103. The following information pertains to an investment:
Investment
$140,000
Annual revenues
$ 96,000
Annual variable costs
$ 32,000
Annual fixed out-of-pocket costs
$ 20,000
Discount rate
12%
Expected life of project
8 years
The present value of the annual cash flow (rounded) is
104. A firm is considering a project with an annual cash flow of $200,000. The project would have a seven year
life, and the company uses a discount rate of 10 percent. What is the maximum amount the company could
invest in the project and have the project still be acceptable?
105. A firm is considering a project with an annual cash flow of $80,000. The project would have a 10-year life,
and the company uses a discount rate of 8 percent. What is the maximum amount the company could invest in
the project and have the project still be acceptable (rounded)?
106. Figure 14-6.
Present value of $1
Periods
4%
6%
8%
10%
12%
14%
1
0.962
0.943
0.926
0.909
0.893
0.877
2
0.925
0.890
0.857
0.826
0.797
0.769
3
0.889
0.840
0.794
0.751
0.712
0.675
4
0.855
0.792
0.735
0.683
0.636
0.592
5
0.822
0.747
0.681
0.621
0.567
0.519
6
0.790
0.705
0.630
0.564
0.507
0.456
7
0.760
0.665
0.583
0.513
0.452
0.400
8
0.731
0.627
0.540
0.467
0.404
0.351
9
0.703
0.592
0.500
0.424
0.361
0.308
10
0.676
0.558
0.463
0.386
0.322
0.270
Present value of an Annuity of $1
Periods
4%
6%
8%
10%
12%
14%
1
0.962
0.943
0.926
0.909
0.893
0.877
2
1.886
1.833
1.783
1.736
1.690
1.647
3
2.775
2.673
2.577
2.487
2.402
2.322
4
3.630
3.465
3.312
3.170
3.037
2.914
5
4.452
4.212
3.993
3.791
3.605
3.433
6
5.242
4.917
4.623
4.355
4.111
3.889
7
6.002
5.582
5.206
4.868
4.564
4.288
8
6.733
6.210
5.747
5.335
4.968
4.639
9
7.435
6.802
6.247
5.759
5.328
4.946
10
8.111
7.360
6.710
6.145
5.650
5.216
Refer to Figure 14-6. Morgan Clinical Practice is considering an investment in new imaging equipment that will cost $400,000. The equipment is
expected to yield cash inflows of $80,000 per year for a six year period. Morgan set a required rate of return at 10 percent. What is the net present
value of the investment? (Note: there may be a rounding error depending on the table you use to compute your answer. Choose the answer closest to
the one you calculate.)
107. Figure 14-6.
Present value of $1
Periods
4%
6%
8%
10%
12%
14%
1
0.962
0.943
0.926
0.909
0.893
0.877
2
0.925
0.890
0.857
0.826
0.797
0.769
3
0.889
0.840
0.794
0.751
0.712
0.675
4
0.855
0.792
0.735
0.683
0.636
0.592
5
0.822
0.747
0.681
0.621
0.567
0.519
6
0.790
0.705
0.630
0.564
0.507
0.456
7
0.760
0.665
0.583
0.513
0.452
0.400
8
0.731
0.627
0.540
0.467
0.404
0.351
9
0.703
0.592
0.500
0.424
0.361
0.308
10
0.676
0.558
0.463
0.386
0.322
0.270
Present value of an Annuity of $1
Periods
4%
6%
8%
10%
12%
14%
1
0.962
0.943
0.926
0.909
0.893
0.877
2
1.886
1.833
1.783
1.736
1.690
1.647
3
2.775
2.673
2.577
2.487
2.402
2.322
4
3.630
3.465
3.312
3.170
3.037
2.914
5
4.452
4.212
3.993
3.791
3.605
3.433
6
5.242
4.917
4.623
4.355
4.111
3.889
7
6.002
5.582
5.206
4.868
4.564
4.288
8
6.733
6.210
5.747
5.335
4.968
4.639
9
7.435
6.802
6.247
5.759
5.328
4.946
10
8.111
7.360
6.710
6.145
5.650
5.216
Refer to Figure 14-6. Morgan Clinical Practice is considering an investment in new imaging equipment that will cost $400,000. The equipment is
expected to yield cash inflows of $80,000 per year for a six year period. At the end of the sixth year, the firm expects to recover $150,000 from the
sale of the equipment. Morgan set a required rate of return at 10 percent. What is the net present value of the investment? (Note: there may be a
rounding error depending on the table you use to compute your answer. Choose the answer closest to the one you calculate.)
108. Figure 14-6.
Present value of $1
Periods
4%
6%
8%
10%
12%
14%
1
0.962
0.943
0.926
0.909
0.893
0.877
2
0.925
0.890
0.857
0.826
0.797
0.769
3
0.889
0.840
0.794
0.751
0.712
0.675
4
0.855
0.792
0.735
0.683
0.636
0.592
5
0.822
0.747
0.681
0.621
0.567
0.519
6
0.790
0.705
0.630
0.564
0.507
0.456
7
0.760
0.665
0.583
0.513
0.452
0.400
8
0.731
0.627
0.540
0.467
0.404
0.351
9
0.703
0.592
0.500
0.424
0.361
0.308
10
0.676
0.558
0.463
0.386
0.322
0.270
Present value of an Annuity of $1
Periods
4%
6%
8%
10%
12%
14%
1
0.962
0.943
0.926
0.909
0.893
0.877
2
1.886
1.833
1.783
1.736
1.690
1.647
3
2.775
2.673
2.577
2.487
2.402
2.322
4
3.630
3.465
3.312
3.170
3.037
2.914
5
4.452
4.212
3.993
3.791
3.605
3.433
6
5.242
4.917
4.623
4.355
4.111
3.889
7
6.002
5.582
5.206
4.868
4.564
4.288
8
6.733
6.210
5.747
5.335
4.968
4.639
9
7.435
6.802
6.247
5.759
5.328
4.946
10
8.111
7.360
6.710
6.145
5.650
5.216
Refer to Figure 14-6. Roman Knoze is considering two investments. Each will cost $20,000 initially. Project 1 will return annual cash flows of
$10,000 in each of three years. Project 2 will return $5,000 in year 1, $10,000 in year 2, and $15,000 in year 3. Roman requires a minimum rate of
return of 10 percent. What is the net present value of Project 1? (Note: there may be a rounding error depending on the table you use to compute your
answer. Choose the answer closest to the one you calculate.)
109. Figure 14-6.
Present value of $1
Periods
4%
6%
8%
10%
12%
14%
1
0.962
0.943
0.926
0.909
0.893
0.877
2
0.925
0.890
0.857
0.826
0.797
0.769
3
0.889
0.840
0.794
0.751
0.712
0.675
4
0.855
0.792
0.735
0.683
0.636
0.592
5
0.822
0.747
0.681
0.621
0.567
0.519
6
0.790
0.705
0.630
0.564
0.507
0.456
7
0.760
0.665
0.583
0.513
0.452
0.400
8
0.731
0.627
0.540
0.467
0.404
0.351
9
0.703
0.592
0.500
0.424
0.361
0.308
10
0.676
0.558
0.463
0.386
0.322
0.270
Present value of an Annuity of $1
Periods
4%
6%
8%
10%
12%
14%
1
0.962
0.943
0.926
0.909
0.893
0.877
2
1.886
1.833
1.783
1.736
1.690
1.647
3
2.775
2.673
2.577
2.487
2.402
2.322
4
3.630
3.465
3.312
3.170
3.037
2.914
5
4.452
4.212
3.993
3.791
3.605
3.433
6
5.242
4.917
4.623
4.355
4.111
3.889
7
6.002
5.582
5.206
4.868
4.564
4.288
8
6.733
6.210
5.747
5.335
4.968
4.639
9
7.435
6.802
6.247
5.759
5.328
4.946
10
8.111
7.360
6.710
6.145
5.650
5.216
Refer to Figure 14-6. Roman Knoze is considering two investments. Each will cost $20,000 initially. Project 1 will return annual cash flows of
$10,000 in each of three years. Project 2 will return $5,000 in year 1, $10,000 in year 2, and $15,000 in year 3. Roman requires a minimum rate of
return of 10 percent. What is the net present value of Project 2?
110. Figure 14-6.
Present value of $1
Periods
4%
6%
8%
10%
12%
14%
1
0.962
0.943
0.926
0.909
0.893
0.877
2
0.925
0.890
0.857
0.826
0.797
0.769
3
0.889
0.840
0.794
0.751
0.712
0.675
4
0.855
0.792
0.735
0.683
0.636
0.592
5
0.822
0.747
0.681
0.621
0.567
0.519
6
0.790
0.705
0.630
0.564
0.507
0.456
7
0.760
0.665
0.583
0.513
0.452
0.400
8
0.731
0.627
0.540
0.467
0.404
0.351
9
0.703
0.592
0.500
0.424
0.361
0.308
10
0.676
0.558
0.463
0.386
0.322
0.270
Present value of an Annuity of $1
Periods
4%
6%
8%
10%
12%
14%
1
0.962
0.943
0.926
0.909
0.893
0.877
2
1.886
1.833
1.783
1.736
1.690
1.647
3
2.775
2.673
2.577
2.487
2.402
2.322
4
3.630
3.465
3.312
3.170
3.037
2.914
5
4.452
4.212
3.993
3.791
3.605
3.433
6
5.242
4.917
4.623
4.355
4.111
3.889
7
6.002
5.582
5.206
4.868
4.564
4.288
8
6.733
6.210
5.747
5.335
4.968
4.639
9
7.435
6.802
6.247
5.759
5.328
4.946
10
8.111
7.360
6.710
6.145
5.650
5.216
Refer to Figure 14-6. Jan Rigby is considering an investment that will cost $20,000 initially, and return annual cash flows of $10,000 in each of
three years. Jan requires a minimum rate of return of 8 percent. What is the present value of the cash inflows? (Note: there may be a rounding error
depending on the table you use to compute your answer. Choose the answer closest to the one you calculate.)
111. The interest rate that sets the present value of a project’s cash inflows equal to the present value of the
project’s cost is called the ____.
112. Which of the following is true regarding the internal rate of return for a project?
113. Elizabeth Myers invested in a project that required an initial amount of $1,560, and returned one cash
inflow of $12,000 at the end of the 18th year. A partial table of the present value of an annuity of $1 in arrears is
as follows:
Year
2%
4%
6%
8%
10%
12%
14%
16%
18
0.700
0.494
0.350
0.250
0.180
0.130
0.095
0.069
What is the internal rate of return for this investment?
114. Jerry Hall invested in a project that required an initial amount of $52,160, and returned cash inflows of
$10,000 per year for 10 years. A partial table of the present value of an annuity of $1 in arrears is as follows:
Year
2%
4%
6%
8%
10%
12%
14%
16%
10
7.983
8.111
7.360
6.710
6.145
5.650
5.216
4.833
What is the internal rate of return for this investment?
115. Amatra Inc., has the opportunity to invest in new equipment that will cost $113,000. The net cash inflows
for ten years equal $20,000 per year. What is the internal rate of return for the investment? A partial table of the
present value of an annuity of $1 in arrears is as follows:
Year
2%
4%
6%
8%
10%
12%
14%
16%
10
7.983
8.111
7.360
6.710
6.145
5.650
5.216
4.833
116. Shoring Company is considering a project with an internal rate of return of 14.5 percent. Shoring requires a
minimum rate of return of 12 percent. The net present value of the project is
117. The internal rate of return is defined as
118. Jones Company is considering the purchase of a new machine for $57,000. The machine would generate an
annual cash flow of $17,411 for five years. At the end of five years, the machine would have no salvage value.
The company’s cost of capital is 12 percent. The company uses straight-line depreciation.
What is the internal rate of return for the machine rounded to the nearest percent?
119. A firm is considering a project requiring an investment of $27,000. The project would generate an annual
cash flow of $6,296 for the next seven years. The company uses the straight-line method of depreciation. The
approximate internal rate of return for the project is
120. Cooper Industries is considering a project that would require an initial investment of $101,000. The project
would result in cost savings of $62,000 in year 1 and $70,000 in year two. The internal rate of return is
121. Figure 14-8.
Present value of an Annuity of $1 in Arrears
Periods
4%
6%
8%
10%
12%
14%
1
0.962
0.943
0.926
0.909
0.893
0.877
2
1.886
1.833
1.783
1.736
1.690
1.647
3
2.775
2.673
2.577
2.487
2.402
2.322
4
3.630
3.465
3.312
3.170
3.037
2.914
5
4.452
4.212
3.993
3.791
3.605
4.433
6
5.242
4.917
4.623
4.355
4.111
3.889
7
6.002
5.582
5.206
4.868
4.564
4.288
8
6.733
6.210
5.747
5.335
4.968
4.639
9
7.435
6.802
6.247
5.759
5.328
4.946
10
8.111
7.360
6.710
6.145
5.650
5.216
Refer to Figure 14-8. Lucas Company is considering a project with an initial investment of $530,250 in new equipment that will yield annual net
cash flows of $95,000, and will be depreciated at $75,750 per year over its seven year life. What is the internal rate of return?
122. Figure 14-8.
Present value of an Annuity of $1 in Arrears
Periods
4%
6%
8%
10%
12%
14%
1
0.962
0.943
0.926
0.909
0.893
0.877
2
1.886
1.833
1.783
1.736
1.690
1.647
3
2.775
2.673
2.577
2.487
2.402
2.322
4
3.630
3.465
3.312
3.170
3.037
2.914
5
4.452
4.212
3.993
3.791
3.605
4.433
6
5.242
4.917
4.623
4.355
4.111
3.889
7
6.002
5.582
5.206
4.868
4.564
4.288
8
6.733
6.210
5.747
5.335
4.968
4.639
9
7.435
6.802
6.247
5.759
5.328
4.946
10
8.111
7.360
6.710
6.145
5.650
5.216
Refer to Figure 14-8. Sawyer Company is considering a project with an initial investment of $226,000 that will yield annual net cash flows of
$40,000, and will be depreciated at $22,600 per year over its ten year life. What is the internal rate of return?
123. Figure 14-9.
Kenner Company is considering two projects.
Project A
Project B
Initial investment
$85,000
$24,000
Annual cash flows
$20,676
$6,011
Life of the project
6 years
5 years
Depreciation per year
$14,167
$4,800
Present value of an Annuity of $1 in Arrears
Periods
8%
10%
12%
14%
1
0.926
0.909
0.893
0.877
2
1.783
1.736
1.690
1.647
3
2.577
2.487
2.402
2.322
4
3.312
3.170
3.037
2.914
5
3.993
3.791
3.605
4.433
6
4.623
4.355
4.111
3.889
7
5.206
4.868
4.564
4.288
8
5.747
5.335
4.968
4.639
9
6.247
5.759
5.328
4.946
10
6.710
6.145
5.650
5.216
Refer to Figure 14-9. Which of the two projects, A or B, is better in terms of internal rate of return?
124. Figure 14-9.
Kenner Company is considering two projects.
Project A
Project B
Initial investment
$85,000
$24,000
Annual cash flows
$20,676
$6,011
Life of the project
6 years
5 years
Depreciation per year
$14,167
$4,800
Present value of an Annuity of $1 in Arrears
Periods
8%
10%
12%
14%
1
0.926
0.909
0.893
0.877
2
1.783
1.736
1.690
1.647
3
2.577
2.487
2.402
2.322
4
3.312
3.170
3.037
2.914
5
3.993
3.791
3.605
4.433
6
4.623
4.355
4.111
3.889
7
5.206
4.868
4.564
4.288
8
5.747
5.335
4.968
4.639
9
6.247
5.759
5.328
4.946
10
6.710
6.145
5.650
5.216
Refer to Figure 14-9. Suppose that Kenner Company requires a minimum rate of return of 8 percent. Which project is better in terms of net present
value?
125. Which of the following compares the actual benefits from an investment with the estimated benefits, and
the actual operating costs of the investment with estimated operating costs?
126. Which of the following is a disadvantage of postaudits?
127. Which of the following is not a benefit of postaudits of capital investments?
128. A follow-up analysis of a capital investment after it is implemented is called a
129. The best person/group in a firm to perform a postaudit of a capital investment is usually
130. The capital investment decision making model that assumes that each cash inflow is reinvested at the
required rate of return is
131. The capital investment decision making model that assumes that each cash inflow is reinvested at the
project’s own rate of return is
132. The best model for choosing the best of several competing projects is
133. When investing in automated systems, which of the following intangible or indirect benefits may be
important?
134. Which of the following is true regarding the measurement and use of indirect and intangible benefits in
capital investment decision making?
135. A division manager is choosing between two mutually exclusive projects.
Project A
Project B
Net present value
$235,000
$210,000
Internal rate of return
13%
15%
The company requires any project to earn at least 12 percent. The manager believes that cash inflows from the project can be reinvested at the rate of
12 percent. Which project will the manager likely choose?
136. How do NPV and IRR differ?
137. Five mutually exclusive projects had the following information:
V
W
X
Y
Z
NPV
$(6,000)
$40,000
$30,000
$10,000
$20,000
IRR
8%
11%
13%
10%
12%
Which project is preferred?
138. The earning of interest on interest is
139. A series of equal future cash flows is a(n) ____.
140. The reason that a discount factor in year 3 is less than a discount factor in year 2 is that
141. Mistral Manufacturing is considering an investment in a new, high-efficient machine. The new machine
requires an initial investment of $1,750,000. The new system cash flows of either:
a. Even cash flows of $350,000 per year or
b. The following expected annual cash flows: $275,000, $420,000, $820,000, $470,000, and $150,000
Required: Calculate the payback period for each case.
142. Brenning Company invested $3,000,000 in a new computer system. The following is the net income
stream:
Year
Net income stream
1
$475,000
2
$375,000
3
$650,000
4
$900,000
5
$920,000
6
$800,000
Required: Calculate the accounting rate of return.
Average net income = ($475,000 +$375,000 + $650,000 + $900,000 + $920,000 + $800,000)/6 years
Average net income = $686,667
ARR = Average net income/Investment
$686,667/$3,000,000 = 0.23
Even cash flows:
$1,750,000/$350,000 = 5 years
$275,000
275,000
1 year
420,000
420,000
1 year
820,000
820,000
1 year
470,000
235,000
.5 year
150,000
1,750,000
3.5 years
$2,135,000
143. Billings Office Services is considering the purchase of a new computer system to replace the one in
operation. Data on the new computer system are:
Cost
$12,000
Salvage value at the end of five years
$ 1,000
Useful life, in years
5
Annual operating cost
$ 4,000
If the existing computer system is kept and used, it would require the purchase of additional hardware a year from now costing $2,000. After using
the system for five years, the salvage value would be $300. Additional information on the existing system is:
Additional years of use
5
Annual operating costs
$ 9,000
Remaining book value
$12,000
Current salvage value
$ 3,000
Cost of capital
12%
The company uses the straight-line method of depreciation.
Required: Should the new system be purchased? Why or why not?
Present
New Computer
Period
Cash Flow
Value Factor
System
Comment
0
$(12,000)
1.000
$(12,000)
Outlay cost
0
3,000
1.000
3,000
Salvage of old
1
2,000
0.893
1,786
Purchase of hardware
avoided
1-5
5,000
3.605
18,025
Lower operating Costs
5
0.567
397
Difference in salvage value