Name:
Class:
Date:
Indicate whether the statement is true or false.
1. If a proposed expenditure of $70,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net
income of $32,000 and $12,000, respectively, the cash payback period is 2.5 years.
a.
True
b.
False
2. Methods that ignore present value in capital investment analysis include the internal rate of return method.
a.
True
b.
False
3. The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred
to as (1) average rate of return and (2) cash payback methods.
a.
True
b.
False
4. Care must be taken involving capital investment decisions, since normally a long-term commitment of funds is
involved and operations could be affected for many years.
a.
True
b.
False
5. In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their
present values.
a.
True
b.
False
6. A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value. The
company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the
machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The average rate of
return for the machine is 16.7%.
a.
True
b.
False
7. If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future
cash inflows over the amount to be invested, the proposal should be accepted.
a.
True
b.
False
8. A company is considering the purchase of a new machine for $48,000. Management expects that the machine can
produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor,
and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except
depreciation are on a cash basis. The payback period for the machine is 12 years.
a.
True
b.
False
9. In computing the net present value of an investment in equipment, the required investment and its residual value should
be subtracted from the present value of all future cash inflows.
Name:
Class:
Date:
a.
True
b.
False
10. The cash payback method can be used only when net cash inflows are the same for each period.
a.
True
b.
False
11. The expected period of time that will elapse between the date of a capital investment and the complete recovery in
cash of the amount invested is called the discount period.
a.
True
b.
False
12. The average rate of return method of capital investment analysis gives consideration to the present value of future cash
flows.
a.
True
b.
False
13. Average rate of return equals estimated average annual income divided by average investment.
a.
True
b.
False
14. For Years 1–5, a proposed expenditure of $250,000 for a fixed asset with a 5-year life has expected net income of
$40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000,
$75,000, and $75,000, respectively. The cash payback period is 3 years.
a.
True
b.
False
15. For Years 1–5, a proposed expenditure of $500,000 for a fixed asset with a 5-year life has expected net income of
$40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000,
$75,000, and $75,000, respectively. The cash payback period is 5 years.
a.
True
b.
False
16. Methods that ignore present value in capital investment analysis include the average rate of return method.
a.
True
b.
False
17. Average rate of return equals average investment divided by estimated average annual income.
a.
True
b.
False
18. In net present value analysis for a proposed capital investment, the expected future net cash flows are averaged and
then reduced to their present values.
a.
True
b.
False
19. If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash
Name:
Class:
Date:
inflows over the amount to be invested, the rate of return on the proposal exceeds the rate used in the analysis.
a.
True
b.
False
20. The average rate of return method of analyzing capital budgeting decisions measures the average rate of return from
using the asset over its entire life.
a.
True
b.
False
21. The methods of evaluating capital investment proposals can be grouped into two general categories that can be
referred to as (1) methods that ignore present value and (2) present value methods.
a.
True
b.
False
22. A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage
value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over
the life of the machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The
payback period for the machine is 12 years.
a.
True
b.
False
23. Methods that ignore present value in capital investment analysis include the cash payback method.
a.
True
b.
False
24. If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net
income of $32,000 and $12,000, respectively, the cash payback period is 4 years.
a.
True
b.
False
25. The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash
flow.
a.
True
b.
False
26. A present value index can be used to rank competing capital investment proposals when the net present value method
is used.
a.
True
b.
False
27. A survey of chief financial officers of large U.S. companies reported that over 85% use the average rate of return
method.
a.
True
b.
False
28. Net present value and the payback period are examples of discounted cash flow methods used in capital budgeting
decisions.
Name:
Class:
Date:
a.
True
b.
False
29. The computations involved in the net present value method of analyzing capital investment proposals are less involved
than those for the average rate of return method.
a.
True
b.
False
30. The process by which management allocates available investment funds among competing capital investment
proposals is termed present value analysis.
a.
True
b.
False
31. Methods that ignore present value in capital investment analysis include the net present value method.
a.
True
b.
False
32. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected
to yield total net income of $300,000 for the 5 years. The expected average rate of return is 30%.
a.
True
b.
False
33. A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual net cash inflows
from the investment are $36,000 (Year 1), $30,000 (Year 2), $18,000 (Year 3), $12,000 (Year 4), and $6,000 (Year
5). The average income from operations over the 5-year life is $20,400. The payback period is 3.5 years.
a.
True
b.
False
34. The computations involved in the net present value method of analyzing capital investment proposals are more
involved than those for the average rate of return method.
a.
True
b.
False
35. A qualitative characteristic that may impact capital investment analysis is employee morale.
a.
True
b.
False
36. In computing the present value of an investment in equipment, the present value of the residual value should be added
to the cash inflows.
a.
True
b.
False
37. A company is considering the purchase of a new machine for $48,000. Management expects that the machine can
produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor,
and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except
depreciation are on a cash basis. The payback period for the machine is 6 years.
a.
True
Name:
Class:
Date:
b.
False
38. The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow.
a.
True
b.
False
39. The internal rate of return method of analyzing capital investment proposals uses present value concepts to compute a
rate of return expected from the proposals.
a.
True
b.
False
40. If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future
cash inflows over the amount to be invested, the proposal should be rejected.
a.
True
b.
False
41. The average rate of return is a measure of profitability computed by dividing the average annual cash inflows from an
asset by the average amount invested in the asset.
a.
True
b.
False
42. A company is considering purchasing a machine for $21,000. The machine will generate income from operations of
$2,000; annual net cash flows from the machine will be $3,500. The payback period for the new machine is 10.5 years.
a.
True
b.
False
43. A qualitative characteristic that may impact capital investment analysis is the impact of investment proposals on
product quality.
a.
True
b.
False
44. A qualitative characteristic that may impact capital investment analysis is manufacturing productivity.
a.
True
b.
False
45. A qualitative characteristic that may impact capital investment analysis is market opportunities.
a.
True
b.
False
46. A company is considering purchasing a machine for $21,000. The machine will generate income from operations of
$2,000; annual net cash flows from the machine will be $3,500. The payback period for the new machine is 6 years.
a.
True
b.
False
47. The time expected to pass before the net cash flows from an investment would return its initial cost is called the
amortization period.
a.
True
Name:
Class:
Date:
b.
False
48. The method of analyzing capital investment proposals in which the estimated average annual income is divided by the
average investment is the average rate of return method.
a.
True
b.
False
49. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected
to yield total net income of $200,000 for the 5 years. The expected average rate of return on investment is 50%.
a.
True
b.
False
50. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected
to yield total net income of $300,000 for the 5 years. The expected average rate of return is 37.5%.
a.
True
b.
False
51. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected
to yield total net income of $200,000 for the 5 years. The expected average rate of return on investment is 25%.
a.
True
b.
False
52. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed
assets is called capital investment analysis.
a.
True
b.
False
53. The cash payback method of capital investment analysis is one of the methods referred to as a present value method.
a.
True
b.
False
54. A series of equal cash flows at fixed intervals is termed an annuity.
a.
True
b.
False
55. A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage
value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over
the life of the machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The
average rate of return for the machine is 50%.
a.
True
b.
False
56. If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash
inflows over the amount to be invested, the rate of return on the proposal is less than the rate used in the analysis.
a.
True
b.
False
Name:
Class:
Date:
57. A qualitative characteristic that may impact capital investment analysis is manufacturing flexibility.
a.
True
b.
False
58. A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage
value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over
the life of the machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The
payback period for the machine is 4 years.
a.
True
b.
False
59. The expected period of time that will elapse between the date of a capital investment and the complete recovery in
cash of the amount invested is called the cash payback period.
a.
True
b.
False
60. The process by which management allocates available investment funds among competing capital investment
proposals is termed capital rationing.
a.
True
b.
False
Indicate the answer choice that best completes the statement or answers the question.
61. Brunette Company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested
is $180,000. The present value of the future cash flows generated by the project is $163,000. Should the company invest
in this project?
a.
Yes, because the rate of return on the project exceeds the desired rate of return used to compute the present
value of the future cash flows.
b.
No, because the rate of return on the project is less than the desired rate of return used to compute the present
value of the future cash flows.
c.
No, because net present value is $17,000.
d.
Yes, because the rate of return on the project is equal to the desired rate of return used to compute the present
value of the future cash flows.
62. The expected average rate of return for a proposed investment of $4,800,000 in a fixed asset, using straight-line
depreciation, with a useful life of 20 years, no residual value, and an expected total income of $10,560,000 over the 20
years is
a.
24%
b.
22%
c.
45%
d.
10%
63. 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 a(n)
a.
average rate of return index
Name:
Class:
Date:
b.
consumer price index
c.
present value index
d.
price-level index
64. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is
$100,000. The present value of the future cash flows at the company’s desired rate of return is $105,000. The IRR on the
project is 12%. Which of the following statements is true?
a.
The project should not be accepted because the net present value is negative.
b.
The desired rate of return used to compute the present value of the future cash flows is less than 12%.
c.
The desired rate of return used to compute the present value of the future cash flows is more than 12%.
d.
The desired rate of return used to compute the present value of the future cash flows is equal to 12%.
65. All of the following are factors that may complicate capital investment analysis except
a.
possible leasing alternatives
b.
changes in price levels
c.
sunk costs
d.
federal income tax ramifications
66. Which of the following would not be considered a good managerial tool in making a decision for determining a
capital investment?
a.
evaluating further assets that are dissimilar in nature or have different useful lives
b.
using only quantitative measures to evaluate asset purchases
c.
analyzing lease versus purchase option
d.
considering income tax ramifications
67. The methods of evaluating capital investment proposals can be separated into two general groups—present value
methods and
a.
past value methods
b.
straight-line methods
c.
reducing value methods
d.
methods that ignore present value
Use these present value tables to answer the questions that follow.
Here is a table for the 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
5
0.747
0.621
0.567
Here is a table for the present value of an annuity of $1 at compound interest.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
Name:
Class:
Date:
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
68. Using the provided present value tables, what would be the internal rate of return of an investment of $227,460 that
would generate an annual cash inflow of $60,000 for the next 5 years?
a.
6%
b.
10%
c.
12%
d.
cannot be determined from the data given
69. Using the provided present value tables, what is the present value of $3,000 (rounded to the nearest dollar) to be
received at the end of each of the next 4 years, assuming an earnings rate of 12%?
a.
$10,815
b.
$7,206
c.
$9,111
d.
$1,908
70. Using the provided present value tables, what would be the present value of $30,000 to be received 3 years from
today, assuming an earnings rate of 6%?
a.
$25,200
b.
$26,700
c.
$23,760
d.
$80,190
71. Which of the following is an advantage of the cash payback method?
a.
easy to use
b.
takes into consideration the time value of money
c.
includes the cash flow over the entire life of the proposal
d.
emphasizes accounting income
72. The amount of the average investment for a proposed investment of $120,000 in a fixed asset with a useful life of 4
years, straight-line depreciation, no residual value, and an expected total net income of $21,600 for the 4 years is
a.
$30,000
b.
$21,600
c.
$5,400
d.
$60,000
73. The method of analyzing capital investment proposals that divides the estimated average annual income by the
average investment is the
a.
cash payback method
b.
net present value method
c.
internal rate of return method
d.
average rate of return method
Name:
Class:
Date:
Use these present value tables to answer the questions that follow.
Here is a table for the 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
5
0.747
0.621
0.567
Here is a table for the present value of an annuity of $1 at compound interest.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
74. Using the provided present value tables, what would be the internal rate of return of an investment of $210,600 that
would generate an annual cash inflow of $50,000 for the next 5 years?
a.
6%
b.
10%
c.
12%
d.
14%
75. Using the provided present value tables, what would be the present value of $25,000 (rounded to the nearest dollar) to
be received 4 years from today, assuming an earnings rate of 10%?
a.
$19,800
b.
$17,075
c.
$79,250
d.
$15,525
76. The rate of earnings is 6% and the cash to be received in 4 years is $20,000. The present value amount, using the
following partial table of present value of $1 at compound interest, is
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.
$12,720
c.
$15,840
d.
$16,800
Use these present value tables to answer the questions that follow.
Name:
Class:
Date:
Here is a table for the 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
5
0.747
0.621
0.567
Here is a table for the present value of an annuity of $1 at compound interest.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
77. Using the provided present value tables, what is the present value of $6,000 to be received at the end of each of the
next 4 years, assuming an earnings rate of 10%?
a.
$20,790
b.
$19,020
c.
$14,412
d.
$25,272
78. An anticipated purchase of equipment for $490,000 with a useful life of 8 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
$60,000
$110,000
2
50,000
100,000
3
50,000
100,000
4
40,000
90,000
5
40,000
90,000
6
40,000
90,000
7
40,000
90,000
8
40,000
90,000
What is the cash payback period?
a.
5 years
b.
4 years
c.
6 years
d.
3 years
79. An analysis of a proposal by the net present value method indicated that the present value of future cash inflows
exceeded the amount to be invested. Which of the following statements best describes the results of this analysis?
a.
The proposal is desirable, and the rate of return expected from the proposal exceeds the minimum rate used for
the analysis.
b.
The proposal is desirable, and the rate of return expected from the proposal is less than the minimum rate used
for the analysis.
Name:
Class:
Date:
c.
The proposal is undesirable, and the rate of return expected from the proposal is less than the minimum rate
used for the analysis.
d.
The proposal is undesirable, and the rate of return expected from the proposal exceeds the minimum rate used
for the analysis.
Use these present value tables to answer the questions that follow.
Here is a table for the 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
5
0.747
0.621
0.567
Here is a table for the present value of an annuity of $1 at compound interest.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
80. Using the provided present value tables, what would be the present value of $8,000 to be received 1 year from today,
assuming an earnings rate of 12%?
a.
$7,544
b.
$7,120
c.
$7,272
d.
$7,144
81. The production department is proposing the purchase of an automatic insertion machine. It has identified three
machines and has asked the accountant to analyze them to determine which of the proposals (if any) meets or exceeds the
company’s policy of a minimum desired rate of return of 10% using the net present value method. Each of the assets has
an estimated useful life of 10 years.
The accountant has identified the following data:
Machine A
Machine B
Machine C
Present value of future cash flows
computed using 10% rate of return
$305,000
$295,000
$300,000
Amount of initial investment
300,000
300,000
300,000
Which of the investments are acceptable?
a.
Machines A and C
b.
Machines B and C
c.
Machine B only
d.
Machine A only
Name:
Class:
Date:
82. All of the following qualitative considerations may impact capital investment analysis except
a.
time value of money
b.
employee morale
c.
the impact on product quality
d.
manufacturing flexibility
Use this information for River Corporation to answer the questions that follow.
The management of River Corporation is considering the purchase of a new machine costing $380,000. The company’s
desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition
to the foregoing information, use the following data in determining the acceptability of this investment:
Year
Income from
Operations
Net Cash
Flow
1
$20,000
$95,000
2
20,000
95,000
3
20,000
95,000
4
20,000
95,000
5
20,000
95,000
83. The average rate of return for this investment is
a.
5%
b.
10.5%
c.
25%
d.
15%
84. The management of Dakota Corporation is considering the purchase of a new machine costing $420,000. The
company’s desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through
5 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 of this investment:
Year
Income from
Operations
Net Cash
Flow
1
$100,000
$180,000
2
40,000
120,000
3
20,000
100,000
4
10,000
90,000
5
10,000
90,000
The present value index for this investment is
a.
1.08
b.
1.45
c.
1.14
d.
0.70
Use this information for Nebraska Corporation to answer the questions that follow.
The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. The
company’s desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through
5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data
Name:
Class:
Date:
in determining the acceptability:
Year
Income from
Operations
Net Cash
Flow
1
$100,000
$180,000
2
40,000
120,000
3
40,000
100,000
4
10,000
90,000
5
10,000
120,000
85. The average rate of return for this investment is
a.
18%
b.
16%
c.
58%
d.
10%
86. The amount of the estimated average income for a proposed investment of $90,000 in a fixed asset, giving effect to
depreciation (straight-line method), with a useful life of 4 years, no residual value, and an expected total income yield of
$25,300, is
a.
$12,650
b.
$25,300
c.
$6,325
d.
$45,000
87. Which of the following is not an advantage of the average rate of return method?
a.
easy to use
b.
takes into consideration the time value of money
c.
includes the amount of income earned over the entire life of the proposal
d.
emphasizes accounting income
88. Which of the following is true of the cash payback period?
a.
the longer the payback, the longer the estimated life of the asset
b.
the longer the payback, the sooner the cash spent on the investment is recovered
c.
the shorter the payback, the less likely the possibility of obsolescence
d.
All of these choices
89. Which of the following is not considered a complicating factor in capital investment decisions?
a.
income tax
b.
lease versus purchasing options
c.
equal proposal lives
d.
qualitative factors
90. The management of Charlton Corporation is considering the purchase of a new machine costing $380,000. The
company’s desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212.
In addition to the foregoing information, use the following data in determining the acceptability of this investment:
Income from
Net Cash
Name:
Class:
Date:
Year
Operations
Flow
1
$20,000
$95,000
2
20,000
95,000
3
20,000
95,000
4
20,000
95,000
5
20,000
95,000
The cash payback period for this investment is
a.
4 years
b.
5 years
c.
19 years
d.
3.3 years
91. Which method of evaluating capital investment proposals uses the concept of present value to compute a rate of
return?
a.
average rate of return
b.
accounting rate of return
c.
cash payback
d.
internal rate of return
92. The production department is proposing the purchase of an automatic insertion machine. It has identified three
machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return?
Machine A
Machine B
Machine C
Annual net cash flows
$ 50,000
$ 40,000
$ 75,000
Average investment
250,000
300,000
500,000
a.
Machine B only
b.
Machine C only
c.
Machines A and B
d.
Machine A only
93. The expected average rate of return for a proposed investment of $6,000,000 in a fixed asset, using straight-line
depreciation, with a useful life of 20 years, no residual value, and an expected total income of $12,000,000 over the 20
years is
a.
20%
b.
10%
c.
40%
d.
5%
94. An anticipated purchase of equipment for $520,000, with a useful life of 8 years and no residual value, is expected to
yield the following annual net income and net cash flow:
Year
Net Income
Net Cash Flow
1
$60,000
$120,000
2
50,000
110,000
3
50,000
110,000
4
40,000
100,000
5
40,000
80,000
Name:
Class:
Date:
6
40,000
80,000
7
40,000
60,000
8
40,000
60,000
What is the cash payback period?
a.
5 years
b.
4 years
c.
6 years
d.
3 years
95. The expected average rate of return for a proposed investment of $800,000 in a fixed asset with a useful life of
4 years, straight-line depreciation, no residual value, and an expected total net income of $360,000 for the 4 years is
a.
45%
b.
22.5%
c.
11.3%
d.
5.5%
96. The process by which management allocates available investment funds among competing investment proposals is
called
a.
investment capital
b.
investment rationing
c.
cost-volume-profit analysis
d.
capital rationing
97. Heidi Company is considering the acquisition of a machine that costs $420,000. The machine is expected to have a
useful life of 6 years, a negligible residual value, an annual net cash flow of $120,000, and annual income from operations
of $83,721. What is the estimated cash payback period for the machine?
a.
3.5 years
b.
5 years
c.
5.1 years
d.
4 years
98. Motel Corporation is analyzing a capital expenditure that will involve a cash outlay of $208,240. Estimated cash flows
are expected to be $40,000 annually for 7 years. The present value factors for an annuity of $1 for 7 years at interest of
6%, 8%, 10%, and 12% are 5.582, 5.206, 4.868, and 4.564, respectively. The internal rate of return for this investment is
a.
10%
b.
6%
c.
12%
d.
8%
99. The management of Zesty Corporation is considering the purchase of a new machine costing $400,000. The
company’s desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through
5 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 of this situation:
Year
Income from
Operations
Net Cash
Flow
Name:
Class:
Date:
1
$100,000
$180,000
2
40,000
120,000
3
20,000
100,000
4
10,000
90,000
5
10,000
90,000
The cash payback period for this investment is
a.
5 years
b.
4 years
c.
2 years
d.
3 years
Use this information for Wyoming Corporation to answer the questions that follow.
The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The
company’s desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212.
In addition to the foregoing information, use the following data in determining the acceptability of this investment:
Year
Income from
Operations
Net Cash
Flow
1
$18,750
$93,750
2
18,750
93,750
3
18,750
93,750
4
18,750
93,750
5
18,750
93,750
100. The net present value for this investment is
a.
$(118,145)
b.
$118,145
c.
$19,875
d.
$(19,875)
101. By converting dollars to be received in the future into current dollars, the present value methods take into
consideration that money
a.
has an international rate of exchange
b.
is the language of business
c.
is the measure of assets, liabilities, and stockholders’ equity on financial statements
d.
has a time value
102. The formula for computing the present value factor for an annuity of $1 is
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 ÷ Equal Annual Net Cash Flows
Use these present value tables to answer the questions that follow.
Here is a table for the present value of $1 at compound interest.
Name:
Class:
Date:
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
5
0.747
0.621
0.567
Here is a table for the present value of an annuity of $1 at compound interest.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
103. Using the provided present value tables, if an investment is made now for $23,500 that will generate a cash inflow of
$8,000 a year for the next 4 years, what would be the net present value of the investment, assuming an earnings rate of
10%?
a.
$23,500
b.
$16,050
c.
$25,360
d.
$1,860
Use this information for River Corporation to answer the questions that follow.
The management of River Corporation is considering the purchase of a new machine costing $380,000. The company’s
desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition
to the foregoing information, use the following data in determining the acceptability of this investment:
Year
Income from
Operations
Net Cash
Flow
1
$20,000
$95,000
2
20,000
95,000
3
20,000
95,000
4
20,000
95,000
5
20,000
95,000
104. The cash payback period for this investment is
a.
4 years
b.
5 years
c.
20 years
d.
3 years
105. 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.
deductions for individuals
b.
depreciation deduction
c.
minimum tax provision
Name:
Class:
Date:
d.
charitable contributions
106. Which of the following is a present value method of analyzing capital investment proposals?
a.
average rate of return
b.
cash payback
c.
accounting rate of return
d.
net present value
107. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is
$210,000. The present value of the future cash flows is $225,000. The company’s desired rate of return used in the present
value computations was 12%. Which of the following statements is true?
a.
The project should not be accepted because the net present value is negative.
b.
The internal rate of return on the project is less than 12%.
c.
The internal rate of return on the project is more than 12%.
d.
The internal rate of return on the project is equal to 12%.
Use this information for Wyoming Corporation to answer the questions that follow.
The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The
company’s desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212.
In addition to the foregoing information, use the following data in determining the acceptability of this investment:
Year
Income from
Operations
Net Cash
Flow
1
$18,750
$93,750
2
18,750
93,750
3
18,750
93,750
4
18,750
93,750
5
18,750
93,750
108. The cash payback period for this investment is
a.
4 years
b.
5 years
c.
20 years
d.
3 years
109. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed
assets is called
a.
absorption cost analysis
b.
variable cost analysis
c.
capital investment analysis
d.
cost-volume-profit analysis
Use this information for Wyoming Corporation to answer the questions that follow.
The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The
company’s desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212.
In addition to the foregoing information, use the following data in determining the acceptability of this investment:
Name:
Class:
Date:
Year
Income from
Operations
Net Cash
Flow
1
$18,750
$93,750
2
18,750
93,750
3
18,750
93,750
4
18,750
93,750
5
18,750
93,750
110. The average rate of return for this investment is
a.
5%
b.
10%
c.
25%
d.
15%
111. Tennessee Corporation is analyzing a capital expenditure that will involve a cash outlay of $109,332. Estimated cash
flows are expected to be $36,000 annually for 4 years. The present value factors for an annuity of $1 for 4 years at interest
of 10%, 12%, 14%, and 15% are 3.170, 3.037, 2.914, and 2.855, respectively. The internal rate of return for this
investment is
a.
9%
b.
10%
c.
12%
d.
3%
Use this information for Nebraska Corporation to answer the questions that follow.
The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. The
company’s desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through
5 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:
Year
Income from
Operations
Net Cash
Flow
1
$100,000
$180,000
2
40,000
120,000
3
40,000
100,000
4
10,000
90,000
5
10,000
120,000
112. The cash payback period for this investment is
a.
5 years
b.
4 years
c.
2 years
d.
3 years
113. The production department is proposing the purchase of an automatic insertion machine. It has identified three
machines and has asked the accountant to analyze them to determine the best cash payback. Which machine has the best
payback period?
Name:
Class:
Date:
Machine A
Machine B
Machine C
Annual cash flow
$ 40,000
$ 50,000
$ 75,000
Initial cost
300,000
250,000
500,000
a.
Machine A
b.
Machine C
c.
Machine B
d.
They all three have the same cash payback period.
114. Assume in analyzing alternative proposals that Proposal F has a useful life of 6 years and Proposal J has a useful life
of 9 years. What is one widely used method to make the net present values of the proposals comparable?
a.
Ignore the fact that Proposal F has a useful life of 6 years and treat it as if it has a useful life of 9 years.
b.
Adjust the life of Proposal J to a time period that is equal to that of Proposal F by estimating a residual value at
the end of Year 6.
c.
Ignore the useful lives of 6 and 9 years and find an average (7 1/2 years).
d.
Ignore the useful lives of 6 and 9 years and compute the average rate of return.
115. Which method for evaluating capital investment proposals reduces the expected future net cash flows originating
from the proposals to their present values and computes a net present value?
a.
net present value
b.
average rate of return
c.
internal rate of return
d.
cash payback
116. The expected average rate of return for a proposed investment of $650,000 in a fixed asset with a useful life of 4
years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the 4 years, is
a.
13.9%
b.
36.9%
c.
18.5%
d.
9.25%
117. In capital rationing, alternative proposals are initially screened by establishing minimum standards, using the
a.
cash payback and average rate of return methods
b.
average rate of return and net present value methods
c.
net present value and cash payback methods
d.
internal rate of return and net present value methods
118. Which of the following are two methods of analyzing capital investment proposals that both ignore present value?
a.
internal rate of return and average rate of return
b.
net present value and average rate of return
c.
internal rate of return and net present value
d.
average rate of return and cash payback method
119. The rate of earnings is 12% and the cash to be received in 2 years is $10,000. Determine the present value amount,
using the following partial table for the present value of $1 at compound interest:
Year
6%
10%
12%
Name:
Class:
Date:
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.
$8,930
b.
$7,120
c.
$7,970
d.
$8,260
Use this information for Wyoming Corporation to answer the questions that follow.
The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The
company’s desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212.
In addition to the foregoing information, use the following data in determining the acceptability of this investment:
Year
Income from
Operations
Net Cash
Flow
1
$18,750
$93,750
2
18,750
93,750
3
18,750
93,750
4
18,750
93,750
5
18,750
93,750
120. The present value index for this investment is
a.
1.00
b.
0.95
c.
1.25
d.
1.05
Use these present value tables to answer the questions that follow.
Here is a table for the 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
5
0.747
0.621
0.567
Here is a table for the present value of an annuity of $1 at compound interest.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
Name:
Class:
Date:
d.
annuity
121. Using the provided present value tables, if an investment is made now for $20,000 that will generate a cash inflow of
$7,000 a year for the next 4 years, what would be the present value of the investment cash inflows, assuming an earnings
rate of 12%?
a.
$20,352
b.
$3,969
c.
$22,190
d.
$21,259
122. Which of the following are present value methods of analyzing capital investment proposals?
a.
internal rate of return and average rate of return
b.
average rate of return and net present value
c.
net present value and internal rate of return
d.
net present value and cash payback
123. Which of the following is a method of analyzing capital investment proposals that ignores present value?
a.
internal rate of return
b.
net present value
c.
discounted cash flow
d.
average rate of return
124. Which of the following can be used to place capital investment proposals involving different amounts of investment
on a comparable basis for purposes of net present value analysis?
a.
price-level index
b.
future value index
c.
rate of investment index
d.
present value index
125. In capital rationing, alternative proposals that survive initial and secondary screening are normally evaluated in terms
of
a.
present value
b.
qualitative factors
c.
maximum cost
d.
net cash flow
126. The present value index is computed using which of the following formulas?
a.
Amount to Be Invested ÷ Average Rate of Return
b.
Total Present Value of Net Cash Flow ÷ Amount to Be Invested
c.
Total Present Value of Net Cash Flow ÷ Average Rate of Return
d.
Amount to Be Invested ÷ Total Present Value of Net Cash Flow
127. A series of equal cash flows at fixed intervals is termed a(n)
a.
present value index
b.
price-level index
c.
net cash flow
Name:
Class:
Date:
128. Periods in time that experience increasing price levels are known as periods of
a.
inflation
b.
recession
c.
depression
d.
deflation
129. The primary advantages of the average rate of return method are its ease of computation and the fact that
a.
it is especially useful to managers whose primary concern is liquidity
b.
there is less possibility of loss from changes in economic conditions and obsolescence when the commitment
is short term
c.
it emphasizes the amount of income earned over the life of the proposal
d.
rankings of proposals are necessary
130. The management of Idaho Corporation is considering the purchase of a new machine costing $430,000. The
company’s desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through
5 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 of this investment:
Year
Income from
Operations
Net Cash
Flow
1
$100,000
$180,000
2
40,000
120,000
3
20,000
100,000
4
10,000
90,000
5
10,000
90,000
The net present value for this investment is
a.
$16,400
b.
$25,200
c.
$(99,600)
d.
$(126,800)
131. The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. The
company’s desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through
5 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 of this investment:
Year
Income from
Operations
Net Cash
Flow
1
$100,000
$180,000
2
40,000
120,000
3
40,000
100,000
4
10,000
90,000
5
10,000
120,000
The net present value for this investment is
a.
$36,400
b.
$55,200
Name:
Class:
Date:
c.
$(16,170)
d.
$(126,800)
132. Hayden Company is considering the acquisition of a machine that costs $675,000. The machine is expected to have a
useful life of 6 years, a negligible residual value, an annual net cash flow of $150,000, and annual income from operations
of $87,500. What is the estimated cash payback period for the machine?
a.
3.5 years
b.
4 years
c.
4.5 years
d.
5 years
133. Which method of evaluating capital investment proposals uses present value concepts to compute the rate of return
from the net cash flows?
a.
internal rate of return method
b.
cash payback
c.
net present value method
d.
average rate of return method
134. Using the following partial table of present value of $1 at compound interest, the present value of $15,000 to be
received 3 years hence with earnings at the rate of 6% a year is
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.
$12,600
b.
$11,880
c.
$13,350
d.
$11,265
135. Decisions to install new equipment, replace old equipment, and purchase or construct a new building are examples of
a.
sales mix analysis
b.
variable cost analysis
c.
capital investment analysis
d.
variable cost analysis
136. All of the following qualitative considerations may impact capital investment analysis except
a.
manufacturing productivity
b.
manufacturing sunk cost
c.
manufacturing flexibility
d.
market opportunities
Use this information for River Corporation to answer the questions that follow.
The management of River Corporation is considering the purchase of a new machine costing $380,000. The company’s
desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition
Name:
Class:
Date:
to the foregoing information, use the following data in determining the acceptability of this investment:
Year
Income from
Operations
Net Cash
Flow
1
$20,000
$95,000
2
20,000
95,000
3
20,000
95,000
4
20,000
95,000
5
20,000
95,000
137. The net present value for this investment is
a.
$20,140
b.
$(20,140)
c.
$19,875
d.
$(19,875)
138. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is
$100,000. The present value of the future cash flows at the company’s desired rate of return is $100,000. The IRR on the
project is 12%. Which of the following statements is true?
a.
The project should not be accepted because the net present value is negative.
b.
The desired rate of return used to compute the present value of the future cash flows is less than 12%.
c.
The desired rate of return used to compute the present value of the future cash flows is more than 12%.
d.
The desired rate of return used to compute the present value of the future cash flows is equal to 12%.
139. The management of California Corporation is considering the purchase of a new machine costing $400,000. The
company’s desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through
5 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 of this investment:
Year
Income from
Operations
Net Cash
Flow
1
$100,000
$180,000
2
40,000
120,000
3
20,000
100,000
4
10,000
90,000
5
10,000
90,000
The present value index for this investment is
a.
0.88
b.
1.45
c.
1.14
d.
0.70
140. Using the following partial table for the present value of $1 at compound interest, determine the present value of
$50,000 to be received 3 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
Name:
Class:
Date:
3
0.840
0.751
0.712
4
0.792
0.683
0.636
a.
$37,550
b.
$31,800
c.
$35,600
d.
$39,850
141. The production department is proposing the purchase of an automatic insertion machine. It has identified three
machines and has asked the accountant to analyze them to determine the best average rate of return. Which machine has
the best average rate of return?
Machine A
Machine B
Machine C
Estimated average annual income
$ 40,000
$ 50,000
$ 75,000
Average investment
300,000
250,000
500,000
a.
Machine B
b.
Machine C
c.
Machines A and B
d.
Machine A
142. The management of Indiana Corporation is considering the purchase of a new machine costing $400,000. The
company’s desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through
5 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 of this investment:
Year
Income from
Operations
Net Cash
Flow
1
$100,000
$180,000
2
60,000
120,000
3
30,000
100,000
4
10,000
90,000
5
10,000
90,000
The average rate of return for this investment is
a.
18%
b.
21%
c.
53%
d.
10%
143. T-Bone Company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested
is $150,000. The present value of the future cash flows is $141,000. Should the company invest in this project?
a.
Yes, because net present value is $9,000.
b.
Yes, because net present value is $(9,000).
c.
No, because net present value is $(9,000).
d.
No, because net present value is $(9,000).
Use these present value tables to answer the questions that follow.
Here is a table for the present value of $1 at compound interest.
Name:
Class:
Date:
151. Also referred to as capital budgeting
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
5
0.747
0.621
0.567
Here is a table for the present value of an annuity of $1 at compound interest.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
144. Using the provided present value tables, what would be the present value of $15,000 to be received at the end of each
of the next 2 years, assuming an earnings rate of 6%?
a.
$27,495
b.
$26,040
c.
$30,000
d.
$25,350
Match each of the following capital investment evaluation methods with the category (a or b) to which it belongs.
a.
Method that does not use present value
b.
Method that uses present value
145. Cash payback method
146. Internal rate of return method
147. Average rate of return method
148. Net present value method
Match each of the following descriptions with the term (a–e) it best describes.
a.
Capital investment analysis
b.
Time value of money concept
c.
Net present value method
d.
Average rate of return
e.
Cash payback period
149. Recognizes that a dollar today is worth more than a dollar tomorrow
150. Often referred to as the discounted cash flow method
Name:
Class:
Date:
152. Average annual income as a percentage of average investment
153. Can be determined by initial cost divided by annual net cash inflow of an investment
Match each of the following definitions with the term (a–f) it best defines.
a.
Capital rationing
b.
Annuity
c.
Capital investment analysis
d.
Internal rate of return method
e.
Payback period
f.
Accounting rate of return
154. A measure of the average income as a percent of the average investment
155. The process by which management allocates funds among various capital investment proposals
156. A stream of equal cash flow amounts
157. A formal means of analyzing long-range investment decisions
158. Uses present value concepts to compute the rate of return on an investment from a capital investment proposal based
on its expected net cash flows
159. The length of time it will take to recover through cash inflows the dollars of a capital outlay
160. Proposals M and N each cost $550,000, have 6-year lives, and have expected total cash flows of $750,000. Proposal
M is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal N are as follows:
Year 1
$250,000
Year 2
200,000
Year 3
150,000
Year 4
75,000
Year 5
50,000
Year 6
25,000
Determine the cash payback period for each proposal.
161. A project is estimated to cost $248,400 and provide annual cash flows of $50,000 for 8 years. Determine the internal
rate of return for this project, using the following present value of an annuity table.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
6
4.917
4.355
4.111
7
5.582
4.868
4.564
Name:
Class:
Date:
8
6.210
5.335
4.968
9
6.802
5.759
5.328
10
7.360
6.145
5.650
162. Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of
4 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
$ 75,000
$280,000
2
100,000
300,000
3
109,000
200,000
4
36,000
120,000
$320,000
$900,000
The company’s minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for Years 1
through 4 is 0.893, 0.797, 0.712, and 0.636, respectively.
Determine the net present value.
163. A $400,000 capital investment proposal has an estimated life of 4 years and no residual value. The estimated net cash
flows are as follows:
Year
Net Cash Flow
1
$200,000
2
150,000
3
90,000
4
80,000
The minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of
12% for Years 1 through 4 is 0.893, 0.797, 0.712, and 0.636, respectively.
Determine the net present value.
164. The net present value has been computed for Proposals P and Q. Relevant data are as follows:
Proposal P
Proposal Q
Amount to be invested
$245,000
$460,000
Total present value of net cash flow
296,500
425,000
Determine the present value index for each proposal. Round answers to two decimal places.
165. An 8-year project is estimated to cost $400,000 and have no residual value. If the straight-line depreciation method is
used and the average rate of return is 5%, determine the estimated annual net income.
166. Proposals A and B each cost $600,000 and have 5-year lives. Proposal A is expected to provide equal annual net cash
flows of $159,000, while the net cash flows for Proposal B are as follows:
Year 1
$150,000
Year 2
140,000
Year 3
110,000
Year 4
150,000
Year 5
50,000
$600,000
Name:
Class:
Date:
Determine the cash payback period for each proposal. Round answers to two decimal places.
167. Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of
4 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
$ 75,000
$285,000
2
100,000
290,000
3
109,000
190,000
4
36,000
125,000
$320,000
$890,000
The company’s minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for Years 1
through 4 is 0.893, 0.797, 0.712, and 0.636, respectively.
Determine the average rate of return on the investment.
168. An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next 4 years. What is
the investment’s internal rate of return?
Here is a table for the present value of $1 at compound interest.
Year
6%
10%
12%
15%
1
0.943
0.909
0.893
0.870
2
0.890
0.826
0.797
0.756
3
0.840
0.751
0.712
0.658
4
0.792
0.683
0.636
0.572
5
0.747
0.621
0.567
0.497
Here is a table for the present value of an annuity of $1 at compound interest.
Year
6%
10%
12%
15%
1
0.943
0.909
0.893
0.870
2
1.833
1.736
1.690
1.626
3
2.673
2.487
2.402
2.283
4
3.465
3.170
3.037
2.855
5
4.212
3.791
3.605
3.353
169. Tipper Co. is considering a 10-year project that is estimated to cost $700,000 and has no residual value. Tipper 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 Tipper Co.
170. A project is estimated to cost $273,840 and provide annual net cash flows of $60,000 for 7 years. Determine the
internal rate of return for this project, using the following present value of an annuity table.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
6
4.917
4.355
4.111
7
5.582
4.868
4.564
Name:
Class:
Date:
8
6.210
5.335
4.968
9
6.802
5.759
5.328
10
7.360
6.145
5.650
171. Determine the average rate of return for a project that is estimated to yield total income of $600,000 over 4 years,
cost $840,000, and has an $80,000 residual value. Round the answer to one decimal place.
172. Jimmy Co. is considering a 12-year project that is estimated to cost $1,050,000 and has no residual value. Jimmy Co.
seeks to earn an average rate of return of 18% 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 Jimmy Co.
173. What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky?
174. Project A requires an original investment of $50,000. The project will yield cash flows of $15,000 per year for 7
years. Project B has a computed net present value of $13,500 over a 4-year life. Project A could be sold at the end of 4
years for $25,000. (a) Using the tables that follow, determine the net present value of Project A over a 4-year life with
salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greater net present value?
Here is a table for the 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
5
0.747
0.621
0.567
Here is a table for the present value of an annuity of $1 at compound interest.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
175. BAM Co. is evaluating a project requiring a capital expenditure of $806,250. The project has an estimated life of 4
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
$ 75,000
$285,000
2
102,000
290,000
3
109,500
190,000
4
36,000
125,000
$322,500
$890,000
The company’s minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for Years 1
through 4 is 0.893, 0.797, 0.712, and 0.636, respectively.
Determine (a) the average rate of return on investment, including the effect of depreciation on the investment, and (b) the
net present value.
176. A project has estimated annual net cash flows of $60,000. It is estimated to cost $240,000. Determine the cash
Name:
Class:
Date:
3
0.658
8
0.327
payback period.
177. A $550,000 capital investment proposal has an estimated life of 4 years and no residual value. The estimated net cash
flows are as follows:
Year
Net Cash Flow
1
$300,000
2
280,000
3
208,000
4
180,000
The minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of
12% for Years 1 through 4 is 0.893, 0.797, 0.712, and 0.636, respectively.
Determine the net present value.
178. Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. The project has an estimated
life of 4 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
$ 90,000
$210,000
2
80,000
200,000
3
40,000
160,000
4
30,000
150,000
$240,000
$720,000
The company’s minimum desired rate of return for net present value analysis is 15%. The present value of $1 at compound
interest of 15% for Years 1 through 4 is 0.870, 0.756, 0.658, and 0.572, respectively.
Determine (a) the average rate of return on investment, using straight-line depreciation, and (b) the net present value.
179. Briefly describe the time value of money. Why is the time value of money important in capital investment analysis?
180. Sunrise Inc. is considering a capital investment proposal that costs $227,500 and has an estimated life of 4 years and
no residual value. The estimated net cash flows are as follows:
Year
Net Cash Flow
1
$97,500
2
80,000
3
60,000
4
40,000
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 Years 1 through 4 is 0.909, 0.826, 0.751, and 0.683, respectively. Determine the net present value. Round
interim answers to the nearest dollar.
181. What is the present value of $8,000 to be received at the end of 6 years if the required rate of return is 15%?
Here is the table for the present value of $1 at compound interest of 15%.
Year
15%
Year
15%
1
0.870
6
0.432
2
0.756
7
0.376
Name:
Class:
Date:
4
0.572
9
0.284
5
0.497
10
0.247
Here is the table for the present value of an annuity of $1 at compound interest of 15%.
Year
15%
Year
15%
1
0.870
6
3.785
2
1.626
7
4.160
3
2.283
8
4.487
4
2.855
9
4.772
5
3.353
10
5.019
182. Project A requires an original investment of $65,000. The project will yield cash flows of $15,000 per year for 7
years. Project B has a computed net present value of $5,500 over a 5-year life. Project A could be sold at the end of 5
years for a price of $30,000. (a) Using the tables that follow, determine the net present value of Project A over a 5-year
life with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present
value?
Here is a table for the 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
5
0.747
0.621
0.567
Here is a table for the present value of an annuity of $1 at compound interest.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
183. Proposals L and K each cost $600,000, have 6-year lives, and have expected total cash flows of $720,000. Proposal L
is expected to provide equal annual net cash flows of $170,000, 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
50,000
Year 5
100,000
Year 6
20,000
$720,000
Determine the cash payback period for each proposal. Round answers to two decimal places.
184. Norton Company is considering a closed-loop geothermal heat pump to replace its existing heating system. The
project will require an initial investment of $750,000 and will return $200,000 each year for 5 years.
a. If taxes are ignored and the required rate of return is 9%, what is the project’s net present value?
Name:
Class:
Date:
b. Based on this analysis, should Norton Company proceed with the project?
Here is the table for the present value of $1 at compound interest of 9%.
Year
9%
Year
9%
1
0.917
6
0.596
2
0.842
7
0.547
3
0.772
8
0.502
4
0.708
9
0.460
5
0.650
10
0.422
Here is the table for the present value of an annuity of $1 at compound interest of 9%.
Year
9%
Year
9%
1
0.917
6
4.486
2
1.759
7
5.033
3
2.531
8
5.535
4
3.240
9
5.995
5
3.890
10
6.418
185. Identify four capital investment evaluation methods discussed in the chapter and discuss the strengths and
weaknesses of each method.
186. A project has estimated annual cash flows of $95,000 for 4 years and is estimated to cost $260,000. Assume a
minimum acceptable rate of return of 10%. Using the following tables determine the (a) net present value of the project
and (b) the present value index, rounded to two decimal places.
Here is a table for the 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
5
0.747
0.621
0.567
Here is a table for the present value of an annuity of $1 at compound interest.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
187. A project has estimated annual net cash flows of $80,000. It is estimated to cost $600,000. Determine the cash
payback period.
188. A 6-year project is estimated to cost $350,000 and have no residual value. If the straight-line depreciation method is
used and the average rate of return is 12%, determine the estimated average annual income.
189. Determine the average rate of return for a project that is estimated to yield total income of $250,000 over 4 years,
cost $480,000, and has a $20,000 residual value.
Name:
Class:
Date:
190. A project has estimated annual cash flows of $90,000 for 3 years and is estimated to cost $250,000. Assume a
minimum acceptable rate of return of 10%. Using the following tables, determine the (a) net present value of the project
and (b) the present value index, rounded to two decimal places.
Here is a table for the 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
5
0.747
0.621
0.567
Here is a table for the present value of an annuity of $1 at compound interest.
Year
6%
10%
12%
1
0.943
0.909
0.893
2
1.833
1.736
1.690
3
2.673
2.487
2.402
4
3.465
3.170
3.037
5
4.212
3.791
3.605
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date:
Name:
Class:
Date: