Chapter 23—Capital Investment Decisions Key
1. All of the following define capital EXCEPT:
2. All of the following are characteristics of the capital investment decisions that are critical to long-run
profitability EXCEPT:
3. Determining whether capital investment projects meet minimum standards of financial acceptability is
called:
4. Determining whether or not a given investment is best among all acceptable alternatives is called:
5. The present value of $1 to be received 2 years in the future is:
6. Which of the following investments has the greatest present value?
7. Cash outlays for capital assets include all the following EXCEPT:
8. Which of the following expenses are often ignored when making capital budgeting decisions?
9. When making a capital budgeting decision, which of the following is usually NOT discounted?
10. Which of the following is true when making capital budgeting decisions?
11. Which of the following capital budgeting methods ignores the time value of money?
12. The formula for computing the payback period is:
13. Another name for the accounting rate of return is the:
14. The formula for computing unadjusted rate of return is:
15. The formula, Investment Cost divided by Annual Net Cash Inflows, is used to determine an interval of time
in which method?
16. Which of these factors is necessary to compute the payback period for an investment?
17. Which of the following is LEAST preferable for measuring profitability of an investment?
18. Which method measures the amount of time it will take for net cash flows of an investment to equal the cash
outlay?
19. Which of the following does NOT consider the time value of money?
20. Which of the following is a strength of the payback method?
21. Which of the following is a characteristic of the unadjusted rate of return?
22. In order for a project to be acceptable, the rate of return must be larger than the:
23. Curritt Company purchased equipment for $360,000 that is expected to generate cash inflows from
operations of $108,000 in each of the next 5 years. The machine will be depreciated on a straight-line basis with
no salvage value. What is the payback period for the investment by Curritt Company?
24. Curritt Company purchased equipment for $360,000 that is expected to increase revenues $115,200 in each
of the next 5 years. The machine will be depreciated on a straight-line basis with no salvage value. What is the
unadjusted rate of return on the initial investment by Curritt Company?
25. SkiTime Photos plans to spend $74,400 for a new machine, which is expected to generate cash inflows of
$18,600 per year over its useful life of 10 years. The new machine will be depreciated on a straight-line basis
over 10 years with no salvage value. What is the payback period?
26. Boone Corporation expects to buy a machine for $126,000, which will be depreciated over an 8-year period
on a straight-line basis with no salvage value. The machine is expected to generate a net cash flow of $42,000
per year. What is the payback period?
27. Merriam Corporation is considering the purchase of a new machine that costs $18,000, has an expected
useful life of 10 years, and has no salvage value. Merriam estimates that the machine will save the company
$3,000 per year over the 10-year life. The company’s hurdle rate is 12%. Given the data provided, the payback
period for the machine is:
28. Merriam Corporation is considering the purchase of a new machine that costs $18,000, has an expected
useful life of 10 years, and has no salvage value. Merriam estimates that the machine will give the company a
net income of $3,000 per year over the 10-year life. The company’s hurdle rate is 12%. Given the data provided,
the unadjusted rate of return for the machine is:
29. A $240,000 asset that is being depreciated at a rate of 10% per year and will increase a company’s annual
net income by $40,000 a year provides an approximate unadjusted rate of return of:
30. If an investment has a payback period of 13 years and provides annual cash inflows of $14,500, its cost is:
31. Tootie Clothing Store is considering opening a new store. The expected purchase price is $270,000,
expected annual revenues are $150,000, and expected annual costs are $90,000, including $22,500 of
depreciation. The store has a payback period of approximately:
32. Tootie Clothing Store is considering opening a new store. The expected purchase price is $270,000,
expected annual revenues are $150,000, and expected annual costs are $90,000, including $22,500 of
depreciation. The store has an unadjusted rate of return of approximately:
33. What is the average cost of a firm’s debt and its equity?
34. Which of the following is true?
35. When would a project be rejected under the net present value method?
36. The “true” discount rate of a capital investment is calculated by using the:
37. Interpolation is usually associated with which of the following capital budgeting methods?
38. Which of the following would be considered a discounted cash flow method?
39. Which two capital budgeting techniques take the time value of money into consideration?
40. Which method is best to help managers make capital investment decisions that will be LEAST costly to the
organization?
41. Which of the following would have the greatest impact on the net present value of an investment?
42. The internal rate of return capital budgeting method uses the same formula as which of the following?
43. A company’s hurdle rate is the:
44. The net present value of a proposed investment represents the:
45. When using the internal rate of return method, a project will be rejected if:
46. The internal rate of return and the net present value methods for making capital budgeting decisions are
superior to the payback method because they:
47. The internal rate of return method provides a rate of return that approximates:
48. Which of the following capital budgeting methods considers the time value of money?
49. If the net present value of an investment is positive, this represents the:
50. Which of the following situations is one in which a least-cost decision would be used?
51. Clarke Company purchased equipment for $100,000 that is expected to generate cash inflows from
operations of $30,000 in each of the next 5 years. The machine will be depreciated on a straight-line basis with
no salvage value. Assume the following present value factors:
Present Value of
Present Value of
Period
$1 at 12%
an Annuity of $1 at 12%
1
0.8929
0.8929
2
0.7972
1.6901
3
0.7118
2.4018
4
0.6355
3.0373
5
0.5574
3.6048
What would be the net present value of the investment by Clarke Company?
52. Crawford Company expects to invest $144,000 in an asset with a 10-year life. The annual cash inflows from
using the asset are estimated to be $24,000. The company’s expected rate of return for this type of asset is 10%.
The following present value information is available:
At 10%
At 12%
Present value of $1 for 10 periods
0.3855
0.3220
Present value of an annuity of $1 for 10 periods
6.1446
5.6502
The company’s actual rate of return on this asset is:
53. An asset is purchased for $40,000. It is expected to provide an additional $10,000 of annual net cash
inflows. The asset has a 10-year life and an expected salvage value of $3,300. The hurdle rate is 10%. The
present value of an annuity factor of 10% for 10 years is 6.1446. The present value of $1 discounted for 10
years at 10% is 0.3855. Given the data provided, the net present value of the investment is approximately:
54. Linex Corporation is considering the purchase of a new machine that costs $18,000, has an expected useful
life of 10 years, and has no salvage value. Linex estimates that the machine will save the company $3,000 per
year over the 10-year life. The company’s hurdle rate is 12%. The present value annuity factors of 10, 12, and
14% for 10 years are 6.145, 5.650, and 5.216, respectively. The present value of $1 discounted for 10 years at
12% is 0.322. Given the data provided, the internal rate of return on the machine is:
55. Linex Corporation is considering the purchase of a new machine that costs $18,000, has an expected useful
life of 10 years, and has no salvage value. Linex estimates that the machine will save the company $3,000 per
year over the 10-year life. The company’s hurdle rate is 12%. The present value annuity factors of 10, 12, and
14% for 10 years are 6.145, 5.650, and 5.216, respectively, and the present value of $1 discounted for 10 years
at 12% is 0.322. Given the data provided, the net present value of the machine is:
56. Linex Corporation is considering the purchase of a new machine that costs $18,000 and has an expected
useful life of 10 years. Linex estimates that the machine will save the company $3,000 per year over the 10-year
life. The company’s hurdle rate is 12%. The present value annuity factors of 10, 12, and 14% for 10 years are
6.145, 5.650, and 5.216, respectively. The present value of $1 discounted for 10 years at 12% is 0.322. Given
the data provided, if the machine had a salvage value of $4,000, the net present value of the machine would be:
57. Gallatin Co. is considering the purchase of a new machine that costs $300,000. It is anticipated that it will
provide net annual cash inflows of $80,000. The machine has an expected life of 5 years with no salvage value.
Gallatin’s hurdle rate is 7%. The present value annuity factors for 5 years are 4.1002 at 7%, 3.9927 at 8%,
3.8897 at 9%, 3.7908 at 10%, and 3.6048 at 12%. The internal rate of return for the purchase is:
58. Hildale Hotels has been told that it must install a fire sprinkler system. System A would cost $400,000
immediately, but it would not add to annual operating costs. System B costs only $250,000, but it would add
$25,000 a year to operating costs. Both systems have a useful life of 10 years. The hotel’s hurdle rate is 12%.
Given the data provided, with a present value of an annuity for 10 years at 12% of 5.650 and a present value of
$1 for 10 years at 12% of 0.322, the company should:
59. An asset is purchased for $100,000. It is expected to provide an additional $15,600 of annual net cash
inflows. The asset has a 10-year life and no expected salvage value. The hurdle rate is 10%. Assume the
following present value factors:
Present Value of
Present Value of an
Percent
$1 for 10 years
Annuity of $1 for 10 years
8%
0.4632
6.7101
9%
0.4224
6.4177
10%
0.3855
6.1446
12%
0.3220
5.6502
Given the data provided, the internal rate of return would be approximately:
60. An asset is purchased for $100,000. It is expected to provide an additional $14,800 of annual net cash
inflows. The asset has a 10-year life and an expected salvage value of $6,000. The hurdle rate is 9%. Assume
the following present value factors:
Present Value of
Present Value of an
Percent
$1 for 10 years
Annuity of $1 for 10 years
8%
0.4632
6.7101
9%
0.4224
6.4177
10%
0.3855
6.1446
12%
0.3220
5.6502
Given the data provided, the net present value would be approximately: