41
99) The following relates to a proposed equipment purchase:
Cost $ 144,000
Salvage value $ 4,000
Estimated useful life 4 years
Annual net cash flows $ 46,100
Depreciation method Straight-line
Ignoring income taxes, the annual net income amount used to calculate the accounting rate of
return is:
A) $46,100
B) $11,100
C) $12,100
D) $74,000
E) $48,950
100) An estimate of an asset’s value to the company, calculated by discounting the future cash
flows from the investment at the project’s required rate of return and then subtracting the initial
amount of the investment, is known as:
A) Annual net cash flows.
B) Rate of return on investment.
C) Net present value.
D) Payback period.
E) Unamortized carrying value.
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101) Which of the following cash flows is not considered when using the net present value
method?
A) Future cash inflows.
B) Future cash outflows.
C) Past cash outflows.
D) Non-uniform cash inflows.
E) Future year-end cash flows.
102) Which one of the following methods considers the time value of money in evaluating
alternative capital expenditures?
A) Accounting rate of return.
B) Net present value.
C) Payback period.
D) Cash flow method.
E) Return on average investment.
103) The hurdle rate is often set at:
A) The rate the company could earn if the investment were placed in the bank.
B) The company’s cost of capital.
C) 10% above the IRR of current projects.
D) 10% above the ARR of current projects.
E) The rate at which the company is taxed on income.
104) Butler Corporation is considering the purchase of new equipment costing $30,000. The
projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 for
depreciation. The revenue is to be received at the end of each year. The machine has a useful life
of 3 years and no salvage value. Butler requires a 12% return on its investments. The present
value of an annuity of $1 for different periods follows:
Periods 12%
1 0.8929
2 1.6901
3 2.4018
4 3.0373
What is the net present value of the machine?
A) $24,018.
B) $(3,100).
C) $30,000.
D) $26,900.
E) $(29,520).
105) Vextra Corporation is considering the purchase of new equipment costing $35,000. The
projected annual cash inflow is $11,000, to be received at the end of each year. The machine has
a useful life of 4 years and no salvage value. Vextra requires a 12% return on its investments.
The present value of an annuity of $1 for different periods follows:
Periods 12%
1 0.8929
2 1.6901
3 2.4018
4 3.0373
What is the net present value of the machine?
A) $(33,410).
B) $(3,100).
C) $35,000.
D) $3,410.
E) $(1,590).
106) The following present value factors are provided for use in this problem.
Periods Present Value
of $1 at 8% Present Value of an
Annuity of $1 at 8%
1 0.9259 0.9259
2 0.8573 1.7833
3 0.7938 2.5771
4 0.7350 3.3121
Cliff Co. wants to purchase a machine for $40,000, but needs to earn a return of 8%. The
expected year-end net cash flows are $12,000 in each of the first three years, and $16,000 in the
fourth year. What is the machine’s net present value?
A) $(9,075).
B) $2,685.
C) $42,685.
D) $(28,240).
E) $52,000.
107) The following present value factors are provided for use in this problem.
Periods Present Value
of $1 at 8% Present Value of an
Annuity of $1 at 8%
1 0.9259 0.9259
2 0.8573 1.7833
3 0.7938 2.5771
4 0.7350 3.3121
Xavier Co. wants to purchase a machine for $37,000 with a four year life and a $1,000 salvage
value. Xavier requires an 8% return on investment. The expected year-end net cash flows are
$12,000 in each of the four years. What is the machine’s net present value?
A) $3,480.
B) $2,745.
C) $40,480.
D) ($3,480).
E) ($2,745).
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108) Turk Manufacturing is considering purchasing two machines. Each machine costs $9,000
and will produce cash flows as follows:
End of
Year Machine
A B
1 $ 5,000 $ 1,000
2 4,000 2,000
3 2,000 11,000
Turk Manufacturing uses the net present value method to make the decision, and it requires a
15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696;
2 years, 0.7561; 3 years, 0.6575. Which machine should Turk purchase?
A) Only Machine A is acceptable.
B) Only Machine B is acceptable.
C) Both machines are acceptable, but A should be selected because it has the greater net present
value.
D) Both machines are acceptable, but B should be selected because it has the greater net present
value.
E) Neither machine is acceptable.
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109) Alfarsi Industries uses the net present value method to make investment decisions and
requires a 15% annual return on all investments. The company is considering two different
investments. Each require an initial investment of $15,000 and will produce cash flows as
follows:
End of
Year Investment
A B
1 $ 8,000 $ 0
2 8,000 0
3 8,000 24,000
The present value factors of $1 each year at 15% are:
1 0.8696
2 0.7561
3 0.6575
The present value of an annuity of $1 for 3 years at 15% is 2.2832
Which investment should Alfarsi choose?
A) Only Investment A is acceptable.
B) Only Investment B is acceptable.
C) Both investments are acceptable, but A should be selected because it has the greater net
present value.
D) Both investments are acceptable, but B should be selected because it has the greater net
present value.
E) Neither machine is acceptable.
110) Alfarsi Industries uses the net present value method to make investment decisions and
requires a 15% annual return on all investments. The company is considering two different
investments. Each require an initial investment of $15,000 and will produce cash flows as
follows:
End of
Year Investment
A B
1 $ 8,000 $ 0
2 8,000 0
3 8,000 24,000
The present value factors of $1 each year at 15% are:
1 0.8696
2 0.7561
3 0.6575
The present value of an annuity of $1 for 3 years at 15% is 2.2832.
The net present value of Investment A is:
A) $18,266.
B) $(15,000).
C) $9,000.
D) $(20,549).
E) $3,266.
111) Alfarsi Industries uses the net present value method to make investment decisions and
requires a 15% annual return on all investments. The company is considering two different
investments. Each require an initial investment of $15,000 and will produce cash flows as
follows:
End of
Year Investment
A B
1 $ 8,000 $ 0
2 8,000 0
3 8,000 24,000
The present value factors of $1 each year at 15% are:
1 0.8696
2 0.7561
3 0.6575
The present value of an annuity of $1 for 3 years at 15% is 2.2832
The net present value of Investment B is:
A) $780.
B) $(15,780).
C) $9,000.
D) $39,797.
E) $(5,918).
112) A company is considering the purchase of new equipment for $45,000. The projected
annual net cash flows are $19,000. The machine has a useful life of 3 years and no salvage value.
Management of the company requires a 12% return on investment. The present value of an
annuity of $1 for various periods follows:
Period Present value of an annuity of $1 at 12%
1 0.8929
2 1.6901
3 2.4018
What is the net present value of this machine assuming all cash flows occur at year-end?
A) $(1,768)
B) $3,000
C) $634
D) $19,000
E) $45,634
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113) A company can buy a machine that is expected to have a three-year life and a $30,000
salvage value. The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax
net income to be received at the end of each year. If a table of present values of $1 at 12% shows
values of 0.8929 for one year, 0.7972 for two years, and 0.7118 for three years, what is the net
present value of the cash flows from the investment, discounted at 12%?
A) $118,855
B) $583,676
C) $629,788
D) $705,391
E) $1,918,855
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114) A company is considering a 5-year project. The company plans to invest $60,000 now and
it forecasts cash flows for each year of $16,200. The company requires a hurdle rate of 12%.
Calculate the internal rate of return to determine whether it should accept this project. Selected
factors for a present value of an annuity of $1 for five years are shown below:
Interest rate Present value of an annuity
of $1 factor for year 5
10 % 3.7908
12 % 3.6048
14 % 3.4331
A) The project should be accepted.
B) The project should be rejected because it earns less than 10%.
C) The project earns more than 10% but less than 12%. At a hurdle rate of 12%, the project
should be rejected.
D) Only 9% is acceptable.
E) Only 10% is acceptable.
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115) Tressor Company is considering a 5-year project. The company plans to invest $90,000
now and it forecasts cash flows for each year of $27,000. The company requires that investments
yield a discount rate of at least 14%. Selected factors for a present value of an annuity of $1 for
five years are shown below:
Interest rate Present value of an annuity
of $1 factor for year 5
10 % 3.7908
12 % 3.6048
14 % 3.4331
Calculate the internal rate of return to determine whether it should accept this project.
A) The project should be accepted because it will earn more than 14%.
B) The project should be accepted because it will earn more than 10%.
C) The project will earn more than 12% but less than 14%. At a hurdle rate of 14%, the project
should be rejected.
D) The project should be rejected because it will earn less than 14%.
E) The project should be rejected because it will not earn exactly 14%.
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116) A new manufacturing machine is expected to cost $278,000, have an eight-year life, and a
$30,000 salvage value. The machine will yield an annual incremental after-tax income of
$35,000 after deducting the straight-line depreciation. Compute the payback period for the
purchase.
A) 8.7 years.
B) 3.8 years.
C) 4.2 years.
D) 7.3 years.
E) 5.4 years.
117) A new manufacturing machine is expected to cost $278,000, have an eight-year life, and a
$30,000 salvage value. The machine will yield an annual incremental after-tax income of
$35,000 after deducting the straight-line depreciation. Compute the accounting rate of return for
the investment.
A) 22.7%.
B) 23.4%.
C) 46.9%.
D) 12.2%.
E) 24.5%.
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118) Nestor Company is considering the purchase of an asset for $100,000. It is expected to
produce the following net cash flows. The cash flows occur evenly throughout each year.
Annual Net
Cash Flows
Year 1 $ 40,000
Year 2 $ 40,000
Year 3 $ 35,000
Year 4 $ 35,000
Year 5 $ 30,000
Compute the payback period for this investment.
A) 2.85 years.
B) 2.57 years.
C) 3.00 years.
D) 2.50 years.
E) 3.62 years.
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119) A machine costs $180,000 and will have an eight-year life, a $20,000 salvage value, and
straight-line depreciation is used. Management estimates the machine will yield an after-tax net
income of $12,500 each year. Compute the accounting rate of return for the investment.
A) 12.5%.
B) 26.8%.
C) 11.8%.
D) 10.8%.
E) 22.5%.