ch21 sample questions
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CHAPTER 21!
Sample Exam Questions!
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1. [CPA Adapted] If the algebraic sum of the present values of all cash flows related to a proposed capital expenditure discounted at the company’s required rate of return is positive, it indicates that the!
A. resultant amount is the maximum that should be paid for the asset.!
B. discount rate used is not the proper required rate of return for this company.!
C. investment is the best alternative.!
D. return on the investment exceeds the company’s required rate of return.!
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The following data apply to questions 2 through 6.!
The Hilltop Corporation is considering (as of 1/1/08) the replacement of an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation through 2011. If Hilltop decides to replace the old machine, Baker Company has offered to purchase it for $50,000 on the replacement date. The disposal value of the old machine would be zero at the end of 2011. Hilltop uses the straight-line method of depreciation for all classes of machinery.! !
If the replacement occurs, a new machine would be acquired from Busby Industries on January 2,
2008. The purchase price of $500,000 for the new machine would be paid in cash at the time of replacement. Due to the increased efficiency of the new machine, estimated annual cash savings of $150,000 would be generated through 2011, the end of its expected useful life. The new machine is expected to have a zero disposal price at the end of 2011.!
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All operating cash receipts, operating cash expenditures, and applicable tax payments and credits are assumed to occur at the end of the year. Hilltop employs the calendar year for reporting purposes.!
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Discount tables for several different interest (discount) rates that are to be used in any discounting calculations are given below. Assume for questions 2 through 6 that Hilltop is not subject to income taxes.!
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Present Value of $1.00 Received at the End of Period !
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CHAPTER 21!
Sample Exam Questions!
!
1. [CPA Adapted] If the algebraic sum of the present values of all cash flows related to a proposed capital expenditure discounted at the company’s required rate of return is positive, it indicates that the!
A. resultant amount is the maximum that should be paid for the asset.!
B. discount rate used is not the proper required rate of return for this company.!
C. investment is the best alternative.!
D. return on the investment exceeds the company’s required rate of return.!
!
!
The following data apply to questions 2 through 6.!
The Hilltop Corporation is considering (as of 1/1/08) the replacement of an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation through 2011. If Hilltop decides to replace the old machine, Baker Company has offered to purchase it for $50,000 on the replacement date. The disposal value of the old machine would be zero at the end of 2011. Hilltop uses the straight-line method of depreciation for all classes of machinery.! !
If the replacement occurs, a new machine would be acquired from Busby Industries on January 2,
2008. The purchase price of $500,000 for the new machine would be paid in cash at the time of replacement. Due to the increased efficiency of the new machine, estimated annual cash savings of $150,000 would be generated through 2011, the end of its expected useful life. The new machine is expected to have a zero disposal price at the end of 2011.!
!
All operating cash receipts, operating cash expenditures, and applicable tax payments and credits are assumed to occur at the end of the year. Hilltop employs the calendar year for reporting purposes.!
!
Discount tables for several different interest (discount) rates that are to be used in any discounting calculations are given below. Assume for questions 2 through 6 that Hilltop is not subject to income taxes.!
!
!
Present Value of $1.00 Received at the End of Period !