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Cost Accounting 101 Practice Test: Capital Budgeting and Cost Analysis
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Capital budgeting is a cost-benefit analysis that helps companies decide if long-term investments are profitable. It involves evaluating costs and benefits over a longer period of time, and placing greater emphasis on the time value of money. Capital budgeting can involve acquiring land, purchasing fixed assets, research and development, or expansion.  The capital budgeting process typically includes the following steps: Determine the total amount of the investment Determine the cash flows that the investment will return Determine the residual/terminal value Calculate the annual cash... Show more
Cost Accounting 101 Practice Test: Capital Budgeting and Cost Analysis
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25 Questions

1. Using capital budgeting techniques to track and (based on success to date) modify resource levels committed to staged R&D investments is called timed options.
2. Net present value is calculated using the:
3. A weaknesses of the payback method is that it does not consider a project's cash flows after the payback period.
4. The payback method of capital budgeting approach to the investment decision highlights:
5. Internal rate of return is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.
6. Which of the following are NOT included in the formal financial analysis of a capital budgeting program?
7. Which capital budgeting technique(s) measure all expected future cash inflows and outflows as if they occurred at a single point in time?
8. The final activity in the capital budgeting process is to obtain funding and make the investments identified in the make decisions by choosing among alternatives stage of the process.
9. It is possible to use the net present value in an analysis of customer profitability.
10. The stage of the capital budgeting process during which marketing is queried for potential revenue numbers is the:
11. A capital budgeting project is accepted if the required rate of return equals or exceeds the internal rate of return.
12. A increase in the tax rate will increase the net present value (NPV) for a given capital budgeting project.
13. The payback method is only useful when the expected cash flows in the later years of the project are highly uncertain.
14. There is an INCONSISTENCY between using the net present value method as best for capital budgeting decisions and then using a different method to evaluate performance.
15. Upper Darby Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $72,096. The annual cost savings if the new machine is acquired will be $20,000. The machine will have a 5-year life, at which time the terminal disposal value is expected to be zero. Upper Darby Park is assuming no tax consequences. Upper Darby Park has a 10% required rate of return. What is the payback period on this investment?
16. The method that measures the time it will take to recoup, in the form of future cash inflows, the total dollars invested in a project is called:
17. Capital budgeting is the process of making long-run planning decisions for investments in projects.
18. Post-investment audits:
19. The net present value method can be used in situations where the required rate of return varies over the life of the project.
20. Cash received from the disposal of old equipment is NOT relevant to a decision to buy a replacement.
21. For capital budgeting decisions, the use of the accrual accounting rate of return for evaluating performance is often a stumbling block to the implementation of the:
22. The accounting system that corresponds to the project dimension in capital budgeting is the:
23. The net present value method accurately assumes that project cash flows can only be reinvested at the company's required rate of return.
24. A capital budgeting tool that management can use to summarize the difference in the future net cash inflows from an intangible asset at two different points in time is referred to as:
25. In using the net present value method, only projects with a zero or positive net present value are acceptable because:

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