11 the accounting rate of return method focuses on net operating income instead of n 4306352
11) The accounting rate of return method focuses on net operating income instead of net cash inflow generated by an asset.
12) The accounting rate of return is also known as average rate of return or annual rate of return.
13) The accounting rate of return method evaluates the lifetime return of an asset, whereas return on investment evaluates an annual return.
14) The accounting rate of return is calculated by dividing the average annual operating income by the average amount invested.
15) Which of the following is a capital budgeting method that ignores the time value of money?
A) payback
B) internal rate of return
C) return on assets
D) net present value
16) Which capital budgeting method uses accrual accounting, rather than net cash flows, as a basis for calculations?
A) payback
B) accounting rate of return
C) net present value
D) internal rate of return
17) Flint Systems is considering investing in productionmanagement software that costs $600,000, has $60,000 residual value, and leads to cost savings of $150,000 per year over its fiveyear life. Calculate the average amount invested in the asset that should be used for calculating the accounting rate of return?
A) $660,000
B) $600,000
C) $330,000
D) $60,000
18) Cortes Cargo Inc. is considering three investment opportunities with the following payback periods:
Project X 
Project Y 
Project Z 

Payback period 
3 years 
2.5 years 
2.8 years 
Use the decision rule for payback to rank the projects from most desirable to least desirable, all else being equal.
A) Y, Z, X
B) X, Y, Z
C) Z, Y, X
D) Y, X, Z
19) Newman Automobiles Manufacturing is considering two alternative investment proposals with the following data:
Proposal X 
Proposal Y 

Investment 
$10,000,000 
$500,000 
Useful life 
5 years 
5 years 
Estimated annual net cash inflows for 5 years 
$2,000,000 
$95,000 
Residual value 
$50,000 
$20,000 
Depreciation method 
Straightline 
Straightline 
Required rate of return 
12% 
10% 
Calculate the payback period for Proposal X.
A) 5 years
B) 4 years
C) 8 years
D) 10 years
20) Newman Automobiles Manufacturing is considering two alternative investment proposals with the
following data:
Proposal X 
Proposal Y 

Investment 
$10,000,000 
$500,000 
Useful life 
5 years 
5 years 
Estimated annual net cash inflows for 5 years 
$2,000,000 
$95,000 
Residual value 
$50,000 
$20,000 
Depreciation method 
Straightline 
Straightline 
Required rate of return 
12% 
10% 
Calculate accounting rate of return for Proposal Y.
A) 8.95%
B) 10.21%
C) 7.50%
D) 6.57%