37. Which one of the following statements concerning capital budgeting is not true?
38. Which of the following methods can be used to deal formally with uncertainty in the
capital-budgeting process?
39. Two investments have the same total cash inflows and the same payback period.
Therefore:
40. In a discounted cash flow (DCF) analysis, a required incremental investment in net
working capital:
41. Which of the following is always true with regard to the NPV decision model?
42. If a company is in the situation of having unlimited capital funds, the best decision rule,
considering only financial factors, is for the company to invest in all projects in which:
43. When the net present value (NPV) of a project is calculated based on the assumption
that the after-tax cash inflows occur at the end of the year when they actually occur uniformly
throughout each year, the NPV will:
44. Without knowing its required rate of return (i.e., hurdle rate) for use in the evaluation of
capital investment projects, a company will be unable to calculate a project’s:
Payback Period Book Rate of Return Net Present Value Internal
Rate of Return
A) Yes Yes Yes Yes
B) No No Yes Yes
C) No Yes No Yes
D) No No Yes No
E) Yes No No Yes
45. When the internal rate of return (IRR) method and the net present value (NPV) method
do not yield the same recommendation for the same investment project, the project–selection
decision should normally be based on:
46. If an existing asset is sold at a gain, and the gain is taxable, then the after-tax proceeds
from this transaction would be equal to:
47. For a given income tax rate,
t
, after-tax cash operating receipts are calculated as follows:
48. Which of the following statements regarding the determination of the weighted-average
cost of capital (WACC) is not true?
49. Which of the following is not used to deal with uncertainty in the capital budgeting
process?
50. The term “breakeven after-tax cash flow” represents:
51. Tyson Company has a pre-tax net cash inflow of $1,200,000. The company can claim
depreciation expense of $500,000 this year. The company is subject to a combined income tax
rate of 26%. What is the after-tax cash flow for the year?
52. What is the present value of $1 received five years from now (rounded to two decimal
places) if the discount rate is 12%?
53. Omaha Plating Corporation is considering purchasing a machine for $1,500,000. The
machine is expected to generate a constant after-tax income of $100,000 per year for 15 years.
The firm will use straight-line (SL) depreciation for the new machine over 10 years with no
residual value.
What is the payback period for the new machine?
54. Omaha Plating Corporation is considering purchasing a machine for $1,500,000. The
machine is expected to generate a constant after-tax income of $100,000 per year for 15 years.
The firm will use straight-line (SL) depreciation for the new machine over 10 years with no
residual value.
What is the estimated accounting (book) rate of return (rounded to two decimal places) on the
initial investment?
55. All of the following capital budgeting decision models, except for this one, use cash flows
as the primary basis for the calculation.
56. Madson Company is analyzing several proposed investment projects. The firm has
resources only for one project.
Project P Project Q Project R Project S Project T
Cost of investment $30,000 $36,000 $54,000 $45,000 $50,000
Net cash inflows:
Year 1 12,000 3,000 4,000 24,000 15,000
Year 2 12,000 14,000 16,000 8,000 15,000
Year 3 12,000 14,000 20,000 6,000 15,000
Year 4 -0- 18,000 30,000 4,000 10,000
Year 5 -0- -0- 50,000 2,000 10,000
The company uses the payback period method for making capital investment decisions. On the
basis of this decision model, which project should be selected? (Ignore taxes and assume that
cash inflows occur evenly throughout the year. Carry calculations out to two decimal places.)
57. Pique Corporation wants to purchase a new machine for $300,000. Management predicts
that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are
expected to include direct materials, direct labor, and factory overhead (excluding depreciation)
totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all
depreciable assets. Pique’s combined income tax rate is 40%. Management requires a minimum
after-tax rate of return of 10% on all investments.
What is the net after-tax cash inflow in Year 1 from the investment?
58. Pique Corporation wants to purchase a new machine for $300,000. Management predicts
that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are
expected to include direct materials, direct labor, and factory overhead (excluding depreciation)
totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all
depreciable assets. Pique’s combined income tax rate is 40%. Management requires a minimum
after-tax rate of return of 10% on all investments.
What is the amount of net income (after taxes) in Year 2 of the investment?
59. Pique Corporation wants to purchase a new machine for $300,000. Management predicts
that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are
expected to include direct materials, direct labor, and factory overhead (excluding depreciation)
totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all
depreciable assets. Pique’s combined income tax rate is 40%. Management requires a minimum
after-tax rate of return of 10% on all investments.
What is the payback period for the new machine (rounded to nearest one-tenth of a year)?
(Assume that the cash inflows occur evenly throughout the year.)
60. Pique Corporation wants to purchase a new machine for $300,000. Management predicts
that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are
expected to include direct materials, direct labor, and factory overhead (excluding depreciation)
totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all
depreciable assets. Pique’s combined income tax rate is 40%. Management requires a minimum
after-tax rate of return of 10% on all investments.
Rounded to the nearest whole number, what is the annual accounting (book) rate of return (ARR)
based on the initial investment?
61. Pique Corporation wants to purchase a new machine for $300,000. Management predicts
that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are
expected to include direct materials, direct labor, and factory overhead (excluding depreciation)
totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all
depreciable assets. Pique’s combined income tax rate is 40%. Management requires a minimum
after-tax rate of return of 10% on all investments.
What is the net present value (NPV) of the investment? (The PV annuity factor for 5 years, 10% is
3.791.) Assume that the cash inflows occur at year-end.