CHAPTER 21 QUIZ
1. [CPA Adapted] If the algebraic sum of the present values of all cash flows related to a
proposed capital expenditure discounted at the company’s required rate of return is
positive, it indicates that the
a. resultant amount is the maximum that should be paid for the asset.
b. discount rate used is not the proper required rate of return for this company.
c. investment is the best alternative.
d. return on the investment exceeds the company’s required rate of return.
The following data apply to questions 2 through 6.
The Hilltop Corporation is considering (as of 1/1/08) the replacement of an old machine
that is currently being used. The old machine is fully depreciated but can be used by the
corporation through 2011. If Hilltop decides to replace the old machine, Baker Company
has offered to purchase it for $50,000 on the replacement date. The disposal value of the
old machine would be zero at the end of 2011. Hilltop uses the straight-line method of
depreciation for all classes of machinery.
If the replacement occurs, a new machine would be acquired from Busby Industries on
January 2, 2008. The purchase price of $500,000 for the new machine would be paid in
cash at the time of replacement. Due to the increased efficiency of the new machine,
estimated annual cash savings of $150,000 would be generated through 2011, the end of its
expected useful life. The new machine is expected to have a zero disposal price at the end
of 2011.
All operating cash receipts, operating cash expenditures, and applicable tax payments and
credits are assumed to occur at the end of the year. Hilltop employs the calendar year for
reporting purposes.
Discount tables for several different interest (discount) rates that are to be used in any
discounting calculations are given below. Assume for questions 2 through 6 that Hilltop is
not subject to income taxes.
Present Value of $1.00 Received at the End of Period
Period 6% 8% 10% 12% 14%
1 .94 .93 .91 .89 .88
2 .89 .86 .83 .80 .77
3 .84 .79 .75 .71 .68
4 .79 .74 .68 .64 .59
5 .75 .68 .62 .57 .52
Present Value of an Annuity of $1.00 Received at the End of Each Period
Period 6% 8% 10% 12% 14%
1 0.94 0.93 0.91 0.89 0.88
2 1.83 1.78 1.73 1.69 1.65
3 2.67 2.58 2.49 2.40 2.32
4 3.47 3.31 3.17 3.04 2.91
5 4.21 3.99 3.79 3.61 3.43
2. [CMA Adapted] If Hilltop requires investments to earn an 8 percent return, the net
present value for replacing the old machine with the new machine is
a. $100,000.
b. $50,000.
c. ($63,000).
d. $46,500.
3. [CMA Adapted] The internal rate-of-return, to the nearest percent, to replace the old
machine is
a. 12 percent.
b. 10 percent.
c. 8 percent.
d. 6 percent.
4. [CMA Adapted] The payback period to replace the old machine with the new machine is
a. 3.3 years.
b. 3.0 years.
c. 4.0 years.
d. 2.5 years.
5. The discounted payback at a required rate of return of 8 percent is
a. 4 years
b. 3 years
c. 3.57 years
d. 1.5 years
6. The accrual accounting rate of return on the initial investment to the nearest percent is
a. 0 percent.
b. 11.0 percent.
c. 5.6 percent.
d. 30 percent.
7. [CPA Adapted] The assumption that cash flows are reinvested at the rate earned by the
investment belongs to which of the following capital budgeting methods?
Internal rate Net present
of return value
a. No No
b. No Yes
c. Yes Yes
d. Yes No
8. [CPA Adapted] The payback capital budgeting technique considers:
Time value Income over entire
of money life of project
a. Yes Yes
b. Yes No
c. No Yes
d. No No
9. Refer to data for questions 2 through 6. If Hilltop is subject to an income tax rate of 30
percent, what amount of annual cash savings would be used in a discounted cash flow
method or in the payback method?
a. $275,000
b. $150,000
c. $142,500
d. $105,000
10. Refer to data for questions 2 through 6. If Hilltop is subject to an income tax rate of 30
percent and a required rate of return of 8 percent, the net present value for replacing the
old machine with the new machine is
a. $46,500.
b. $21,675 .
c $71,675.
d. ($334,425).
CHAPTER 21 QUIZ SOLUTIONS