Chapter 10—Long-Term (Capital Investment) Decisions Key
1. The time value of money concept focuses on:
2. Capital investment decisions often involve all of the following except:
3. Which of the following statements is true regarding the concept of the time value of money?
4. A quantitative analysis of capital investment decisions should consider:
5. Which of the following is not a typical cash outflow associated with a capital investment?
6. NPV calculations generally require which of the following simplifying assumptions?
7. The NPV method assumes that cash inflows associated with a particular capital investment decision are:
8. The NPV method assumes that cash flows are reinvested at:
9. The IRR method assumes that cash inflows associated with a particular investment occur:
10. The IRR method assumes that cash inflows associated with a particular capital investment decision are:
11. The IRR method assumes that cash flows are reinvested at:
12. When using the NPV method, the interest rate used to discount cash flows should not be thought of as the:
13. Which of the following statements is false regarding the interest rate used in NPV calculations?
14. If an investment’s net present value is positive, then:
15. When using the NPV method for a particular investment decision, if the present value of all cash inflows is
greater than the present value of all cash outflows, then:
16. When using the NPV method for a particular investment decision, if the present value of the cash inflows is
equal to the present value of the cash outflows, then:
17. If the net present value of an investment is negative, then:
18. If the net present value of an investment is negative, then:
19. Blossoms Inc., a local florist, is considering replacing its current refrigerator used for storing flowers with a
larger one. The estimated cost of the new refrigerator will be $30,000. Using a discount rate of 15%, the
company calculates a net present value for the new refrigerator of $6,000. Based on this information, which of
the following statements is true?
20. Cameo Inc., a local company specializing in home repairs, is considering replacing its older van with a new
and larger one. The estimated cost of the new van will be $65,000. Using a discount rate of 18%, the company
calculates a net present value for the new van of $(5,000). Based on this information, which of the following
statements is true?
21. Newman Auto Repair is considering the purchase of a hydraulic machine costing approximately $35,000.
Using a discount rate of 18%, the present value of future cash inflows are calculated to be $42,000. To yield at
least an 18% return, the actual cost of the machine should not exceed the $35,000 estimate by more than:
22. Mid-Town Plumbers Inc. is considering the purchase of a machine costing approximately $4,000. Using a
discount rate of 20%, the present value of future cash inflows are calculated to be $4,000. To yield at least an
20% return, the actual cost of the machine should not exceed the $4,000 estimate by more than:
23. Big Al’s is considering the purchase of a capital investment costing $15,000. Annual cash savings of $5,000,
with a present value at 15 percent of $18,923, are expected for the next six years. Given this information, which
of the following statements is true?
24. Floyd Manufacturing purchased an asset costing $50,000. Annual operating cash inflows are expected to be
$11,000 each year for eight years. No salvage value is expected at the end of the asset’s life. Assuming Floyd’s
cost of capital is 12 percent, what is the asset’s net present value? (ignore income taxes)
25. O’Malley Inc. purchased an asset costing $90,000. Annual operating cash inflows are expected to be
$20,000 each year for six years. No salvage value is expected at the end of the asset’s life. Assuming O’Malley’s
cost of capital is 16 percent, what is the asset’s net present value? (ignore income taxes)
26. C & K Inc. purchased a delivery van costing $65,000. Annual operating cash inflows are expected to be
$18,000 each year for six years. At the end of the asset’s life, the salvage value is expected to be $5,000.
Assuming C & K’s cost of capital is 15 percent, what is the asset’s net present value? (ignore income taxes)
27. Mid-Town Products Inc. purchased equipment costing $100,000. Annual operating cash inflows are
expected to be $30,000 each year for five years. At the end of the equipment’s life, the salvage value is expected
to be $6,000. If Mid-Town’s cost of capital is 14 percent, what is the asset’s net present value? (ignore income
taxes)
28. Palmetto Products is considering the purchase of a new industrial machine. The estimated cost of the
machine is $50,000. The machine is expected to generate annual cash inflows for the next four years as follows:
Year
Annual cash flow
1
$25,000
2
$20,000
3
$20,000
4
$15,000
The machine is not expected to have a residual value at the end of its useful life. If Palmetto uses a discount rate of 16%, what is the expected net
present value of the machine? (ignore taxes)
29. Pristine Products is considering the purchase of a new machine. The estimated cost of the machine is
$25,000. The machine is expected to generate annual cash inflows for the next four years as follows:
Year
Annual cash flow
1
$15,000
2
$10,000
3
$ 5,000
4
$ 5,000
The machine is not expected to have a residual value at the end of its useful life. If the company uses a discount rate of 12%, what is the expected net
present value of the machine? (ignore taxes)
30. Trenton Inc. is considering an equipment purchase that has a cost of $15,000. The equipment is expected to
have a salvage value of $2,000 at the end of three years. In addition, the equipment is expected to generate cash
flows over the next three years as follows:
Year
Annual cash flow
1
$8,000
2
$6,000
3
$3,000
If Trenton’s cost of capital is equal to 14 percent, the net present value of the equipment is: (ignore income taxes)
31. Woody Manufacturing Inc. is considering the purchase of a new machine. They have narrowed their choices
down to two machines, Machine #1 and Machine #2, each having a cost of $40,000. The following information
is available regarding the expected cash inflows from each machine:
Year
Machine #1
Machine #2
1
$20,000
$60,000
2
20,000
0
3
20,000
0
When using net present value analysis, Woody uses the same cost of capital for both machines and both machines have a positive net present value.
Based on the above information, which of the following statements is true?
32. Grant Inc. would like to replace an outdated piece of equipment with a newer model. Grant has determined
that the new equipment needs to generate annual cash inflows of $10,000 for six years and have a salvage value
at the end of year six of $4,000. Grant uses a cost of capital equal to 15 percent when making capital investment
decisions. Given this information, which of the following statements is true regarding the cost of the new
equipment if, using net present value analysis, Grant decides to purchase the new equipment because it has a
positive net present value?
33. If the net present value (NPV) of an investment is zero, then the internal rate of return (IRR) is:
34. If a project has an internal rate of return of 12% and a negative net present value, which of the following
statements is true regarding the discount rate used for the net present value computation?
35. If a project has an internal rate of return of 14% and a positive net present value, which of the following
statements is true regarding the discount rate used for the net present value computation?
36. The internal rate of return (IRR) of a project can be calculated using all of the following except:
37. Finch Corporation purchased an asset costing $10,000. Annual operating cash inflows generated from the
asset are expected to be $1,610 each year for eight years. No salvage value is expected at the end of the asset’s
life. Using time value of money tables, which of the following rates is closest to the internal rate of return on the
project?
38. Cardinal Inc. purchased an asset costing $25,000. Annual operating cash inflows generated from the asset
are expected to be $6,595 each year for five years. No salvage value is expected at the end of the asset’s life.
Using time value of money tables, which of the following rates is closest to the internal rate of return on the
project?
39. Bluebird Inc. requires all capital investments to generate an internal rate of return of 14%. Bluebird is
currently considering an investment that is expected to generate annual cash inflows of $12,000 for 5 years. The
cost of the investment should not exceed:
40. Oakwood Inc. requires all capital investments to generate an internal rate of return of 16%. Oakwood is
currently considering an investment that is expected to generate annual cash inflows of $15,000 for 7 years. The
cost of the investment should not exceed:
41. Butner Inc. requires all capital investments to generate an internal rate of return of 16%. The company is
considering an investment costing $80,000 that is expected to generate equal, annual cash inflows for 5 years.
The equal, cash inflows are expected to be:
42. Deciding whether or not an investment meets a predetermined company standard is called a:
43. A company choosing between two or more acceptable investment alternatives is called a:
44. The calculation of the profitability index (PI) is most helpful for which type of decisions?
45. Which of the following statements regarding the profitability index is true?
46. Which of the following statements comparing the NPV and IRR methods is false?
47. Vess Inc. is considering the following two projects:
Project #1
Project #2
Initial investment
$20,000
$60,000
PV of cash inflows
26,000
66,000
Which of the following statements is true when comparing each of these projects?
48. NC Products Inc. is considering investing in one of two projects. Both projects have a net present value of
$25,000; however, Project #1 requires an initial investment of $300,000 while Project #2 requires an initial
investment of $700,000. Based on this information, which of the following statements is true?
49. Charles Inc. has the following information available regarding one of the projects it is considering:
Initial investment
$50,000
PV of cash inflows
55,000
The profitability index of this project is:
50. Peterson Inc. has the following information available regarding one of the projects it is considering:
Initial investment
$75,000
PV of cash inflows
$100,000
Internal rate of return
15%
The profitability index of this project is:
51. Adam’s Manufacturing has the following information available regarding one of the projects it is
considering:
Initial investment
$500,000
Net present value
$80,000
The profitability index of this project is:
52. Richardson Corporation has the following information available regarding one of the projects it is
considering:
Initial investment
$800,000
Net present value
$100,000
The profitability index of this project is:
53. Talley Manufacturing has a project that requires an initial investment of $60,000 and has the following
expected stream of cash flows:
Year
Annual cash flow
1
$40,000
2
$30,000
3
$20,000
Assuming the company’s cost of capital is 14 percent, what is the profitability index for the project?
54. ABC Manufacturing has a project that requires an initial investment of $100,000 and has the following
expected stream of cash flows:
Year
Annual cash flow
1
$80,000
2
$60,000
3
$20,000
Assuming the company’s cost of capital is 12 percent, what is the profitability index for the project?
55. Haven Inc. is in the 35 percent tax bracket and has a 12 percent rate of return. The after-tax rate of return is:
56. Morris Manufacturing is in the 40 percent tax bracket and has a 9 percent rate of return. The after-tax rate of
return is:
57. Which of the following expenses for accounting purposes generates an after-tax cash inflow for purposes of
net present value computations?
58. Which of the following statements is false regarding the impact of taxes on net present value computations?
59. Assuming taxes are a consideration, which of the following would not have an overall positive effect on
cash inflows when a company is computing the net present value of a potential capital investment?