What is true of audits of the capital investment

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Chapter 26 / Exercise 26-4B
Accounting Using Excel for Success
Reeve/Warren
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82.What is trueof audits of the capital investment process?a.Audits of the capital investment process compare the estimates made in the capital budgeting process with the actual results.b.Audits of the capital investment process should never be conducted because of the effect on employee morale.c.Audits of the capital investment process should never be used to identify and reward good plannersd.Audits of the capital investment process create an environment in which planners will be tempted to inflate their estimates of the benefits associated with the project to get it approved.ANS: AAudits of the capital investment process compare the estimates made in the capital budgeting process with the actual results.
PTS:183.What should a firm do to reduce the temptation for planners to inflate their estimates of the benefits associated with the project to get it approved?
PTS:1PROBLEM1.The XYZ Company is evaluating a capital budgeting proposal for the current year. The initial investment would be $50,000. It would be depreciated on a straight-line basis over five years with no salvage value. The before-tax annual cash inflow due to this investment is $5,000, and the income tax rate is 40 percent paid in the same year as incurred. The desired after-tax rate of return is 15 percent. All cash flows occur at year-end.What is the net present value of XYZ's capital-budgeting proposal? Should the proposal be accepted?
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Chapter 26 / Exercise 26-4B
Accounting Using Excel for Success
Reeve/Warren
Expert Verified
PTS:1Mercken IndustriesMercken Industries is contemplating four projects: Project P, Project Q, Project R, and Project S. The capital costs and estimated after-tax net cash flows of each mutually exclusive project are listed below.Mercken's desired after-tax opportunity cost is 12 percent, and the company has a capital budget for the year of $450,000. Idle funds cannot be reinvested at greater than 12 percent.Project PProject QProject RProject SInitial cost$200,000$235,000$190,000$210,000Annual CashFlowsYear 1$ 93,000$ 90,000$ 45,000$ 40,000Year 293,00085,00055,00050,000Year 393,00075,00065,00060,000Year 4055,00070,00065,000Year 5050,00075,00075,000Net present value$23,370$29,827$27,233$(7,854)Internal rate of return18.7%17.6%17.2%10.6% Excess present value index1.121.131.140.952.Refer to Mercken Industries. Which project(s) will the company choose?

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