% is less than the required rate
of 18%.
Initial outlay $79,100

Annuity amount 14,000
Outlay  annuity amount = PV of

annuity factor 5.6500
Internal rate of return 12%
121. An investment that costs $50,000 will return $22,000 per year for five years.
Required:
Determine the net present value of the investment if the required rate of return is 14 percent (ignoring taxes).
Should the investment be undertaken?
The net present value is positive so the project should be undertaken.
Cash Flow PV Factor Total

($50,000) 1.0000 ($50,000)
22,000 3.4331 75,528.20
$25,528.20
122. Jackson Company is considering the investment in a computer system. The company estimates that it will
require an initial outlay of $1,200,000. Other cash flows will be as follows:
Year 1 ($600,000)
Year 2 150,000
Year 3 620,000
Year 4 725,000
Year 5 800,000
Required:
Assuming the company limits its analysis to five years, should the company consider this investment if the required rate of return is 12 percent?
The NPV is approximately zero with a required rate of return of 7 percent. Thus, the IRR is approximately 7%.
Given that the required rate of return is 12%, the company should not consider the investment in the computer
system unless significant nonquantifiable factors prevail.
PV at 7%

$(1,200,000) 1.0000 $(1,200,000)
(600,000) 0.9346 (560,760)
150,000 0.8734 131,010
620,000 0.8163 506,106
725,000 0.7629 553,103
800,000 0.7130 570,400
$ (141)
123. Rainer Company is considering a project that will require an initial investment of $750,000 and will return
$200,000 each year for five years. If taxes are ignored and the required rate of return is 9%, what is the
project’s net present value? Based on this analysis, should the company proceed with the project?
($200,000 * 3.8897) - $750,000 = $27,940

Yes, since the net present value is greater than zero, the company should proceed with the project.
124. Falcon Company’s most recent capital expenditure project will require an initial investment of $600,000
and is expected to generate the following cash flows:
Year 1 $100,000
Year 2 $250,000
Year 3 $250,000
Year 4 $200,000
Year 5 $100,000
Required:
If the required rate of return is 20% and taxes are ignored, what is the project’s net present value?

$(600,000) 1.0000 $(600,000)
100,000 0.8333 83,330
250,000 0.6944 173,600
250,000 0.5787 144,675
200,000 0.4823 96,460
100,000 0.4019 40,190
Net present value $ (61,745)
125. Berringer Company is considering an investment that will generate cash revenues of $100,000 per year for
8 years, and have cash expenses of $70,000 per year for 8 years. The cost of the asset is $80,000, and it will be
Required:
a.
Cash Revenues $ 100,000

Less: Cash Expenses 70,000
Less: Depreciation 10,000
Income before tax 20,000
Less: Taxes 6,000
Net Income $ 14,000
+ Depreciation 10,000
Cash Flow $24,000
b. ($80,000) + [24,000 X 4.9676] = $39,222
126. Wilcox Company is considering an investment that will generate cash revenues of $120,000 per year for 8
years, and have cash expenses of $60,000 per year for 8 years. The cost of the asset is $120,000, and it will be
Required:
a.
Cash Revenues $ 120,000

Less: Cash Expenses 60,000
Less: Depreciation 15,000
Income before tax 45,000
Less: Taxes 13,500
Net Income $ 31,500
+ Depreciation 15,000
Cash Flow $46,500
b. ($120,000) + [46,500 X 4.9676] = $110,993

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Managerial Accounting An Introduction

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47. Which statement is true concerning depreciation?

48. Which statement is true concerning depreciation?

50. Which statement is true concerning depreciation?

51. How would income tax laws affect investment decisions?

52. Which statement is true concerning depreciation charges?

57. Which of the following is a useful feature of spreadsheet programs?

59. Which of the following statements is correct regarding capital investments?

The internal rate of return for the project is closest to

78. Justification of investments in advanced manufacturing systems is a(n)

82. What is true of audits of the capital investment process?

84. Which of the following is not a capital expenditure decision?

86. Mercken Industries

Project P Project Q Project R Project S

Net present value $23,370 $29,827 $27,233 $(7,854)

Refer to Mercken Industries. Which project(s) will the company choose?

Project P Project Q Project R Project S

Net present value $23,370 $29,827 $27,233 $(7,854)

What is the net present value of the investment proposal?

89. Use this information to answer the following questions:

90. Use this information to answer the following questions:

Year Project X Project Y Project Z

94. Crown Corporation

95. Eastchester Products

Year Cash Inflow at End of Year

96. Eastchester Products

Year Cash Inflow at End of Year

97. Eastchester Products

Year Cash Inflow at End of Year

98. Feed the Hungry Foundation

99. Feed the Hungry Foundation

101. Feed the Hungry Foundation

106. Why does the capital investment process require audits?

110. Discuss the advantages of using spreadsheets including sensitivity analysis.

47. Which statement is true concerning depreciation?

48. Which statement is true concerning depreciation?

50. Which statement is true concerning depreciation?

51. How would income tax laws affect investment decisions?

52. Which statement is true concerning depreciation charges?

57. Which of the following is a useful feature of spreadsheet programs?

59. Which of the following statements is correct regarding capital investments?

The internal rate of return for the project is closest to

78. Justification of investments in advanced manufacturing systems is a(n)

82. What is true of audits of the capital investment process?

84. Which of the following is not a capital expenditure decision?

After-tax cash flow $13,000

86. Mercken Industries

Project P Project Q Project R Project S

Net present value $23,370 $29,827 $27,233 $(7,854)

Refer to Mercken Industries. Which project(s) will the company choose?

87. Mercken Industries

Project P Project Q Project R Project S

$10,450 calculated as follows:

89. Use this information to answer the following questions:

No, the net present value is -80 ((-20,000) + (8,000 ´ 2.49)).

90. Use this information to answer the following questions: