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47. _______________________ ignore the time value of money.
48. The ______________ is the time required for a firm to recover its original investment.
49. The _________________________ measures the return on a project in terms of income.
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50. _______________________ are the future cash flows expressed in terms of their present value.
51. The difference between the present value of the cash inflows and the outflows associated with a project is known as
the ___________________.
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52. The ___________________ is the minimum acceptable rate of return.
53. The _______________________ is defined as the interest rate that sets the present value of a project’s cash inflows
equal to the present value of the project’s cost.
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54. If the internal rate of return (IRR) is greater than the required rate, the project is deemed ___________.
55. If the internal rate of return (IRR) is less than the required rate of return, the project is __________.
56. A key element in the capital investment process is a follow-up analysis of a capital project once it is implemented; this
analysis is a called a _____________.
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57. The major disadvantage of a postaudit is that it is ____________.
58. When choosing among competing projects, the ___________________ model correctly identifies the best investment
alternative.
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59. When choosing among competing alternatives the ________________ model may choose an inferior project in terms
of maximizing firm wealth.
60. The amount that must be invested now to produce a future value is known as the ____________ of the future amount.
61. The value of an investment at the end of its life is called its ________________.
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62. In general terms, a sound capital investment will earn
a. back its original capital outlay.
b. a return greater than existing capital investments.
c. back its original capital outlay and provide a reasonable return on the original investment.
d. back its original capital outlay by the midpoint of its useful life.
e. None of these.
63. Which of the following is true while making a capital investment decision?
a. A manager should assess the risk of the project.
b. A manager should ignore the timing of the cash flows.
c. A manager should compute the competitor’s return on investment.
d. A manager should ensure that the project cost is equal to the cash flow from investment.
e. All of these.
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64. Which of the following is true of capital investment decision making?
a. It is used only for independent projects.
b. It is used only for mutually exclusive projects.
c. It requires that funding for a project must come from sources with the same opportunity cost of funds.
d. It is used to determine whether or not a firm should accept a special order.
e. None of these.
65. Which of the following is used to calculate the payback period?
a. Original Investment / Annual Cash Flow
b. Net Profit × Annual Cash Flow
c. Original Investment + Annual Cash Flow
d. Net Profit − Annual Cash Flow
e. (Net Profit + Annual Cash Flow) / Annual Cash Flow
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66. The payback period provides information to managers that can be used to help
a. control the risks associated with the uncertainty of future cash flows.
b. minimize the impact of an investment on a firm’s liquidity problems.
c. control the risk of obsolescence.
d. control the effect of the investment on performance measures.
e. All of these.
67. The disadvantage of a payback period is that it:
a. ignores the project’s total profitability.
b. considers the time value of money.
c. considers total profitability, requiring the forecasting of all future cash flows.
d. uses an internal rate of return to calculate profitability.
e. uses operating income rather than cash flows.
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68. Which of the following formulas is used to compute the accounting rate of return?
a. Average Income / Initial Investment
b. Initial Investment / Annual Cash Flow
c. Net Profit / Initial Cash Flow
d. Present Value of the Investment / Average Income
e. (Average Income + Initial Investment) / Initial Investment
69. Managers may use the accounting rate of return to evaluate potential investment projects because
a. debt contracts require that a firm maintain certain ratios that are affected by income and long-term asset levels.
b. it serves as a screening measure to insure that new investments do not affect key financial ratios.
c. bonuses to managers may be based on accounting income and/or return on assets.
d. it can be tied to the manager’s personal income.
e. All of these.
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70. Which of the following capital investment decision models is based on the time required for a firm to recover its
original investment?
a. The average rate of return
b. The internal rate of return
c. The net present value
d. The accounting rate of return
e. The payback period
71. Which of the following is preferred by managers when the risk of obsolescence is high?
a. A short payback period
b. A high opportunity cost
c. A low accounting rate of return
d. All of these
e. None of these
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72. One disadvantage of the payback period is that
a. it is sometimes used as a crude measure of risk.
b. managers may choose investments with quick payback periods to maximize short term criteria on which their own
bonuses, etc. may be based.
c. it cannot be used for investments with unequal cash inflows.
d. it cannot be used if the entire cost of the investment does not occur immediately.
e. All of these.
73. A division manager was considering a project that required a significant initial investment. If accepted, the project
could have a negative impact on certain financial ratios that the firm was required to maintain to satisfy debt contracts. To
ensure that the ratios would not be adversely affected by the investment, the manager would use which of the following
capital investment models?
a. payback period
b. accounting rate of return
c. net present value
d. internal rate of return
e. None of these.
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74. Tom has just invested $150,000 in a coffee shop. He expects to receive cash income of $10,000 a year. What is the
payback period?
a. 19 years
b. 31 years
c. 22 years
d. 10 years
e. 15 years
75. Kate is considering an investment in a retail shopping mall. The initial investment is $630,000. She expects to receive
cash income of $90,000 a year. What is the payback period?
a. 2 years
b. 5 years
c. 7 years
d. 12 years
e. 15 years
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76. Elena Wallace invested $150,000 in a project that pays her an even amount per year for 10 years. The payback period
is 6 years. What are Elena’s yearly cash inflows from the project?
a. $150,000
b. $15,000
c. $25,000
d. $90,000
e. Cannot be determined from this information.
77. Tina invested in a project with a payback period of 4 years. The project brings $20,000 per year for a period of 10
years. What was the initial investment?
a. $80,000
b. $107,500
c. $162,000
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d. $240,000
e. Cannot be determined from this information.
78. Neil Morrison has just invested $130,000 in a restaurant. He expects to receive income of $24,000 a year, and to have
the investment for 8 years. What is the accounting rate of return?
a. 5.60%
b. 18.46%
c. 14.52%
d. 12.41%
e. 4.50%
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79. An investment of $10,000 provides average net cash flows of $500 with zero salvage value. Depreciation is $15 per
year. Calculate the accounting rate of return using the original investment. (Note: Round the answer to two decimal
places.)
a. 3.41%
b. 5.19%
c. 4.85%
d. 3.29%
e. 6.47%
80. Buster Evans is considering investing $20,000 in a project with the following annual cash revenues and expenses:
Cash Cash
Revenues Expenses
Year 1 $ 8,000 $ 8,000
Year 2 $12,000 $ 8,000
Year 3 $15,000 $ 9,000
Year 4 $20,000 $10,000
Year 5 $20,000 $10,000
Depreciation will be $4,000 per year.
What is the accounting rate of return on the investment?
a. 15%
b. 35%
c. 70%
d. 75%
e. None of these.
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81. Tetryl Company is considering a project with an initial investment of $200,000 in new equipment that will yield
annual net cash flows of $48,000 and will depreciate at $24,000 per year over its eight year life. What is the accounting
rate of return?
a. 37%
b. 25%
c. 12%
d. 19%
e. 54%
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82. When comparing the payback method and the accounting rate of return methods, which of the following is true?
Profitability Time Value of Money
i Ignored by both methods Ignored by both methods
ii Ignored by both methods Used in accounting rate of return; ignored by payback method
iii Considered by accounting method, not by payback Ignored by both methods
iv Considered by accounting method, not by payback Considered by both methods
a. i
b. ii
c. iii
d. iv
83. Aqua Shop is considering the purchase of a used printing press costing $15,000. The printing press would generate a
net cash inflow of $6,000 per year for four years. At the end of four years, the press would have no salvage value. The
company’s cost of capital is 12%. The company uses straight-line depreciation with no mid-year convention.
What is the accounting rate of return on the original investment in the press to the nearest percent, assuming no taxes are
paid?
a. 20 %
b. 15%
c. 41%
d. 9%
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84. A company is considering two projects.
Project I Project II
Initial investment $120,000 $120,000
Cash inflow Year 1 $40,000 $20,000
Cash inflow Year 2 $40,000 $20,000
Cash inflow Year 3 $40,000 $32,000
Cash inflow Year 4 $40,000 $48,000
Cash inflow Year 5 $40,000 $50,000
What is the payback period for Project I?
a. 1 year
b. 3 years
c. 2.5 years
d. 3.5 years
e. 5 years
85. A company is considering two projects.
Project I Project II
Initial investment $2,00,000 $2,00,000
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Cash inflow Year 1 50,000 60,000
Cash inflow Year 2 50,000 60,000
Cash inflow Year 3 50,000 80,000
Cash inflow Year 4 50,000 10,000
Cash inflow Year 5 50,000 50000
What is the payback period for Project II?
a. 1 year
b. 2.5 years
c. 4.3 years
d. 3 years
e. 5 years
86. A company is considering two projects.
Project A Project B
Initial investment $200,000 $200,000
Cash inflow Year 1 $50,000 $90,000
Cash inflow Year 2 $50,000 $90,000
Cash inflow Year 3 $50,000 $40,000
Cash inflow Year 4 $50,000 $30,000
Cash inflow Year 5 $50,000 $30,000
What is the payback period for Project A?
a. 4.5 year
b. 2.5 years
c. 5 years
d. 3.5 years
e. 4 years