Figure 14-3.
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
27. Refer to Figure 14-3. 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
28. Refer to Figure 14-3. 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%
Figure 14-4.
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
29. Refer to Figure 14-4. What is the average income for the project?
a.
$19,250
b.
$30,000
c.
$20,000
d.
$14,500
e.
$18,000
30. Refer to Figure 14-4. What is the accounting rate of return for the project?
a.
32%
b.
41%
c.
20%
d.
26%
e.
35%
Average income = (sum of revenues – sum of expenses)/years
Average income = ($196,000 – $80,000)/8
Average income = $116,000/8 = $14,500
ARR = Average income/Investment
ARR = $14,500/$45,000 = 0.32 or 32%
31. Refer to Figure 14-4. 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
Figure 14-5.
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
32. Refer to Figure 14-5. 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
33. Refer to Figure 14-5. What is the accounting rate of return for the project?
a.
8.67%
b.
15.60%
c.
7.50%
d.
3.10%
e.
Cannot be calculated with this information.
Figure 14-7.
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
34. Refer to Figure 14-7. What is the accounting rate of return for the investment?
a.
10%
b.
12.5%
c.
25%
d.
2.5%
e.
20%
35. Refer to Figure 14-7. 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
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)
36. Which of the following provides an absolute dollar measure?
a.
internal rate of return
b.
net present value
c.
payback period
d.
accounting rate of return
e.
None of these.
37. The required rate of return used in the net present value model can also be called the
a.
hurdle rate.
b.
minimum acceptable rate of return.
c.
cost of capital.
d.
discount rate.
e.
All of these.
38. If net present value is negative, it means that the return on the investment is
a.
less than the discount rate.
b.
more than the discount rate.
c.
equal to the discount rate.
d.
acceptable.
e.
meaningless since the return on the investment bears no relationship to the discount rate.
39. 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
b.
accounting rate of return
c.
net present value
d.
internal rate of return
e.
None of these.
40. A firm is evaluating a project that has a net present value of $0 when a discount rate of 8% is used. A
discount rate of 6% 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.
41. 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
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
42. 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.
43. A firm is considering a project with an annual cash flow of $200,000. The project would have a seven
year life, and the company uses a discount rate of 10%. What is the maximum amount the company
could invest in the project and have the project still be acceptable?
a.
$718,200
b.
$1,400,000
c.
$973,600
d.
$200,000
44. A firm is considering a project with an annual cash flow of $80,000. The project would have a 10-year
life, and the company uses a discount rate of 8%. What is the maximum amount the company could
invest in the project and have the project still be acceptable (rounded)?
a.
$800,000
b.
$536,800
c.
$406,420
d.
$727,208
Figure 14-6.
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
45. Refer to Figure 14-6. 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
46. Refer to Figure 14-6. 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)
0
6
NPV
47. Refer to Figure 14-6. 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
0
NPV
b.
$25,670
c.
$4,860
d.
$22,530
e.
$2,530
48. Refer to Figure 14-6. 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
49. Refer to Figure 14-6. 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
50. 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
51. 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.
52. Elizabeth Myers invested in a project that required an initial amount of $1,560, and returned one cash
inflow of $12,000 at the end of the 18th year. A partial table of the present value of an annuity of $1 in
arrears is as follows:
Year
2%
4%
6%
8%
10%
12%
14%
16%
18
0.700
0.494
0.350
0.250
0.180
0.130
0.095
0.069
What is the internal rate of return for this investment?
a.
8%
b.
10%
c.
12%
d.
14%
e.
16%
53. Jerry Hall invested in a project that required an initial amount of $52,160, and returned cash inflows of
$10,000 per year for 10 years. A partial table of the present value of an annuity of $1 in arrears is as
follows:
Year
2%
4%
6%
8%
10%
12%
14%
16%
10
7.983
8.111
7.360
6.710
6.145
5.650
5.216
4.833
What is the internal rate of return for this investment?
a.
8%
b.
10%
c.
12%
d.
14%
e.
16%
54. Amatra Inc., has the opportunity to invest in new equipment that will cost $113,000. The net cash
inflows for ten years equal $20,000 per year. What is the internal rate of return for the investment? A
partial table of the present value of an annuity of $1 in arrears is as follows:
Year
2%
4%
6%
8%
10%
12%
14%
16%
10
7.983
8.111
7.360
6.710
6.145
5.650
5.216
4.833
a.
8%
b.
10%
c.
12%
d.
14%
e.
16%
55. Shoring Company is considering a project with an internal rate of return of 14.5%. Shoring requires a
minimum rate of return of 12%. The net present value of the project is
a.
negative.
b.
infinite.
c.
equal to zero.
d.
positive.
e.
None of these.
56. The internal rate of return is defined as
a.
a blend of the costs of capital from all sources.
b.
the minimal acceptable interest rate on investments.
c.
the difference between the present value of the cash inflows and outflows associated with
a project.
d.
the interest rate that sets the present value of a project’s cash inflows equal to the present
value of a project’s cost.
57. Jones Company is considering the purchase of a new machine for $57,000. The machine would
generate an annual cash flow of $17,411 for 5 years. At the end of five years, the machine would have
no salvage value. The company’s cost of capital is 12%. The company uses straight-line depreciation.
What is the internal rate of return for the machine rounded to the nearest percent?
a.
12%
b.
18%
c.
14%
d.
16%
58. A firm is considering a project requiring an investment of $27,000. The project would generate an
annual cash flow of $6,296 for the next seven years. The company uses the straight-line method of
depreciation. The approximate internal rate of return for the project is
a.
6%.
b.
8%.
c.
12%.
d.
14%.
59. Cooper Industries is considering a project that would require an initial investment of $101,000. The
project would result in cost savings of $62,000 in year 1 and $70,000 in year two. The internal rate of
return is
a.
between 16% and 17%.
b.
between 18% and 20%.
c.
under 15%.
d.
none of these.
Figure 14-8.
Present value of an Annuity of $1 in Arrears
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
4.433
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
60. Refer to Figure 14-8. Lucas Company is considering a project with an initial investment of $530,250
in new equipment that will yield annual net cash flows of $95,000, and will be depreciated at $75,750
per year over its seven year life. What is the internal rate of return?
a.
8%
b.
6%
c.
12%
d.
10%
e.
14%
61. Refer to Figure 14-8. Sawyer Company is considering a project with an initial investment of $226,000
that will yield annual net cash flows of $40,000, and will be depreciated at $22,600 per year over its
ten year life. What is the internal rate of return?
a.
6%
b.
8%
c.
10%
d.
12%
e.
14%
Figure 14-9.
Kenner Company is considering two projects.
Project A
Project B
Initial investment
$85,000
$24,000
Annual cash flows
$20,676
$6,011
Life of the project
6 years
5 years
Depreciation per year
$14,167
$4,800
Present value of an Annuity of $1 in Arrears
Periods
8%
10%
12%
14%
1
0.926
0.909
0.893
0.877
2
1.783
1.736
1.690
1.647
3
2.577
2.487
2.402
2.322
4
3.312
3.170
3.037
2.914
5
3.993
3.791
3.605
4.433
6
4.623
4.355
4.111
3.889
7
5.206
4.868
4.564
4.288
8
5.747
5.335
4.968
4.639
9
6.247
5.759
5.328
4.946
10
6.710
6.145
5.650
5.216
62. Refer to Figure 14-9. Which of the two projects, A or B, is better in terms of internal rate of return?
a.
project A with an IRR of 12%
b.
project B with an IRR of 14%
c.
project A with an IRR of 10%
d.
project B with an IRR of 10%
e.
both projects have the same IRR
63. Refer to Figure 14-9. Suppose that Kenner Company requires a minimum rate of return of 8%. Which
project is better in terms of net present value?
a.
project A with NPV of $10,585
b.
project B with NPV of $7,756
c.
project A with NPV of $4,210
d.
project B with NPV of $1,212
e.
both projects have the same NPV
64. Which of the following compares the actual benefits from an investment with the estimated benefits,
and the actual operating costs of the investment with estimated operating costs?
a.
internal rate of return
b.
discounted returns
c.
postaudit
d.
opportunity cost
e.
capital investment decision making
65. Which of the following is a disadvantage of postaudits?
a.
They evaluate profitability rather than cash flows.
b.
They may point to the need for additional funding for the project.
c.
They tend to hold managers accountable for capital investment decision making.
d.
The assumptions driving the original analysis may be invalidated by changes in the actual
operating environment.
e.
All of these.
66. Which of the following is not a benefit of postaudits of capital investments?
a.
Considers changes in the actual operating environment.
b.
Guides managers to make capital investment in the best interests of the firm.
c.
Ensures that resources are used wisely by evaluating profitability.
d.
Supplies feedback to managers that should help improve decision making.
e.
All of these are benefits.
67. A follow-up analysis of a capital investment after it is implemented is called a
a.
capital investment review.
b.
profitability analysis.
c.
postaudit.
d.
peer review.
68. The best person/group in a firm to perform a postaudit of a capital investment is usually
a.
the manager of that investment.
b.
the CEO.
c.
the board of directors.
d.
the internal audit staff.
e.
an external auditor.
69. The capital investment decision making model that assumes that each cash inflow is reinvested at the
required rate of return is
a.
net present value.
b.
internal rate of return.
c.
payback period.
d.
accounting rate of return.
e.
None of these.
70. The capital investment decision making model that assumes that each cash inflow is reinvested at the
project’s own rate of return is
a.
net present value.
b.
accounting rate of return.
c.
payback period.
d.
internal rate of return.
e.
None of these.
71. The best model for choosing the best of several competing projects is
a.
net present value.
b.
internal rate of return.
c.
payback period.
d.
accounting rate of return.
e.
None of these.