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Chapter 15
94. In capital rationing, alternative proposals that survive initial screening and further analysis using present value
methods are normally evaluated in terms of:
a.
net income.
b.
qualitative factors.
c.
maximum cost.
d.
net cash flow.
95. In capital rationing, an initial screening of alternative proposals is usually performed by establishing minimum
standards. Which of the following evaluation methods are normally used?
a.
Cash payback method and average rate of return method
b.
Average rate of return method and net present value method
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c.
Net present value method and cash payback method
d.
Internal rate of return and net present value methods
96. 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
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97. Which of the following is the formula to calculate the return on stockholders' equity?
a.
Operating income / Average stockholders' equity
b.
Gross income / Average stockholders' equity
c.
Average stockholders' equity / Operating income
d.
Average stockholders' equity / Gross income
98. A company's profit margin is 15.5%, its asset turnover 0.72, and its financial leverage is 3.25. Determine the
company's return on shareholders' equity.
a.
42.5%
b.
36.3%
c.
51.7%
d.
28.4%
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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. 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.
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101. Proposals L and K each cost $500,000, have 6-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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102. A 5-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.
103. Project A as well as project B require an initial investment of $1,050,000, have a 6-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.
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104. 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 1, 2, 3, and 4 years is 0.893, 0.797, 0.712, and 0.636, respectively. Determine the net present value.
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105. 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 1, 2, 3, and 4 years is 0.909, 0.826, 0.751, and 0.683, respectively. Determine the net present value.
106. The net present value for Proposals X and Y has been calculated on the basis of the data given below.
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.
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107. Sommers Company is evaluating a project requiring a capital expenditure of $300,000. The project has an estimated
life of 5 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 table below:
Year
Present Value
of $1 at 12%
1
0.893
2
0.797
3
0.712
4
0.636
5
0.567
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108. 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
The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for 1, 2, 3,
and 4 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.
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109. The internal rate of return method is used to analyze a $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 present value of an annuity
of $1 table presented below, 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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