Chapter 12
87. A company is considering two projects.
Project A Project B
Initial investment $300,000 $300,000
Cash inflow Year 1 $60,000 $90,000
Cash inflow Year 2 $60,000 $80,000
Cash inflow Year 3 $60,000 $80,000
Cash inflow Year 4 $60,000 $50,000
Cash inflow Year 5 $60,000 $70,000
What is the payback period for Project B?
a. 2 years
b. 4.5 years
c. 3.5 years
d. 2.5 years
e. 3 years
88. Davis Company is considering the purchase of a new piece of equipment that will cost $1,600,000 and have a life of
five years with no expected salvage value. The expected cash flows associated with the project are as follows:
Cash Cash Expenses &
Year Revenues Depreciation
1 $1,500,000 $900,000
2 $1,500,000 $900,000
3 $1,500,000 $900,000
4 $1,500,000 $900,000
5 $1,500,000 $900,000
What is the average annual income for this project?
a. $900,000
b. $1,500,000
c. $600,000
d. $700,000
e. $300,000
89. Davis Company is considering the purchase of a new piece of equipment that will cost $1,600,000 and have a life of
five years with no expected salvage value. The expected cash flows associated with the project are as follows:
Cash Cash Expenses &
Year Revenues Depreciation
1 $1,500,000 $900,000
2 $1,500,000 $900,000
3 $1,500,000 $900,000
4 $1,500,000 $900,000
5 $1,500,000 $900,000
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What is the accounting rate of return for the project?
a. 83.33%
b. 31.25%
c. 47.00%
d. 37.50%
e. 43.75%
90. Sony Lavery is considering investing $45,000 in a project with the following cash revenues and expenses:
Cash Expenses &
Year Revenues Depreciation
Year 1 $18,000 $8,000
Year 2 $22,000 $10,000
Year 3 $22,000 $9,000
Year 4 $24,000 $9,000
Year 5 $26,000 $9,000
Year 6 $28,000 $12,000
Year 7 $28,000 $11,000
Year 8 $28,000 $12,000
What is the average income for the project?
a. $19,250
b. $30,000
c. $20,000
d. $14,500
e. $18,000
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91. Sony Lavery is considering investing $45,000 in a project with the following cash revenues and expenses:
Cash Expenses &
Year Revenues Depreciation
Year 1 $18,000 $8,000
Year 2 $22,000 $10,000
Year 3 $22,000 $9,000
Year 4 $24,000 $9,000
Year 5 $26,000 $9,000
Year 6 $28,000 $12,000
Year 7 $28,000 $11,000
Year 8 $28,000 $12,000
What is the accounting rate of return for the project?
a. 32%
b. 41%
c. 20%
d. 26%
e. 35%
Chapter 12
92. Sony Lavery is considering investing $45,000 in a project with the following cash revenues and expenses:
Cash Expenses &
Year Revenues Depreciation
Year 1 $18,000 $8,000
Year 2 $22,000 $10,000
Year 3 $22,000 $9,000
Year 4 $24,000 $9,000
Year 5 $26,000 $9,000
Year 6 $28,000 $12,000
Year 7 $28,000 $11,000
Year 8 $28,000 $12,000
Assuming straight-line depreciation over 8 years, what is the payback period for the project?
a. between 4 and 5 years
b. between 2 and 3 years
c. between 5 and 6 years
d. between 7 and 8 years
e. between 6 and 7 years
Chapter 12
93. Sara Turner is considering investing $60,000 in a project with the following cash revenues and expenses:
Cash Expenses &
Year Revenues Depreciation
Year 1 $16,000 $16,000
Year 2 $18,000 $16,000
Year 3 $17,000 $17,000
Year 4 $26,000 $14,000
Year 5 $26,000 $14,000
Assuming straight-line depreciation over five years, what is the payback period for this investment?
a. between 3 and 4 years
b. between 2 and 3 years
c. between 3 and 4 years
d. between 4 and 5 years
e. between 1 and 2 years
Chapter 12
94. Mark is considering investing $90,000 in a project with the following cash revenues and expenses:
Cash Expenses &
Year Revenues Depreciation
Year 1 $20,000 $15,000
Year 2 $25,000 $20,000
Year 3 $18,000 $15,000
Year 4 $30,000 $10,000
Year 5 $40,000 $10,000
What is the accounting rate of return for the project?
a. 14%
b. 15%
c. 7%
d. 3%
e. Cannot be calculated with this information
Chapter 12
95. Osler Company is considering an investment with the following data:
Initial cost $200,000
Annual net cash inflows $25,000
Expected life 10 years
Salvage value none
Depreciation will be taken on a straight-line basis over the expected life of the investment.
What is the accounting rate of return for the investment?
a. 10%
b. 12.5%
c. 25%
d. 2.5%
e. 20%
96. Osler Company is considering an investment with the following data:
Initial cost $200,000
Annual net cash inflows $25,000
Expected life 10 years
Salvage value none
Depreciation will be taken on a straight-line basis over the expected life of the investment.
The company requires a minimum rate of return of 4%. What is the net present value of the investment?
Period 1 2 3 4 5 6 7 8 9 10
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4% 0.962 1.886 2.775 3.630 4.452 5.242 6.002 6.773 7.435 8.111
a. $2,775
b. $202,775
c. $118,170
d. ($81,830)
97. The absolute dollar measure of a project is given by:
a. standard costing.
b. the net present value.
c. the kaizen method.
d. the accounting rate of return.
e. None of these
98. Which of the following refers to the minimum acceptable rate of return?
a. The standard rate
Chapter 12
b. The contribution margin
c. The cost of capital
d. The future rate
e. All of these
99. Which of the following is true if net present value (NPV) is negative?
a. The return on investment is less than the discount rate.
b. The return on investment is more than the discount rate.
c. The return on investment is equal to the discount rate.
d. The return on investment is equal to the growth rate.
e. The return on investment is greater than the growth rate.
100. A division manager is considering a project that requires a significant initial investment. The company’s top
management will not approve any project that does not return at least 12%. The manager will most likely use which of the
following capital investment models?
a. payback period
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b. accounting rate of return
c. net present value
d. internal rate of return
e. None of these.
101. A firm is evaluating a project that has a net present value of $0 when a discount rate of 10% is used. A discount rate
of 7% will result in a:
a. negative net present value.
b. positive net present value.
c. net present value of $0.
d. The question cannot be answered based upon the information provided.
102. Jackson Company invests in a new piece of equipment costing $40,000. The equipment is expected to yield the
following amounts per year for the equipment’s four-year useful life:
Cash revenues $ 60,000
Chapter 12
Cash expenses (32,000)
Depreciation expenses (straight-line) (10,000)
Income provided from equipment $ 18,000
Cost of capital 14%
What is the net present value of this investment in equipment?
a. $81,592
b. $41,592
c. $(4,480)
d. $52,452
103. The following information pertains to an investment:
Investment $140,000
Annual revenues $96,000
Annual variable costs $32,000
Annual fixed out-of-pocket costs $20,000
Discount rate 12%
Expected life of project 8 years
The present value of the annual cash flow (rounded) is
a. $136,822.
b. $152,538.
c. $204,884.
d. $218,592.
Chapter 12
104. A firm is considering a project with an annual cash flow of $300,000. The project would have a five year life, and the
company uses a discount rate of 12%. What is the maximum amount the company could invest in the project and have the
project still be acceptable?
a. $2,180,143
b. $1,650,159
c. $1,081,434
d. $3,150,562
Chapter 12
105. A firm is considering a project with an annual cash flow of $100,000. The project would have an 8-year life, and the
company uses a discount rate of 5%. What is the maximum amount the company could invest in the project and have the
project still be acceptable?
a. $800,545
b. $646,321
c. $516,425
d. $960,110
106. Present value of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 0.925 0.890 0.857 0.826 0.797 0.769
3 0.889 0.840 0.794 0.751 0.712 0.675
4 0.855 0.792 0.735 0.683 0.636 0.592
5 0.822 0.747 0.681 0.621 0.567 0.519
6 0.790 0.705 0.630 0.564 0.507 0.456
7 0.760 0.665 0.583 0.513 0.452 0.400
8 0.731 0.627 0.540 0.467 0.404 0.351
9 0.703 0.592 0.500 0.424 0.361 0.308
10 0.676 0.558 0.463 0.386 0.322 0.270
Present value of an Annuity of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
5 4.452 4.212 3.993 3.791 3.605 3.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
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9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216
Morgan Clinical Practice is considering an investment in new imaging equipment that will cost $400,000. The equipment
is expected to yield cash inflows of $80,000 per year for a six year period. Morgan set a required rate of return at 10%.
What is the net present value of the investment? (Note: there may be a rounding error depending on the table you use to
compute your answer. Choose the answer closest to the one you calculate.)
a. $51,600
b. ($51,600)
c. $348,400
d. ($348,600)
e. $451,600
107. Present value of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 0.925 0.890 0.857 0.826 0.797 0.769
3 0.889 0.840 0.794 0.751 0.712 0.675
4 0.855 0.792 0.735 0.683 0.636 0.592
5 0.822 0.747 0.681 0.621 0.567 0.519
6 0.790 0.705 0.630 0.564 0.507 0.456
7 0.760 0.665 0.583 0.513 0.452 0.400
8 0.731 0.627 0.540 0.467 0.404 0.351
9 0.703 0.592 0.500 0.424 0.361 0.308
10 0.676 0.558 0.463 0.386 0.322 0.270
Present value of an Annuity of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
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5 4.452 4.212 3.993 3.791 3.605 3.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216
Morgan Clinical Practice is considering an investment in new imaging equipment that will cost $400,000. The equipment
is expected to yield cash inflows of $80,000 per year for a six year period. At the end of the sixth year, the firm expects to
recover $150,000 from the sale of the equipment. Morgan set a required rate of return at 10%. What is the net present
value of the investment? (Note: there may be a rounding error depending on the table you use to compute your answer.
Choose the answer closest to the one you calculate.)
a. ($33,000)
b. $45,200
c. $433,000
d. $33,000
e. ($177,280)
108. Present value of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 0.925 0.890 0.857 0.826 0.797 0.769
3 0.889 0.840 0.794 0.751 0.712 0.675
4 0.855 0.792 0.735 0.683 0.636 0.592
5 0.822 0.747 0.681 0.621 0.567 0.519
6 0.790 0.705 0.630 0.564 0.507 0.456
7 0.760 0.665 0.583 0.513 0.452 0.400
8 0.731 0.627 0.540 0.467 0.404 0.351
9 0.703 0.592 0.500 0.424 0.361 0.308
10 0.676 0.558 0.463 0.386 0.322 0.270
Present value of an Annuity of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
5 4.452 4.212 3.993 3.791 3.605 3.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216
Roman Knoze is considering two investments. Each will cost $20,000 initially. Project 1 will return annual cash flows of
$10,000 in each of three years. Project 2 will return $5,000 in year 1, $10,000 in year 2, and $15,000 in year 3. Roman
requires a minimum rate of return of 10%. What is the net present value of Project 1? (Note: there may be a rounding
error depending on the table you use to compute your answer. Choose the answer closest to the one you calculate.)
a. $20,000
b. $25,670
c. $4,860
d. $22,530
e. $2,530
109. Present value of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 0.925 0.890 0.857 0.826 0.797 0.769
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3 0.889 0.840 0.794 0.751 0.712 0.675
4 0.855 0.792 0.735 0.683 0.636 0.592
5 0.822 0.747 0.681 0.621 0.567 0.519
6 0.790 0.705 0.630 0.564 0.507 0.456
7 0.760 0.665 0.583 0.513 0.452 0.400
8 0.731 0.627 0.540 0.467 0.404 0.351
9 0.703 0.592 0.500 0.424 0.361 0.308
10 0.676 0.558 0.463 0.386 0.322 0.270
Present value of an Annuity of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
5 4.452 4.212 3.993 3.791 3.605 3.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216
Roman Knoze is considering two investments. Each will cost $20,000 initially. Project 1 will return annual cash flows of
$10,000 in each of three years. Project 2 will return $5,000 in year 1, $10,000 in year 2, and $15,000 in year 3. Roman
requires a minimum rate of return of 10%. What is the net present value of Project 2?
a. $5,670
b. $20,000
c. $2,530
d. $24,070
e. $4,070
Chapter 12
110. Present value of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 0.925 0.890 0.857 0.826 0.797 0.769
3 0.889 0.840 0.794 0.751 0.712 0.675
4 0.855 0.792 0.735 0.683 0.636 0.592
5 0.822 0.747 0.681 0.621 0.567 0.519
6 0.790 0.705 0.630 0.564 0.507 0.456
7 0.760 0.665 0.583 0.513 0.452 0.400
8 0.731 0.627 0.540 0.467 0.404 0.351
9 0.703 0.592 0.500 0.424 0.361 0.308
10 0.676 0.558 0.463 0.386 0.322 0.270
Present value of an Annuity of $1
Periods 4% 6% 8% 10% 12% 14%
1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
5 4.452 4.212 3.993 3.791 3.605 3.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216
Jan Rigby is considering an investment that will cost $20,000 initially, and return annual cash flows of $10,000 in each of
three years. Jan requires a minimum rate of return of 8%. What is the present value of the cash inflows? (Note: there may
be a rounding error depending on the table you use to compute your answer. Choose the answer closest to the one you
calculate.)
a. $25,770
b. $20,000
c. $5,770
d. $45,770
e. $10,000
Chapter 12
111. The interest rate that sets the present value of a project’s cash inflows equal to the present value of the project’s cost is
called the ____.
a. present value
b. discount rate
c. company cost of capital
d. payback period
e. internal rate of return
112. Which of the following is true regarding the internal rate of return for a project?
a. If the internal rate of return is less than the required rate of return, the project will be rejected.
b. If the internal rate of return is equal to the required rate of return, the net present value of the project is zero.
c. If the internal rate of return is more than the required rate of return, the project will be accepted.
d. Managers may believe (in most cases, incorrectly) that the internal rate of return is the compounded rate of return
earned by the initial investment.
e. All of these.