9) The rate of return is the only capital budgeting method that uses accrual accounting. Answer:  TRUE Diff: 1 LO:  21-2 EOC Ref:  E21-17 AACSB:  Analytic Skills AICPA Business:  Critical Thinking...

9) The rate of return is the only capital budgeting method that uses accrual accounting.

Answer:  TRUE

Diff: 1

LO:  21-2

EOC Ref:  E21-17

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

10) The rate of return calculations ignores the time value of money, but the payback period does include consideration of the time value of money.

Answer:  FALSE

Diff: 1

LO:  21-2

EOC Ref:  E21-17

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

11) The payback method and the rate of return method are powerful, comprehensive evaluation tools, and would normally be sufficient to make a final investment decision.

Answer:  FALSE

Diff: 1

LO:  21-2

EOC Ref:  E21-17

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

12) Which of the following methods ignores the time value of money?

A) Payback

B) Internal rate of return

C) Return on assets

D) Net present value

Answer:  A

Diff: 2

LO:  21-2

EOC Ref:  E21-16

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

13) Which capital budgeting method uses accrual accounting, rather than net cash flows, as a basis for calculations?

A) Payback

B) Rate of return

C) Net present value

D) Internal rate of return

Answer:  B

Diff: 2

LO:  21-2

EOC Ref:  E21-17

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

14) Which of the following is TRUE regarding capital rationing decisions for capital assets?

A) Companies should always choose the investment with the shortest payback period.

B) Companies should always choose the investment with the highest net present value.

C) Companies should always choose the investment with the highest rate of return.

D) Companies should consider several different methods of evaluation before choosing an investment.

Answer:  D

Diff: 2

LO:  21-2

EOC Ref:  E21-17

AACSB:  Reflective Thinking

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

15) Simms Manufacturing is considering two alternative investment proposals with the following data:

How long is the payback period for Proposal X?

A) 4.50 years

B) 4.77 years

C) 8 years

D) 10.33 years

Answer:  B

Explanation:  B) Calculations: $620,000/$130,000 = 4.77 yrs

Diff: 2

LO:  21-2

EOC Ref:  E21-17

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement

16) Simms Manufacturing is considering two alternative investment proposals with the following data:

What is the accounting rate of return for Proposal Y?

A) 15.0%

B) 16.0%

C) 20.0%

D) 40.0%

17) ABC Company is adding a new product line that will require an investment of $1,500,000. The product line is estimated to generate cash inflows of $300,000 the first year, $250,000 the second year, and $200,000 each year thereafter for ten more years. What is the payback period?

A) 2.73 years

B) 6.00 years

C) 6.75 years

D) 7.25 years

18) Logan, Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:

How long is the payback period for Investment A?

A) 0.4 years

B) 2.4 years

C) 2.5 years

D) 3.0 years

Answer:  B

Explanation:  B) Calculations: $60,000/$25,000 = 2.4

Diff: 2

LO:  21-2

EOC Ref:  E21-16

AACSB:  Analytic Skills

AICPA Business:  Critical Thinking

AICPA Functional:  Measurement