Mom’s
Breakfast Shop may invest $50,000 in an investment. In 6 months, the manager
earned $2,000 interest on the investment.
What
is the future value of the investment at the end of the investment period?
ANSWER
INCORRECT
·
$48,000
·
$54,000
·
YOU WERE SURE AND INCORRECT
$50,000
·
THE CORRECT ANSWER
$52,000
·
I DON'T KNOW YET
The
future value of the investment at the end of the investment period is $52,000.
The other answers are not correct.
Future
value = Principal + Interest earned
$50,000 + $2,000 = $52,000
Which
of the following is a TRUE statement about the accounting rate of return?
ANSWER
INCORRECT
·
The accounting rate of return
(ARR) is complex and takes too much time to compute.
·
The accounting rate of return
(ARR) fails to measure the profitability of an asset over its entire life when
using accrual accounting figures.
·
YOU WERE SURE AND INCORRECT
Noncash expenses such as
depreciation expense are added to the asset’s net cash inflows to arrive at its
operating income.
·
THE CORRECT ANSWER
The accounting rate of return
(ARR) focuses on the operating income instead of the net cash inflow of an
asset.
·
I DON'T KNOW YET
The accounting rate of return
(ARR) focuses on the operating income instead of the net cash inflow of an
asset is a TRUE statement about the accounting rate of return.
Noncash expenses such as
depreciation expense are added to the asset’s net cash inflows to arrive at its
operating income.
The accounting rate of return
(ARR) measures the profitability of an asset over its entire life using accrual
accounting figures.
The accounting rate of return
(ARR) is simple and quick to compute.
Project
Managers Global hires temporary project managers and places each manager in a
temporary employment position. The managerial accountant reported the inflows
of each manager and the investment to train and place each manager.
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|
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Project Manager’s Global
Project Manager Profitability
Report
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Present value of net cash
inflows
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Initial Investment
|
Profitability Index
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Project Manager A
|
$2,500,000
|
$100,000
|
?
|
|
Project Manager B
|
$2,800,000
|
$75,000
|
?
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Project Manager C
|
$2,300,000
|
$80,000
|
?
|
What
are the profitability indices for each manager?
ANSWER
INCORRECT
·
THE CORRECT ANSWER
25%; 37.33%; 28.75%
·
23%; 35.33%; 26.75%
·
YOU WERE SURE AND INCORRECT
26%; 38.33%; 29.75%
·
24%; 36.33%; 27.75%
·
I DON'T KNOW YET
The profitability indices for
each of the project managers are 25%; 37.33%; 28.75%. The other
answers are not correct.
Profitability Index = Present
Value of Net Cash Inflows / Initial Investment
Project manager A profitability
index = $2,500,000 / $100,000 =25%
Project manager B profitability
index = $2,800,000 / $75,000 = 37.33%
Project manager C profitability
index = $2,300,000 / $80,000 = 28.75
The
payback period is ________.
ANSWER
INCORRECT
·
THE CORRECT ANSWER
a capital budgeting method that
ignores the time value of money and focuses on the time it takes to recover the
company’s cash investment
·
is the difference between the
present value of the investment’s net cash inflows and the investment’s cost
·
is the rate of return, based on
discounted cash flows, that a company can expect to earn by investing in a
capital asset
·
YOU WERE SURE AND INCORRECT
is a capital budgeting method
that ignores the time value of money
·
I DON'T KNOW YET
The payback period is a
capital budgeting method that ignores the time value of money and focuses on
the time it takes to recover the company’s cash investment.
The accounting rate of return
(ARR) is a capital budgeting method that ignores the time value of money.
The net present value (NPV) is
the difference between the present value of the investment’s net cash inflows
and the investment’s cost.
The internal rate of return
(IRR) incorporates the time value of money. Recall the internal rate of return
(IRR) is the rate of return, based on discounted cash flows, that a company can
expect to earn by investing in a capital asset.
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