ch14 Key
1. Strategic planning is the decisions that management makes on a daily basis.
2. Capital investment decisions should be not made within the context of an organization’s strategic plans.
3. Organizations make three general types of long-term capital investments: 1) Replacements and minor
improvements, 2) Expansion, and 3) Strategic moves.
4. Using time horizons that are too short is a potential difficulty in the justification of investments in high–tech
projects.
5. If past financial records are used to help determine the financial analysis for a project, the financial records
should never be adjusted for inflation.
6. The primary purpose of a due diligence investigation is to determine what long-term capital investments that
a company should make.
7. Using a discount rate that is too low is a potential difficulty in the justification of investments in high–tech
projects.
8. When making a decision for a strategic move, past financial records would tend to be very useful.
9. Sensitivity analysis is the study of how the outcome of a decision–making process changes as one or more of
the assumptions change.
10. Sensitivity analysis is performed after the long-term investment decision has been made.
11. Corporate managers can ignore the need to make environmentally friendly investment decisions.
12. Audits of the decision and implementation of investment projects reveal how well the investment performed
compared to expectations.
13. Not–for–profit organizations do not have to consider tax effects on cash flows when determining capital
investment decisions.
14. Omitting certain data from capital investment proposals or making inaccurate projections are not ethical
problems that may be encountered in capital investment decision making.
15. Potential competitor actions should be ignored in strategic investment decisions because they cannot be
known with certainty.
16. Where the possibility of competitor reaction exist, an Expected Value Analysis Decision Tree should assign
a value to a probability to possible reactions
17. Real option analysis recognizes that most investments decisions are not reversible at no cost
18. (Appendix) Discounted cash flow analysis uses cash flows, not the revenues and expenses computed using
accrual accounting.
19. (Appendix) The present value of receiving $1 each year for the next three years would be the less than
receiving $3 at the end of three years.
20. (Appendix) Tax credits effectively reduce the cost of making investments by decreasing the amount of taxes
that a company has to pay.
21. (Appendix) The present value of paying $12,000 in year 3 would be more than $12,000.
22. (Appendix) If the net present value is zero, the internal rate of return will be the same as the discount rate
used in determining net present value.
23. (Appendix) The internal rate of return and the net present value methods will give the same accept/reject
decision for the same project.
24. (Appendix) If the discount rate used is increased, both the net present value and the internal rate of return
will decrease.
25. (Appendix) The internal rate of return method is generally considered to be a superior method to the net
present value method.
26. (Appendix) The time value of money is the concept that cash received later is worth more than cash
received earlier.
27. (Appendix) The discount rate takes risk but not inflation into account.
28. (Appendix) If the net present value for a project is negative, that would also indicate that the internal rate of
return must be negative.
29. A due diligence investigation is considered most important for which of the following types of long term
capital investment decisions?
30. For which of the following long term capital investment decisions would past financial records most likely
not be useful for?
31. For a long term capital investment decision that is classified as a strategic move, which of the following
sources of information would likely be the most useful?
32. Which of the following would not be a cause of difficulties in the justification of investments in high–tech
projects?
33. Which of the following would be nonfinancial factors to consider in a long-term capital investment
decision?
34. ____is the study of how the outcome of a decision–making process changes as one or more of the
assumptions change.
35. The installation of a more sophisticated inventory control system would be an example of what type of
long–term capital investment?
36. Which of the following are ethical problems in capital investment decisions?
37. (Appendix) Which of the following organizations would not consider the tax shield from depreciation in
determining capital investment proposals?
38. __________is the economic value of a project at a point in time.
39. (Appendix) The discount rate takes which of the following factors into consideration?
40. (Appendix) Which of the following would increase the net present value of a proposed investment?
41. (Appendix) Without knowing a discount rate, which of the following would most likely represent the
highest present value?
42. (Appendix) Without knowing any other information, which of the following projects would definitely be
acceptable to invest in?
43. (Appendix) Which of the following could be calculated if the discount rate is not known?
44. (Appendix) Which of the following methods assumes that net cash inflows are reinvested at the
predetermined discount rate?
45. (Appendix) How would an increase in the discount rate used affect the net present value of a project
proposal?
46. (Appendix) Lewington Corp. has purchased new equipment that cost $144,965. The equipment is expected
to last three years and to provide cash inflows as follows:
Year 1 – $45,000
Year 2 – $60,000
Year 3 – ?
Assuming that the equipment will have an internal rate of return of 12%, what is the expected cash inflow for
year 3?
47. (Appendix) How would an increase in the discount rate used affect the internal rate of return of a project
proposal?
48. (Appendix) How would an increase in the income tax rate affect the net present value of a project proposal?
49. (Appendix) How would an increase in the income tax rate affect the internal rate of return of a project
proposal?
50. (Appendix) If the discount rate used is decreased, which of the following would increase?
51. (Appendix) If the income tax rate is decreased, which of the following would increase?
52. (Appendix) Which of the following factors is generally not important when calculating a project‘s net
present value? (CPA adapted)
53. For which of the following cash flow scenarios could the net present value method be used?
54. Tracy Perry, the accountant for Levy Corp., calculated the net present value for a project proposal. In
making the analysis, Ms. Perry assumed that cash inflows would occur at the end of the year, when the cash
inflows actually occurred evenly during the year. How will the net present value be affected?
55. General Motors’ decision to start Saturn would be an example of what type of long-term capital investment?
56. A project should be invested in if:
57. When operating in an inflationary environment, what adjustment should be made to the discount rate used
when calculating a project‘s net present value?
58. (Appendix) Which of the following considers the time value of money?
59. (Appendix) The Chung Corp. is considering investing in three mutually exclusive projects. Each project will
require a $200,000 initial investment and will provide cash flows as follows for a three–year period: (Each
project will not last beyond three years)
If Chung Corp. considers the time value of money in determining which project to invest in, which project
represents the best investment?
60. (Appendix) If the net present value is zero and discount rate used is 12 percent, what is the internal rate of
return?
61. (Appendix) If the internal rate of return and the discount rate used are both 14 percent, what is the net
present value of a project?
62. (Appendix) Ping Inc. is considering an investment in automated equipment for the manufacturing process.
The equipment will cost $210,000, have a useful life of five years, and generate after tax cash flows of $70,000
per year. What is the approximate internal rate of return?
Use the following to answer questions 63-65:
Parker Industries is considering purchasing a new machine, instead of preparing its product by hand. The
machine would cost $90,000. It would have a life of five years, but would require a $5,000 overhaul at the end
of the third year. After five years, the machine could be sold for $15,000. The machine will cost $17,000 per
year to operate. The company currently incurs a direct labor cost of $40,000 per year. This cost will not be
incurred if the new machine is purchased. The machine will also allow the company to produce an additional
5,000 units per year. The company realizes a contribution margin of $0.70 per unit. Evans requires a 10% return
on all investments in equipment. (Ignore taxes)
Hilton – Chapter 14
63. (Appendix) What are the net annual cash inflows provided by the machine?
64. (Appendix) What is the approximate net present value?
65. (Appendix) The internal rate of return for the machine would be:
Use the following to answer questions 66-71:
(CMA adapted) Steinberg Industries is considering replacing an existing production machine with a new
technologically improved machine effective January 1, 2009. The following information is being considered by
Steinberg:
Ⴠ The new machine would be purchased for $190,000, including costs for shipping, installation, and testing.
Ⴠ The new machine is expected to increase annual sales by 20,000 units at a sales price of $40 per unit.
Incremental operating costs include $30 per unit in variable costs and total fixed costs of $40,000 per year.
Ⴠ The investment in the new machine will require an immediate increase in working capital of $40,000. This
cash outflow will be released at the end of year 5.
Ⴠ Steinberg uses straight-line depreciation for financial reporting and tax reporting purposes. The new
machine has an estimated useful life of 5 years and no salvage value is used in calculating depreciation.
Ⴠ Steinberg is subject to a 40% income tax rate.
Ⴠ Steinberg will sell the fully depreciated machine for $20,000 at the end of year 5.
Ⴠ Steinberg uses the net present value method to analyze investments and will use the following factors and
rates:
Hilton – Chapter 14
66. (Appendix) Steinberg Industries discounted annual depreciation tax shield is: