100
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
Which investment should Alfarsi choose?
A) Only Investment B is acceptable.
B) Only Investment A is acceptable.
C) Neither machine is acceptable.
D) Both investments are acceptable, but A should be selected because it has the greater net
present value.
E) Both investments are acceptable, but B should be selected because it has the greater net
present value.
112) 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 Investment
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) $3,266. B) $(20,549). C) $(15,000). D) $18,266. E) $9,000.
113) 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 Investment
Year 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) $9,000. B) $780. C) $(5,918). D) $(15,780). E) $39,797.
114) 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) $19,000 B) $3,000 C) $634 D) $(1,768) E) $45,634
115) 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) $705,391
B) $1,918,855
C) $583,676
D) $629,788
E) $118,855
116) The discount rate that yields a net present value of zero for an investment is the:
A) Net present value rate of return.
B) Zero rate of return.
C) Internal rate of return.
D) Payback rate of return.
E) Accounting rate of return.
117) 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 earns more than 10% but less than 12%. At a hurdle rate of 12%, the project
should be rejected.
B) The project should be accepted.
C) The project should be rejected because it earns less than 10%.
D) Only 9% is acceptable.
E) Only 10% is acceptable.
118) 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 will earn more than 12% but less than 14%. At a hurdle rate of 14%, the project
should be rejected.
C) The project should be rejected because it will earn less than 14%.
D) The project should be accepted because it will earn more than 10%.
E) The project should be rejected because it will not earn exactly 14%.
119) Wheeler Company can produce a product that incurs the following costs per unit: direct materials,
$10; direct labor, $24, and overhead, $16. An outside supplier has offered to sell the product to
Axle for $45. If Wheeler buys from the supplier, it will still incur 45% of its overhead cost.
Compute the net incremental cost or savings of buying.
A) $2.20 cost per unit.
B) $2.20 savings per unit.
C) $3.80 cost per unit.
D) $4.00 savings per unit.
E) $4.00 cost per unit.
120) Paxton Company can produce a component of its product that incurs the following costs per unit:
direct materials, $10; direct labor, $14, variable overhead, $3 and fixed overhead, $8. An outside
supplier has offered to sell the product to Axle for $32. Compute the net incremental cost or
savings of buying the component.
A) $5.00 savings per unit.
B) $0 cost or savings per unit.
C) $3.00 cost per unit.
D) $5.00 cost per unit.
E) $3.00 savings per unit.
121) Walters manufactures a specialty food product that can currently be sold for $22 per unit and has
20,000 units on hand. Alternatively, it can be further processed at a cost of $12,000 and converted
into 12,000 units of Deluxe and 6,000 units of Super. The selling price of Deluxe and Super are
$30 and $20, respectively. The incremental net income of processing further would be:
A) $40,000. B) $12,000. C) $28,000. D) $18,000. E) $44,000.
122) Cornish Company had the following results of operations for the past year:
Sales (20,000 units at $22)
$ 440,000
Direct materials and direct labor
$ 200,000
Overhead (40% variable)
100,000
Selling and administrative expenses (all fixed)
92,000
(392,000 )
Operating income
$ 48,000
A foreign company (whose sales will not affect Cornish’s market) offers to buy 3,000 units at $17.00
per unit. In addition to variable manufacturing costs, selling these units would increase fixed
overhead by $500 and selling and administrative costs by $1,000. If Cornish accepts the offer, its
profits will:
A) Increase by $13,500.
B) Increase by $4,500.
C) Decrease by $4,500.
D) Increase by $15,000.
E) Decrease by $300.