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Chapter 15
75. Which of the following formulas is used to calculate the present value index?
a.
Total present value of net cash flow / Equal annual net cash flows
b.
Amount to be invested / Total present value of net cash flow
c.
Equal annual net cash flows / Total present value of net cash flow
d.
Total present value of net cash flow / Amount to be invested
76. The management of Retz Corporation is considering the purchase of a new machine costing $500,000. The company's
desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are
0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in
determining the acceptability in this situation:
Year
Income from Operations
Net Cash Flow
1
$100,000
$200,000
2
80,000
170,000
3
50,000
130,000
4
10,000
80,000
5
10,000
80,000
The net present value for this investment is:
a.
positive $150,000.
b.
negative $24,170.
c.
positive $24,170.
d.
negative $150,000.
Chapter 15
77. The management of Retz Corporation is considering the purchase of a new machine costing $500,000. The company's
desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are
0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in
determining the acceptability in this situation:
Year
Income from Operations
Net Cash Flow
1
$100,000
$200,000
2
80,000
170,000
3
50,000
130,000
4
10,000
80,000
5
10,000
80,000
The present value index for this investment is:
a.
1.30.
b.
0.95.
c.
1.05.
d.
0.70.
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78. 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 1 through 5 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 net present value for this investment is:
a.
positive $39,750.
b.
positive $118,145.
c.
negative $118,145.
d.
negative $39,750.
79. 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 1 through 5 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
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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.
80. Which of the following is an advantage of the internal rate of return method?
a.
It takes into account cash flows occurring only till the time the initial investment is completely paid back.
b.
It does not use present value concepts in valuing cash flows occurring in different periods because this concept
can give incorrect results.
c.
It ranks proposals based upon the cash flows over their complete useful life, even if the project lives are not
the same.
d.
It assumes the cash received from a proposal can be reinvested at the minimum desired rate of return.
Chapter 15
81. If the desired rate of return on a project is 10%, determine the present value of $40,000 to be received in four years
using the following partial table of present value of $1 at compound interest.
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.
$27,320
b.
$25,440
c.
$31,680
d.
$30,040
82. Using the following partial table of present value of $1 at compound interest, determine the present value of $35,000
to be received three years hence, with earnings at the rate of 10% a year.
Year
6%
10%
12%
1
0.943
0.909
0.893
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2
0.890
0.826
0.797
3
0.840
0.751
0.712
4
0.792
0.683
0.636
a.
$26,285
b.
$29,400
c.
$24,920
d.
$23,905
83. Using the following partial table of present value of $1 at compound interest, determine the present value of $20,000
to be received three years hence, with earnings at the rate of 10% 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.
$14,240
b.
$16,800
c.
$15,020
d.
$15,840
Chapter 15
84. If the rate of earnings is 12% and the cash to be received in two years is $20,000, determine the present value amount,
using the following partial table of present value of $1 at compound interest.
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.
$16,520
b.
$15,940
c.
$14,240
d.
$17,860
85. All of the following qualitative considerations may impact upon capital investments analysis except:
a.
manufacturing productivity.
b.
manufacturing sunk cost.
c.
manufacturing flexibility.
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d.
manufacturing control.
86. Which of the following is a qualitative consideration that influences capital investments analysis?
a.
Time value of money
b.
Internal rate of return
c.
Changes in price level
d.
Manufacturing flexibility
Chapter 15
87. Which of the following is a factor that complicates capital investment analysis?
a.
Equal proposal lives
b.
Certainty of estimates of revenues, expenses, and cash flows
c.
Sunk cost
d.
Leasing alternative
88. 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.
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.
Chapter 15
89. Mars Corp. is choosing between two different capital investment proposals. Machine A has a useful life of 4 years,
and Machine B has a useful life of 6 years. Each proposal requires an initial investment of $200,000, and the company
desires a rate of return of 10%. Although Machine B has a useful life of 6 years, it could be sold at the end of 4 years for
$35,000.
Year
Present Value
of $1 at 10%
1
0.909
2
0.826
3
0.751
4
0.683
5
0.621
6
0.513
Machine A will generate net cash flow of $70,000 in each of the four years. Machine B will generate $80,000 in year 1,
$70,000 in year 2, $60,000 in year 3, and $40,000 per year for the remaining 3 years of its useful life.
Which of the following statements portrays the most accurate analysis between the two proposals?
a.
Mars should invest in Machine A because the net present value of Machine A after 4 years is higher than the
net present value of Machine B after 4 years.
b.
Mars should invest in Machine B because the net present value of Machine A after 4 years is lower and the net
present value of Machine B after 6 years.
c.
Mars should invest in Machine B because the net present value of Machine A after 4 years is lower than the
net present value of Machine B after 4 years.
d.
Mars should invest in Machine A because the net present value of Machine A after 4 years is higher than the
net present value of Machine B after 6 years.
Chapter 15
90. 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
91. Assume in analyzing alternative proposals that Proposal F has a useful life of six years and Proposal J has a useful life
of nine years. What is one widely used method that makes the proposals comparable?
a.
Adjust the life of Proposal F to a time period that is equal to that of Proposal J and add its estimated residual
value to the cash inflow at the end of year nine.
b.
Adjust the life of Proposal J to a time period that is equal to that of Proposal F and add its estimated residual
value to the cash inflow at the end of year six.
c.
Adjust the life of Proposal F and Proposal J to a time period equal to the average of six and nine years (7.5
years) and add its estimated residual value to the cash inflow at the end of operating life.
d.
Adjust the life of Proposal J to a time period that is equal to that of Proposal F and deduct last three years cash
inflow of Proposal J from its total cash inflow.
Chapter 15
92. Periods experiencing increase in price levels are known as periods of:
a.
inflation.
b.
recession.
c.
depression.
d.
deflation.
93. The process by which management allocates available investment funds among competing investment proposals is
called:
a.
investment capital management.
b.
capital budgeting.
c.
cost-volume-profit analysis.
d.
capital rationing.
