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1. If the internal rate of return exceeds the required rate of return for a project, then the net
present value of that project is positive.
2. In comparing two investment alternatives, the difference between the net present values
of the two alternatives obtained using the total cost approach will be the same as the net present
value obtained using the incremental cost approach.
3. The simple rate of return is the same as the internal rate of return.
4. The internal rate of return for a project is the discount rate that makes the net present
value of the project equal to zero.
5. If two projects require the same amount of investment, then the preference ranking
computed using either the project profitability index or the net present value will be the same.
6. In preference decisions, the profitability index and internal rate of return methods may
produce conflicting rankings of projects.
7. The project profitability index is used to compare the internal rates of return of two
companies with different investment amounts.
8. Preference decisions attempt to determine which of many alternative investment projects
would be the best for the company to accept.
9. Projects with shorter payback periods are always more profitable than projects with longer
payback periods.
10. One criticism of the payback method is that it ignores cash flows that occur after the
payback point has been reached.
11. A very useful guide for making investment decisions is: The shorter the payback period,
the more profitable the project.
12. If new equipment is replacing old equipment, any salvage received from sale of the old
equipment should not be considered in computing the payback period of the new equipment.
13. The simple rate of return focuses on accounting net operating income rather than on cash
flows.
14. The simple rate of return method places its focus on cash flows instead of on accounting
net operating income.
15. If a company has computed the project profitability index of an investment project as
0.15, then:
16. Spring Company has invested $20,000 in a project. Spring's discount rate is 12% and the
project profitability index on the project is zero. Which of the following statements would be true?
I. The net present value of the project is $20,000.
II. The project's internal rate of return is equal to 12%.
17. If the internal rate of return is used as the discount rate in computing net present value,
the net present value will be:
18. The discount rate must be specified in advance for which of the following methods?
19. An investment project for which the net present value is $300 would result in which of the
following conclusions?
20. In capital budgeting, what will be the effect on the following if there is an increase in the
working capital needed for a project?
21. The capital budgeting method that recognizes the time value of money by discounting
cash flows over the life of the project, using the company's required rate of return as the discount
rate is called the:
22. The internal rate of return of an investment project is the:
23. If an investment has a project profitability index of 0.15, then the:
24. If investment A has a payback period of 3 years and investment B has a payback period
of 4 years, then:
25. Which one of the following statements about the payback method of capital budgeting is
correct?
26. The length of time required to recover the initial cash outlay for a project is determined
by using the:
27. (Ignore income taxes in this problem.) An investment of P dollars now will yield cash
inflows of $3,000 at the end of the first year and $2,000 at the end of the fourth year. If the
internal rate of return for this investment is 20%, then the value of P is:
28. (Ignore income taxes in this problem.) The Baker Company purchased a piece of
equipment with the following expected results:
The initial cost of the equipment was:
29. (Ignore income taxes in this problem.) The Yates Company purchased a piece of
equipment which is expected to have a useful life of 7 years with no salvage value at the end of
the 7-year period. This equipment is expected to generate a cash inflow of $32,000 each year of
its useful life. If this investment has a internal rate of return of 14%, then the initial cost of the
equipment is:
30. (Ignore income taxes in this problem.) The following information is available on a new
piece of equipment:
The life of the equipment is approximately:
31. (Ignore income taxes in this problem.) Mercredi, Inc., is considering investing in
automated equipment with a ten-year useful life. Managers at Highpoint have estimated the cash
flows associated with the tangible costs and benefits of automation, but have been unable to
estimate the cash flows associated with the intangible benefits. Using the company's 14%
required rate of return, the net present value of the cash flows associated with just the tangible
costs and benefits is a negative $182,560. How large would the annual net cash inflows from the
intangible benefits have to be to make this a financially acceptable investment?
32. (Ignore income taxes in this problem.) A piece of new equipment will cost $70,000. The
equipment will provide a cost savings of $15,000 per year for ten years, after which it will have a
$3,000 salvage value. If the required rate of return is 14%, the equipment's net present value is:
33. (Ignore income taxes in this problem.) Sibble Corporation is considering the purchase of a
machine that would cost $330,000 and would last for 5 years. At the end of 5 years, the machine
would have a salvage value of $50,000. By reducing labor and other operating costs, the machine
would provide annual cost savings of $76,000. The company requires a minimum pretax return of
12% on all investment projects. The net present value of the proposed project is closest to:
34. (Ignore income taxes in this problem.) Benz Company is considering the purchase of a
machine that costs $100,000, has a useful life of 18 years, and no salvage value. The company's
discount rate is 12%. If the machine's net present value is $5,850, then the annual cash inflows
associated with the machine must be (round to the nearest whole dollar):
