Indicate the best answer for each question in the space provided.

1 Which of the following is nota capital budgeting decision?

a Whether to acquire a subsidiary company.

b Whether to expand a product line.

c Whether to fill a special order.

d Whether to purchase a fleet of trucks.

2 Which of the following is an example of a nonfinancial consideration in capital budgeting?

a Will an investment generate adequate cash flows to promptly recover its cost?

b Will an investment generate an acceptable rate of return?

c Will an investment have a positive net present value?

d Will an investment have an adverse effect on the environment?

3 Which of the following is notconsidered when using the payback period to evaluate an investment?

a The profitability of the investment over its entire life.

b The annual net cash flow of the investment.

c The cost of the investment.

d The expected life of the investment.

Use the following data for questions 4 and 5.

Stone Mfg. is considering expanding operations by investing $300,000 in equipment. The equipment has a useful life of eight years, with no salvage value. Straight-line depreciation is used. Stone predicts that net income will increase $37,500 per year as a result of this strategy.

4 Refer to the above data. The payback period for this investment is:

a 8 years.

b 4 years.

c Over 13 years.

d 2.5 years.

5 Refer to the above data. Return on average investment for this investment is:

a 25%.

b 20%.

c 12 1/2%.

d 15%.