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a. 5%
b. 10%
c. 25%
d. 15%
85. An anticipated purchase of equipment for $1,000,000, with a useful life of eight years and no residual value, is
expected to yield the following annual net incomes and net cash flows:
Year Net Income Net Cash Flow
1 $210,000 $400,000
2 180,000 320,000
3 145,000 280,000
4 125,000 270,000
5 60,000 220,000
6 60,000 220,000
7 60,000 220,000
8 60,000 220,000
What is the cash payback period?
a. 5 years
b. 4 years
c. 6 years
d. 3 years
86. Using the following partial table of present value of $1 at compound interest, determine the present value of $20,000
to be received four years hence with earnings at the rate of 12% a year:
Year 6% 10% 12%
1 0.943 0.909 0.893
2 0.890 0.826 0.797
3 0.840 0.751 0.712
4 0.792 0.683 0.636
a. $13,660
b. $15,840
c. $12,720
d. $10,400
87. Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax
expense arising from capital investment projects?
a. Interest deduction
b. Depreciation deduction
c. Minimum tax provision
d. Charitable contributions
88. Gamma Inc. is considering the purchase of a machine costing $450,000, having a useful life of five years.
Depreciation would be recognized using the straight-line method, and the machine would have no residual value at the
end of its useful life. The estimated total net income from the machine is $600,000. The average investment for the
machine is _____.
a. $600,000
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b. $150,000
c. $225,000
d. $300,000
89. The management of London Corporation is considering the purchase of a new machine costing $750,000. The
company’s desired rate of return is 6%. The present value factors for $1 at compound interest of 6% for one through five
years are 0.943, 0.890, 0.840, 0.792, and 0.747, respectively. In addition to this information, use the following data in
determining the acceptability in this situation:
Year Income from Operations Net Cash Flow
1 $37,500 $187,500
2 37,500 187,500
3 37,500 187,500
4 37,500 187,500
5 37,500 187,500
The cash payback period for this investment is _____.
a. 3 years
b. 5 years
c. 20 years
d. 4 years
90. The management of London Corporation is considering the purchase of a new machine costing $750,000. The
company’s desired rate of return is 6%. The present value factors for $1 at compound interest of 6% for one through five
years are 0.943, 0.890, 0.840, 0.792, and 0.747, respectively. In addition to this information, use the following data in
determining the acceptability in this situation:
Year Income from Operations Net Cash Flow
1 $37,500 $187,500
2 37,500 187,500
3 37,500 187,500
4 37,500 187,500
5 37,500 187,500
The present value index for this investment is _____.
a. 1.00
b. 0.95
c. 1.25
d. 1.05
91. Cash payment for monthly rent is an example of _____.
a. the present value index
b. discounted cash flow
c. compounding
d. an annuity
92. One issue to consider when investing in assets in foreign countries is _____.
a. that local currency may weaken to the dollar causing adverse effects on the investment’s return
b. that the dollar may weaken to the local currency causing adverse effects on the investment’s return
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c. that local currency may be difficult to exchange into dollars causing problems in receiving a return on the
investment
d. that dollars may be difficult to exchange into local currency causing problems in receiving any return on
investment
93. Which of the following is the expansion of the DuPont formula for return on stockholders’ equity?
a. Profit margin × Asset turnover × Financial leverage
b. Profit margin × Sales turnover × Financial leverage
c. Profit margin × Asset turnover × Operating leverage
d. Operating income × Asset turnover × Financial leverage
94. Alpha Inc. is evaluating the purchase of a machine costing $350,000. The expected useful life of the machine is five
years at the end of which it would have no residual value, and the depreciation is assumed to be on straight-line basis. The
estimated total income from the machine is $500,000. The expected average rate of return for this machine is _____.
a. 26.4%
b. 42.6%
c. 38.5%
d. 57.1%
95. The payback period is determined using which of the following formulas?
a. Amount to be invested/Annual average net income
b. Annual net cash flow/Amount to be invested
c. Annual average net income/Amount to be invested
d. Amount to be invested/Annual net cash flows
96. A disadvantage of the average rate of return method of capital investment analysis is that _____.
a. it is very complex to compute
b. it does not include the entire amount of income earned over the life of a project
c. it does not emphasize accounting income, which is often used by investors and creditors in
evaluating management performance
d. it does not directly consider the timing of the expected cash flows
97. The two methods that use present values to analyze capital investment proposal consider the _____.
a. time value of money concept
b. going concern concept
c. historical cost concept
d. conservatism concept
98. When several alternative investment proposals of the same amount are being considered, the one with the largest net
present value is the most desirable. If the alternative proposals involve different amounts of investment, it is useful to
prepare a relative ranking of the proposals by using the _____.
a. average rate of return
b. cash payback period
c. present value index
d. price-level index
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99. Diamond Inc.’s sales is $520,000, its operating income is $84,000, average total assets are $480,000, and average
shareholders’ equity is $200,000. Determine the company’s return on shareholders’ equity.
a. 22.6%
b. 36.5%
c. 42.0%
d. 55.2%
100. Sommers Company is evaluating a project requiring a capital expenditure of $300,000. The project has an estimated
life of five years and no salvage value. The estimated net income and net cash flow from the project are as follows:
Year Net Income Net Cash Flow
1 $ 60,000 $120,000
2 50,000 110,000
3 45,000 105,000
4 30,000 90,000
5 20,000 80,000
$205,000 $505,000
The company’s minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound
interest of 12% is shown in the following table:
Year Present Value
of $1 at 12%
1 0.893
2 0.797
3 0.712
4 0.636
5 0.567
Determine (a) the average rate of return on investment, giving effect to depreciation on the investment, and (b) the net
present value.
101. The net present value for Proposals X and Y has been calculated on the basis of the following data.
Proposal X Proposal Y
Amount to be invested $145,000 $280,000
Total present value of net cash flow 172,000 320,000
Net present value 27,000 40,000
Determine the present value index for each proposal.
102. June Co. is evaluating a project requiring a capital expenditure of $620,000. The project has an estimated life of four
years and no salvage value. The estimated net income and net cash flow from the project are as follows:
Year Net Income Net Cash Flow
1 $ 45,000 $200,000
2 85,000 240,000
3 5,000 160,000
4 15,000 170,000
$150,000 $770,000
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The company’s minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for one, two,
three, and four years is 0.893, 0.797, 0.712, and 0.636, respectively.
Determine: (a) the average rate of return on investment, giving effect to depreciation on the investment, and (b) the net
present value.
103. Heedy Inc. is considering a capital investment proposal that costs $460,000 and has an estimated life of four years
and no residual value. The estimated net cash flows are as follows:
Year Net Cash Flow
1 $195,000
2 160,000
3 120,000
4 80,000
The minimum desired rate of return for net present value analysis is 10%. The present value of $1 at compound interest
rates of 10% for one, two, three, and four years is 0.909, 0.826, 0.751, and 0.683, respectively. Determine the net present
value.
104. A five-year project is estimated to cost $700,000 and have no residual value. If the straight-line depreciation method
is used and estimated total income is $231,000, determine the average rate of return giving effect to depreciation on the
investment.
105. Harris Co. is considering a 12-year project that is estimated to cost $900,000 and has no residual value. Harris seeks
to earn an average rate of return of 15% on all capital projects. Determine the necessary average annual income (using
straight-line depreciation) that must be achieved on this project for it to be acceptable to Harris Co.
106. Project A as well as project B require an initial investment of $1,050,000, have a six-year life, and have expected
total cash inflows of $1,680,000. Proposal A is expected to provide an annual net cash inflow of $280,000, while the
annual net cash inflows for Proposal B are as follows:
Year 1 $350,000
Year 2 $315,000
Year 3 $280,000
Year 4 $280,000
Year 5 $245,000
Year 6 $210,000
Determine the cash payback period for each proposal.
107. Proposals L and K each cost $500,000, have six-year lives, and have expected total cash flows of $750,000. Proposal
L is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal K are as follows:
Year 1 $250,000
Year 2 200,000
Year 3 100,000
Year 4 90,000
Year 5 60,000
Year 6 50,000
$750,000
Determine the cash payback period for each proposal.
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108. A $350,000 capital investment proposal has an estimated life of four years and no residual value. The estimated net
cash flows are as follows:
Year Net Cash Flow Year Net Cash Flow
1 $150,000 3 $104,000
2 130,000 4 90,000
The minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of
12% for one, two, three, and four years is 0.893, 0.797, 0.712, and 0.636, respectively. Determine the net present value.
109. The internal rate of return method is used to analyze an $831,500 capital investment proposal with annual net cash
flows of $250,000 for each of the six years of its useful life.
(a) Determine a present value factor for an annuity of $1, which can be used in determining the internal rate of return.
(b) Based on the factor determined in (a) and the portion of the following present value of an annuity of $1 table,
determine the internal rate of return for the proposal.
Year 10% 15% 20%
1 0.909 0.870 0.833
2 1.736 1.626 1.528
3 2.487 2.283 2.106
4 3.170 2.855 2.589
5 3.791 3.353 2.991
6 4.355 3.785 3.326
7 4.868 4.160 3.605
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Answer Key
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