1) Omaha Plating Corporation is considering purchasing a machine for $1,500,000. The machine is expected to generate a constant after-tax income of $100,000 per year for 15 years. The firm will use straight-line (SL) depreciation for the new machine over 10 years with no residual value.

In percentage terms, what is the annual accounting (book) rate of return (rounded to two decimal places) on the initial investment?

2) Omaha Plating Corporation is considering purchasing a machine for $1,500,000. The machine is expected to generate a constant after-tax income of $100,000 per year for 15 years. The firm will use straight-line (SL) depreciation for the new machine over 10 years with no residual value.

What is the payback period (in years) for the new machine, under the assumption that cash inflows occur evenly throughout the year?

3) If the present value payback period is less than the life of the project, one may conclude that:

A. The project is not desirable in a present-value sense.

B. The project's internal rate of return (IRR) is less than the discount (hurdle) rate.

C. The project's IRR is equal to the weighted-average cost of capital.

D. The project's accounting (book) rate of return exceeds the discount (hurdle) rate.

E. The project's net present value (NPV) is positive.

4) Which of the following is not a characteristic of capital budgeting post-audits?

A. They help keep actual projects on target (e.g., by limiting project managers from diverting project funds, without authorization, to other uses).

B.

They provide feedback to managers regarding the soundness of their decision-making.

C.

They may be cost-prohibitive to accomplish.

D. They are sometimes difficult to implement in practice.

E. They encourage managers to build slack into capital investment proposals.

5)

Income tax effects are associated with all of the following except:

A.

Sale of an investment asset at the end of the asset's useful life.

B. Required increase in net working capital associated with an investment project.

C. Effect of depreciation expense associated with an investment project.

D. Annual net benefits associated with a proposed investment.

E. Disposition (i.e., sale) of an existing asset.

6)

Research has shown that in framing capital investment decisions, sunk costs tend to:

A. Have no discernible impact on decisions by managers.

B. Have a slight impact on the decision-making process.

C. Have an impact only when capital funds are limited.

D. Escalate commitment in making capital budgeting decisions.

E. Have a significant impact, but only when dealing with mutually exclusive investment projects.

7)

In capital budgeting, the accounting rate of return (ARR) decision model:

		A. Ignores cash outflows after the initial investment.
		B. Considers the time value of money.
		C. Ignores accounting income generated after the break-even point.
D.		Incorporates the timing of cash flows.
		E. Does not provide an unambiguous decision criterion regarding the acceptance of capital investment projects.