Quiz 14: Capital Budgeting Decisions

Managerial Accounting

Business
131
Questions
15
True/False
97
Choices
19
Essay
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Quiz Materials

Use the following to answer questions 70-71:
The Weston Company is analyzing projects A, B, and C as possible investment opportunities.
Each of these projects has a useful life of five years. The following information has been
obtained:
Project A Project B Project C
Initial investment required ........................ $500,000 $480,000 $630,000
Present value of future cash inflows ......... $675,000 $520,000 $690,000
Internal rate of return ................................ 18% 14% 16%


Use the following to answer questions 72-75:
(Ignore income taxes in this problem.) Overland Company has gathered the following data on
a proposed investment project:
Investment in depreciable equipment ........... $150,000
Annual cash flows ........................................ $40,000
Salvage value of equipment ......................... $0
Life of the equipment ................................... 10 years
Required rate of return ................................. 10%
The company uses straight-line depreciation on all equipment.


Use the following to answer questions 76-79:
(Ignore income taxes in this problem.) Perky Food Corporation produces and sells coffee
jelly. Perky currently produces the jelly using a manual operation but is considering the
purchase of machinery to automate its operations. Information related to the two operations is
as follows:
Manual Automated
Operation Operation
Cost of machinery ..................................... – $420,000
Useful life of machinery ............................ – 12 years
Expected salvage value in 12 years ........... – $0
Expected annual revenue (50,000 jars) ..... $210,000 $210,000
Expected annual variable costs ................. $135,000 $42,000
Expected annual fixed costs ...................... $30,000 $72,000
Perky's discount rate is 12%. Perky uses the straight-line method of depreciation.


Use the following to answer questions 80-82:
(Ignore income taxes in this problem.) Tam Company is negotiating for the purchase of
equipment that would cost $100,000, with the expectation that $20,000 per year could be
saved in cash operating costs. The equipment's estimated useful life is 10 years, with no
salvage value, and would be depreciated by the straight-line method. Tam's required rate of
return is 12%.


Use the following to answer questions 83-84:
(Ignore income taxes in this problem.) Evans Company is considering rebuilding and selling
used alternators for automobiles. The company estimates that the net cash flows (sales less
cash operating expenses) arising from the rebuilding and sale of the used alternators would be
as follows:
Years 1-10 ....... $100,000
Year 11 ............ $(30,000)
Year 12 ............ $110,000
In addition, Evans Company would need to purchase equipment costing $275,000. The
equipment would have a 12-year life and a $25,000 salvage value. The company's required
rate of return is 10%.


Use the following to answer questions 85-86:
Baldock Inc. is considering the acquisition of a new machine that costs $420,000 and has a
useful life of 5 years with no salvage value. The incremental net operating income and
incremental net cash flows that would be produced by the machine are:
Incremental Net
Operating Income
Incremental Net
Cash Flows
Year 1 $61,000 $145,000
Year 2 $67,000 $151,000
Year 3 $78,000 $162,000
Year 4 $41,000 $125,000
Year 5 $83,000 $167,000


Use the following to answer questions 87-88:
Delley Inc. is considering the acquisition of equipment that costs $340,000 and has a useful
life of 6 years with no salvage value. The incremental net cash flows that would be generated
by the equipment are:
Incremental Net
Cash Flows
Year 1 $94,000
Year 2 $133,000
Year 3 $96,000
Year 4 $116,000
Year 5 $115,000
Year 6 $87,000


Use the following to answer questions 89-90:
(Ignore income taxes in this problem.) Westland College has a telephone system that is in
poor condition. The system either can be overhauled or replaced with a new system. The
following data have been gathered concerning these two alternatives:
Present System New System
Purchase cost when new ................ $150,000 $200,000
Accumulated depreciation ............. $140,000
Overhaul costs needed now ........... $130,000
Annual cash operating costs .......... $80,000 $70,000
Salvage value now ......................... $60,000
Salvage value in 8 years ................ $52,000 $65,000
Working capital required ............... $100,000
Westland College uses a 10% discount rate and the total cost approach to capital budgeting
analysis. The working capital required under the new system would be released for use
elsewhere at the conclusion of the project. Both alternatives are expected to have a useful life
of eight years.


Use the following to answer questions 91-92:
(Ignore income taxes in this problem.) Lambert Manufacturing has $100,000 to invest in
either Project A or Project B. The following data are available on these projects:
Project A Project B
Cost of equipment needed now ............................. $100,000 $60,000
Working capital investment needed now .............. $40,000
Annual cash operating inflows .............................. $40,000 $35,000
Salvage value of equipment in 6 years .................. $10,000
Both projects will have a useful life of 6 years. At the end of 6 years, the working capital
investment will be released for use elsewhere. Lambert's required rate of return is 14%. The
company uses the total cost approach to evaluating alternatives.


Use the following to answer questions 93-95:
(Ignore income taxes in this problem.) Carlson Manufacturing has some equipment that needs
to be rebuilt or replaced. The following information has been gathered relative to this
decision:
Present
Equipment
New
Equipment
Purchase cost new .............................................. $50,000 $48,000
Remaining book value ........................................ $30,000
Cost to rebuild now ............................................ $25,000
Major maintenance at the end of 3 years ........... $8,000 $5,000
Annual cash operating costs ............................... $10,000 $8,000
Salvage value at the end of 5 years .................... $3,000 $7,000
Salvage value now .............................................. $9,000
Carlson uses the total cost approach and a discount rate of 12%. Regardless of which option is
chosen, rebuild or replace, at the end of five years Carlson Manufacturing plans to close its
domestic manufacturing operations and to move these operations to foreign countries.


Use the following to answer questions 96-99:
(Ignore income taxes in this problem.) Cedar Hill Hospital needs to expand its facilities and
desires to obtain a new building on a piece of property adjacent to its present location. Two
options are available to Cedar Hill, as follows:
Option 1: Buy the property, erect the building, and install the fixtures at a total cost of
$600,000. This cost would be paid off in five installments: an immediate payment of
$200,000, and a payment of $100,000 at the end of each of the next four years. The annual
cash operating costs associated with the new facilities are estimated to be $12,000 per year.
The new facilities would be occupied for thirteen years, and would have a total resale value of
$300,000 at the end of the 13-year period.
Option 2: A leasing company would buy the property and construct the new facilities for
Cedar Hill which would then be leased back to Cedar Hill at an annual lease cost of $70,000.
The lease period would run for 13 years, with each payment being due at the BEGINNING of
the year. Additionally, the company would require an immediate $10,000 security deposit,
which would be returned to Cedar Hill at the end of the 13-year period. Finally, Cedar Hill
would have to pay the annual maintenance cost of the facilities, which is estimated to be
$4,000 per year. There would be no resale value at the end of the 13-year period under this
option.
The hospital uses a discount rate of 14% and the total-cost approach to net present value
analysis in evaluating its investment decisions.


Use the following to answer questions 100-104:
Hasko Inc. has provided the following data to be used in evaluating a proposed investment
project:
Initial investment ........................... $820,000
Annual cash receipts ..................... $656,000
Life of the project .......................... 9 years
Annual cash expenses ................... $295,000
Salvage value ................................ $41,000
Tax rate .......................................... 30%
For tax purposes, the entire initial investment without any reduction for salvage value will be
depreciated over 7 years. The company uses a discount rate of 10%.


Use the following to answer questions 105-108:
Whitsitt Inc. has provided the following data to be used in evaluating a proposed investment
project:
Initial investment ........................... $840,000
Annual cash receipts ..................... $630,000
Life of the project .......................... 9 years
Annual cash expenses ................... $284,000
Salvage value ................................ $84,000
The company's tax rate is 30%. For tax purposes, the entire initial investment will be
depreciated over 7 years without any reduction for salvage value. The company uses a
discount rate of 17%.


Use the following to answer questions 109-110:
Weichman Inc. has provided the following data concerning an investment project that has
been proposed:
Initial investment ........................... $960,000
Annual cash receipts ..................... $624,000
Life of the project .......................... 8 years
Annual cash expenses ................... $281,000
Salvage value ................................ $48,000
The company's tax rate is 30%. For tax purposes, the entire initial investment will be
depreciated over 7 years without any reduction for salvage value. The company uses a
discount rate of 15%.


Use the following to answer questions 111-112:
Yandell Inc. is considering an investment project that would require an initial investment of
$310,000 and that would last for 8 years. The annual cash receipts from the project would be
$233,000 and the annual cash expenses would be $117,000. The equipment used in the project
could be sold at the end of the project for a salvage value of $16,000. The company's tax rate
is 30%. For tax purposes, the entire initial investment will be depreciated over 7 years without
any reduction for salvage value. The company uses a discount rate of 19%.


Questions

Q1
Free

Benjamin Company produces products C, J, and R from a joint production process.
Each product may be sold at the split-off point or processed further. Joint production
costs of $95,000 per year are allocated to the products based on the relative number of
units produced. Data for Benjamin's operations for last year follow:
Additional sales values and costs if
processed further
Product
Units
Produced
Sales values at
split-off Sales values Added costs*
C 6,000 $75,000 $100,000 $20,000
J 9,000 $70,000 $115,000 $36,000
R 4,000 $46,500 $55,000 $10,000
*All variable and traceable to the products involved.
Required:
Which products should be processed beyond the split-off point?

Essay
expand_more
Answer:
Product C J R Sales value after further processing ................. $100,000 $115,000 $ 55,000 Sales value after split-off ................................. 75,000 70,000 46,500 Added sales value from processing ................. 25,000 45,000 8,500 Added processing costs ................................... 20,000 36,000 10,000 Net gain (loss) from further processing ........... $ 5,000 $ 9,000 $ (1,500) Products C and J should be processed beyond the split-off point. Product R should be sold at split-off. Joint production costs are not relevant to the decision to sell at splitoff or to process further.
Q2
Free

An investment project with a project profitability index of -0.02 has an internal rate of
return that is larger than the discount rate.

True/False
expand_more
A) True.
B) False.
Answer:
False
Q3
Free

Both the net present value method and the internal rate of return method can be used
as a screening tool in capital budgeting decisions.

True/False
expand_more
A) True.
B) False.
Answer:
False
Q4

When considering a number of investment projects, the project that has the best
payback period will also always have the highest net present value.

True/False
expand_more
A) True.
B) False.
Answer:

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Q5

When discounted cash flow methods of capital budgeting are used, the working capital
required for a project is ordinarily counted as a cash outflow at the beginning of the
project and as a cash inflow at the end of the project.

True/False
expand_more
A) True.
B) False.
Answer:

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Q6

Discounted cash flow techniques automatically provide for recovery of initial
investment.

True/False
expand_more
A) True.
B) False.
Answer:

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Q7

The salvage value of new equipment should not be considered when using the internal
rate of return method to evaluate a project.

True/False
expand_more
A) True.
B) False.
Answer:

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Q8

Because of the uncertainty and large cost involved in investments in automated
equipment, any intangible benefits from these projects should be ignored.

True/False
expand_more
A) True.
B) False.
Answer:

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Q9

When the internal rate of return method is used to rank investment proposals, the
lower the internal rate of return, the more desirable the investment.

True/False
expand_more
A) True.
B) False.
Answer:

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Q10

When computing the project profitability index of an investment project, the
investment required will include any investment made in working capital at the
beginning of the project.

True/False
expand_more
A) True.
B) False.
Answer:

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Q11

If investment funds are limited, the net present value of one project should not be
compared directly to the net present value of another project unless the initial
investments in these projects are equal.

True/False
expand_more
A) True.
B) False.
Answer:

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Q12

In calculating payback where new equipment is replacing old equipment, any salvage
value to be received on disposal of the old equipment should be deducted from the
cost of the new equipment.

True/False
expand_more
A) True.
B) False.
Answer:

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Q13

In the payback method, depreciation is added back to net operating income when
computing the net annual cash flow.

True/False
expand_more
A) True.
B) False.
Answer:

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Q14

The simple rate of return method is desirable because of its simplicity and the fact that
it takes the time value of money into account.

True/False
expand_more
A) True.
B) False.
Answer:

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Q15

The present value of a cash flow will never be greater than the future dollar amount of
the cash flow.

True/False
expand_more
A) True.
B) False.
Answer:

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Q16

If salvage value is ignored in depreciating an asset for tax purposes, any sales proceeds
received at the end of the life of the asset are fully taxable as income.

True/False
expand_more
A) True.
B) False.
Answer:

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Q17

If a company has computed a project profitability index of -0.015 for an investment
project, then:

Multiple Choice
expand_more
A) the project's internal rate of return is less than the discount rate.
B) the project's internal rate of return is greater than the discount rate.
C) the project's internal rate of return is equal to the discount rate.
D) the relationship of the internal rate of return and the discount rate is impossible to determine from the data given.
Answer:

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Q18

If the project profitability index of an investment project is zero, then:

Multiple Choice
expand_more
A) the project's internal rate of return is less than the discount rate.
B) the project's internal rate of return is greater than the discount rate.
C) the project's internal rate of return is equal to the discount rate.
D) the relationship of the rate of return and the discount rate is impossible to determine from the data given.
Answer:

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Q19

If the internal rate of return of an investment in equipment is equal to the discount
rate:

Multiple Choice
expand_more
A) the net present value of the investment will be zero.
B) the payback period of the investment will be equal to the useful life of the equipment.
C) neither A nor B above will be true.
D) both A and B above will be true.
Answer:

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Q20

Neu Company is considering the purchase of an investment that has a positive net
present value based on a discount rate of 12%. The internal rate of return would be:

Multiple Choice
expand_more
A) zero.
B) 12%.
C) greater than 12%.
D) less than 12%.
Answer:

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Q21

The assumption that the cash flows from an investment project are reinvested at the
company's discount rate applies to:

Multiple Choice
expand_more
A) both the internal rate of return and the net present value methods.
B) only the internal rate of return method.
C) only the net present value method.
D) neither the internal rate of return nor net present value methods.
Answer:

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Q22

The net present value of a proposed investment is negative. Therefore, the discount
rate used must be:

Multiple Choice
expand_more
A) greater than the project's internal rate of return.
B) less than the project's internal rate of return.
C) greater than the minimum required rate of return.
D) less than the minimum required rate of return.
Answer:

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Q23

Some investment projects require that a company increase its working capital. Under
the net present value method, the investment and eventual recovery of working capital
should be treated as:

Multiple Choice
expand_more
A) an initial cash outflow.
B) a future cash inflow.
C) both an initial cash outflow and a future cash inflow.
D) irrelevant to the net present value analysis.
Answer:

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Q24

The net present value (NPV) method of investment project analysis assumes that the
project's cash flows are reinvested at the:

Multiple Choice
expand_more
A) internal rate of return.
B) discount rate used in the NPV calculation.
C) firm's simple rate of return.
D) firm's average ROI.
Answer:

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Q25

If taxes are ignored, all of the following items are included in a discounted cash flow
analysis except:

Multiple Choice
expand_more
A) future operating cash savings.
B) depreciation expense.
C) future salvage value.
D) investment in working capital.
Answer:

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Q26

In capital budgeting computations, discounted cash flow methods:

Multiple Choice
expand_more
A) automatically provide for recovery of initial investment.
B) can't be used unless cash flows are uniform from year to year.
C) assume that all cash flows occur at the beginning of a period.
D) responses a, b, and c are all correct.
Answer:

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Q27

The internal rate of return for a project can be determined:

Multiple Choice
expand_more
A) only if the project's cash flows are constant.
B) by finding the discount rate that yields a zero net present value for the project.
C) by subtracting the company's cost of capital from the project's profitability index.
D) only if the project profitability index is greater than zero.
Answer:

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Q28

The investment required for the project profitability index should:

Multiple Choice
expand_more
A) be reduced by the amount of any salvage recovered from the sale of old equipment.
B) be reduced by the amount of any salvage recovered from the sale of the new equipment at the end of its useful life.
C) be reduced by the amount of any salvage recovered from the sale of both the old and new equipment.
D) none of the above is correct.
Answer:

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Q29

Which of the following represents the correct treatment of a loss on the sale of an old
asset in a net present value analysis under the total cost approach?

Multiple Choice
expand_more
A) Multiply the amount of the loss times one minus the tax rate prior to discounting.
B) Multiply the amount of the loss times the tax rate prior to discounting.
C) Make no adjustment to the amount of the loss prior to discounting.
D) None of the above.
Answer:

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Q30

In net present value analysis, the release of working capital at the end of a project
should be:

Multiple Choice
expand_more
A) ignored.
B) included as a cash outflow.
C) included as a cash inflow.
D) included as a tax deduction.
Answer:

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Q31

Buret Corporation is contemplating a plant expansion capital budgeting decision. The
plant expansion will require an $80,000 increase in working capital. This amount will
be released at the end of the useful life of this project. Which of the following will
increase the present value of the cash flows associated with the increase and release of
the $80,000 of working capital?

Multiple Choice
expand_more
A) an increase in the cost of capital.
B) an increase in the tax rate.
C) an increase in the useful life of the project.
D) none of the above.
Answer:

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Q32

(Ignore income taxes in this problem.) Ataxia Fitness Center is considering an
investment in some additional weight training equipment. The equipment has an
estimated useful life of 10 years with no salvage value at the end of the 10 years.
Ataxia expects net annual cash inflows of $54,000 from this equipment. Ataxia's
internal rate of return on this equipment is 14%. Ataxia's discount rate is also 14%.
What is the payback period on this equipment?

Multiple Choice
expand_more
A) 1.92 years
B) 2.70 years
C) 3.70 years
D) 5.22 years
Answer:

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Q33

(Ignore income taxes in this problem.) Ludington, Inc. purchased a new machine on
January 1 for $350,000. The machine is expected to have a useful life of 8 years and
no salvage value. Straight-line depreciation is to be used. The internal rate of return on
the project is 14%. The present value of the annual cash inflows generated by the
machine was calculated to be $371,120 using the internal rate of return of 14%. What
was the annual cash inflow that was used in the calculation of the present value?

Multiple Choice
expand_more
A) $350,000 x 0.351
B) $350,000 ÷ 4.639
C) $371,120 x 0.351
D) $371,120 ÷ 4.639
Answer:

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Q34

(Ignore income taxes in this problem.) An investment project has the following
characteristics:
Cost of equipment ............. $22,820
Annual cash inflows .......... $5,000
Internal rate of return ......... 12%
The life of the equipment would be:

Multiple Choice
expand_more
A) It is impossible to determine from the data given.
B) 7 years
C) 12 years
D) 4.56 years.
Answer:

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Q35

(Ignore income taxes in this problem.) The Allen Company is planning an investment
with the following characteristics:
Useful life ................................ 7 years
Yearly net cash inflow ............. $40,000
Salvage value ........................... $0
Internal rate of return ............... 20%
Discount rate ............................ 16%
The initial cost of the equipment is:

Multiple Choice
expand_more
A) $240,080
B) $152,480
C) $144,200
D) Cannot be determined from the given information.
Answer:

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Q36

(Ignore income taxes in this problem.) Highpoint, Inc., is considering investing in
automated equipment with a ten-year useful life. Managers at Highpoint have
estimated the cash flows associated with the tangible costs and benefits of automation,
but have been unable to estimate the cash flows associated with the intangible
benefits. Using the company's 12% required rate of return, the net present value of the
cash flows associated with just the tangible costs and benefits is a negative $282,500.
How large would the annual net cash inflows from the intangible benefits have to be to
make this a financially acceptable investment?

Multiple Choice
expand_more
A) $20,000
B) $28,250
C) $35,000
D) $50,000
Answer:

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Q37

(Ignore income taxes in this problem.) A company wants to have $40,000 at the end of
a five-year period through investment of a single sum now. How much needs to be
invested in order to have the desired sum in five years, if the money can be invested at
10%:

Multiple Choice
expand_more
A) $10,551
B) $8,000
C) $24,840
D) $12,882
Answer:

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Q38

(Ignore income taxes in this problem.) The following data on a proposed investment
project have been provided:
Cost of equipment ........................................ $50,000
Working capital required .............................. $30,000
Salvage value of equipment ......................... $0
Annual cash inflows from the project .......... $20,000
Required rate of return ................................. 20%
Life of the project ......................................... 8 years
The net present value of the project would be:

Multiple Choice
expand_more
A) $3,730
B) $0
C) $32,450
D) $88,370
Answer:

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Q39

(Ignore income taxes in this problem.) Stratford Company purchased a machine with
an estimated useful life of seven years. The machine will generate cash inflows of
$9,000 each year over the next seven years. If the machine has no salvage value at the
end of seven years, and assuming the company's discount rate is 10%, what is the
purchase price of the machine if the net present value of the investment is $17,000?

Multiple Choice
expand_more
A) $43,812
B) $26,812
C) $17,000
D) $22,195
Answer:

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Q40

(Ignore income taxes in this problem.) Anthony operates a part time auto repair
service. He estimates that a new diagnostic computer system will result in increased
cash inflows of $1,500 in Year 1, $2,100 in Year 2, and $3,200 in Year 3. If Anthony's
required rate of return is 10%, then the most he would be willing to pay for the new
computer system would be:

Multiple Choice
expand_more
A) $4,599
B) $5,501
C) $5,638
D) $5,107
Answer:

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Q41

(Ignore income taxes in this problem.) Fossa Road Paving Company is considering an
investment in a curb-forming machine. The machine will cost $240,000, will last 10
years, and will have a $40,000 salvage value at the end of 10 years. The machine is
expected to generate net cash inflows of $60,000 per year in each of the 10 years.
Fossa's discount rate is 18%. What is the net present value of this machine?

Multiple Choice
expand_more
A) $5,840
B) $37,280
C) $(48,780)
D) $69,640
Answer:

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Q42

(Ignore income taxes in this problem.) Apnea Video Rental Store is considering the
purchase of an almost new minivan to use as a vehicle to deliver and pick up video
tapes for customers. The minivan will cost $18,000 and is expected to last 8 years but
only if the engine is overhauled at a cost of $3,000 at the end of year 3. The minivan is
expected to have a $1,000 salvage value at the end of 8 years. This delivery service is
expected to generate net cash inflows of $6,000 per year in each of the 8 years.
Apnea's discount rate is 14%. What is the net present value of this investment
opportunity?

Multiple Choice
expand_more
A) $(2,826)
B) $(3,801)
C) $7,185
D) $8,160
Answer:

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Q43

(Ignore income taxes in this problem.) In an effort to reduce costs, Pontic
Manufacturing Corporation is considering an investment in equipment that will reduce
defects. This equipment will cost $420,000, will have an estimated useful life of 10
years, and will have an estimated salvage value of $50,000 at the end of 10 years.
Pontic's discount rate is 22%. What amount of cost savings will this equipment have to
generate per year in each of the 10 years in order for it to be an acceptable project?

Multiple Choice
expand_more
A) $50,690 or more
B) $41,315 or more
C) $105,315 or more
D) $94,316 or more
Answer:

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Q44

(Ignore income taxes in this problem.) Naomi Corporation has a capital budgeting
project that has a negative net present value of $36,000. The life of this project is 6
years. Naomi's discount rate is 20%. By how much would the annual cash inflows
from this project have to increase in order to have a positive net present value?

Multiple Choice
expand_more
A) $1,200 or more
B) $2,412 or more
C) $6,000 or more
D) $10,824 or more
Answer:

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Q45

(Ignore income taxes in this problem.) The following data pertain to an investment
project:
Investment required ........... $34,055
Annual savings .................. $5,000
Life of the project .............. 15 years
The internal rate of return is:

Multiple Choice
expand_more
A) 12%
B) 14%
C) 10%
D) 8%
Answer:

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Q46

(Ignore income taxes in this problem.) The Laws company has decided to buy a
machine costing $16,000. Estimated cash savings from using the new machine amount
to $4,120 per year. The machine will have no salvage value at the end of its useful life
of six years. If the required rate of return for Laws Company is 12%, the machine's
internal rate of return is closest to:

Multiple Choice
expand_more
A) 12%
B) 14%
C) 16%
D) 18%
Answer:

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Q47

(Ignore income taxes in this problem.) James Company is considering buying a new
machine costing $30,000. James estimates that the machine will save $6,900 per year
in cash operating expenses for the next six years. If the machine has no salvage value
at the end of six years and the discount rate used by James is 8%, then the machine's
internal rate of return is closest to:

Multiple Choice
expand_more
A) 8%
B) 10%
C) 12%
D) 14%
Answer:

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Q48

A project requires an initial investment of $70,000 and has a project profitability index
of 0.932. The present value of the future cash inflows from this investment is:

Multiple Choice
expand_more
A) $70,000
B) $36,231
C) $135,240
D) Cannot be determined from the data provided.
Answer:

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Q49

Bowen Company is considering several investment proposals, as shown below:
Investment Proposal
A B C D
Investment required ....................... $95,000 $120,000 $90,000 $150,000
Present value of future net cash
flows .......................................... $107,000 $130,000 $105,000 $180,000
If the project profitability index is used, the ranking of the projects would be:

Multiple Choice
expand_more
A) D C A B
B) D B A C
C) B A C D
D) D A B C
Answer:

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Q50

Information on four investment proposals is given below:
Proposal Investment Net Present
Number Required Value
1 $20,000 $10,000
2 $15,000 $6,000
3 $12,000 $9,600
4 $18,000 $10,800
Rank the proposals in terms of preference according to the project profitability index:

Multiple Choice
expand_more
A) 1, 4, 3, 2
B) 4, 1, 3, 2
C) 3, 4, 1, 2
D) 2, 1, 4, 3
Answer:

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Q51

Information on four investment proposals is given below:
Proposal Investment Net
Number Required Present Value
1 $8,000 $3,200
2 $12,000 $3,600
3 $10,000 $2,500
4 $4,000 $2,000
Rank the proposals in terms of preference using the project profitability index:

Multiple Choice
expand_more
A) 3, 2, 1, 4
B) 2, 3, 1, 4
C) 2, 1, 3, 4
D) 4, 1, 2, 3
Answer:

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Q52

The Gomez Company is considering two projects, T and V. The following information
has been gathered on these projects:
Project T Project V
Initial investment needed ........................... $112,500 $75,000
Present value of future cash inflows .......... $168,000 $107,000
Useful life .................................................. 10 years 10 years
Based on this information, which of the following statements is (are) true?
I. Project T has the highest ranking according to the project profitability index
criterion.
II. Project V has the highest ranking according to the net present value criterion.

Multiple Choice
expand_more
A) Only I
B) Only II
C) Both I and II
D) Neither I nor II
Answer:

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Q53

(Ignore income taxes in this problem.) Major Corporation is considering the purchase
of a new machine for $5,000. The machine has an estimated useful life of 5 years and
no salvage value. The machine will increase Major's cash flows by $2,000 annually
for 5 years. Major uses straight-line depreciation. The company's required rate of
return is 10%. What is the payback period for the machine?

Multiple Choice
expand_more
A) 5.00 years
B) 2.50 years
C) 7.58 years
D) 8.34 years
Answer:

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Q54

(Ignore income taxes in this problem.) Harrison Company is studying a project that
would have an eight-year life and would require a $300,000 investment in equipment
which has no salvage value. The project would provide net operating income each
year as follows for the life of the project:
Sales ............................................... $500,000
Less cash variable expenses .......... 200,000
Contribution margin ...................... 300,000
Less fixed expenses:
Fixed cash expenses ................... $150,000
Depreciation expenses ................ 37,500 187,500
Net operating income .................... $112,500
The company's required rate of return is 10%. What is the payback period for this
project?

Multiple Choice
expand_more
A) 3 years
B) 2 years
C) 2.5 years
D) 2.67 years
Answer:

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Q55

(Ignore income taxes in this problem.) An investment project requires an initial
investment of $100,000. The project is expected to generate net cash inflows of
$28,000 per year for the next five years. Assuming a 12% discount rate, the project's
payback period is:

Multiple Choice
expand_more
A) 0.28 years
B) 3.36 years
C) 3.57 years
D) 1.40 years
Answer:

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Q56

(Ignore income taxes in this problem.) Mercer Corporation is considering replacing a
technologically obsolete machine with a new state-of-the-art numerically controlled
machine. The new machine would cost $250,000 and would have a ten-year useful
life. Unfortunately, the new machine would have no salvage value. The new machine
would cost $12,000 per year to operate and maintain, but would save $55,000 per year
in labor and other costs. The old machine can be sold now for scrap for $10,000. The
simple rate of return on the new machine is closest to:

Multiple Choice
expand_more
A) 17.9%
B) 7.5%
C) 22.0%
D) 7.2%
Answer:

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Q57

(Ignore income taxes in this problem.) Pearson Co. is considering the purchase of a
$200,000 machine that is expected to reduce operating cash expenses by $65,000 per
year. This machine, which has no salvage value, has an estimated useful life of 5 years
and will be depreciated on a straight-line basis. For this machine, the simple rate of
return would be:

Multiple Choice
expand_more
A) 10%
B) 12.5%
C) 20%
D) 32.5%
Answer:

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Q58

(Ignore income taxes in this problem.) Assume you can invest money at a 14% rate of
return. How much money must be invested now in order to be able to withdraw $5,000
from this investment at the end of each year for 8 years, the first withdrawal occurring
one year from now?

Multiple Choice
expand_more
A) $24,840
B) $23,195
C) $21,440
D) $1,755
Answer:

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Q59

(Ignore income taxes in this problem.) How much would you have to invest today in
the bank at an interest rate of 5% to have an annuity of $1,400 per year for 5 years,
with nothing left in the bank at the end of the 5 years? Select the amount below that is
closest to your answer.

Multiple Choice
expand_more
A) $6,667
B) $6,061
C) $7,000
D) $1,098
Answer:

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Q60

(Ignore income taxes in this problem.) You have deposited $15,584 in a special
account that has a guaranteed interest rate. If you withdraw $3,700 at the end of each
year for 5 years, you will completely exhaust the balance in the account. The
guaranteed interest rate is closest to:

Multiple Choice
expand_more
A) 6%
B) 19%
C) 24%
D) 4%
Answer:

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Q61

(Ignore income taxes in this problem.) You have deposited $16,700 in a special
account that has a guaranteed interest rate of 11% per year. If you are willing to
completely exhaust the account, what is the maximum amount that you could
withdraw at the end of each of the next 6 years? Select the amount below that is
closest to your answer.

Multiple Choice
expand_more
A) $3,465
B) $3,089
C) $2,783
D) $3,947
Answer:

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Q62

(Ignore income taxes in this problem.) Latting Corporation has entered into a 7 year
lease for a building it will use as a warehouse. The annual payment under the lease
will be $4,781. The first payment will be at the end of the current year and all
subsequent payments will be made at year-ends. What is the present value of the lease
payments if the discount rate is 6%?

Multiple Choice
expand_more
A) $31,573
B) $22,257
C) $33,467
D) $26,688
Answer:

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Q63

(Ignore income taxes in this problem.) Schaad Corporation has entered into a 8 year
lease for a piece of equipment. The annual payment under the lease will be $2,500,
with payments being made at the beginning of each year. If the discount rate is 14%,
the present value of the lease payments is closest to:

Multiple Choice
expand_more
A) $20,000
B) $7,011
C) $17,544
D) $13,220
Answer:

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Q64

A company anticipates a taxable cash receipt of $50,000 in year 3 of a project. The
company's tax rate is 30% and its discount rate is 10%. The present value of this future
cash flow is closest to:

Multiple Choice
expand_more
A) $11,270
B) $15,000
C) $35,000
D) $26,296
Answer:

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Q65

A company anticipates a taxable cash expense of $70,000 in year 2 of a project. The
company's tax rate is 30% and its discount rate is 10%. The present value of this future
cash flow is closest to:

Multiple Choice
expand_more
A) $(40,496)
B) $(17,355)
C) $(21,000)
D) $(49,000)
Answer:

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Q66

A company anticipates a depreciation deduction of $10,000 in year 2 of a project. The
company's tax rate is 30% and its discount rate is 10%. The present value of the
depreciation tax shield resulting from this deduction is closest to:

Multiple Choice
expand_more
A) $3,000
B) $2,479
C) $5,785
D) $7,000
Answer:

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Q67

A company needs an increase in working capital of $30,000 in a project that will last 4
years. The company's tax rate is 30% and its discount rate is 8%. The present value of
the release of the working capital at the end of the project is closest to:

Multiple Choice
expand_more
A) $22,051
B) $21,000
C) $9,000
D) $15,436
Answer:

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Q68

The Moline Company had sales of $400,000 and expenses of $185,000 last year. All
sales were cash sales and all expenses were cash expenses. Moline's tax rate is 30%.
The after-tax net cash inflow was:

Multiple Choice
expand_more
A) $64,500
B) $150,500
C) $280,000
D) $55,500
Answer:

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Q69

Last year the sales at Seidelman Company were $600,000 and were all cash sales. The
company's expenses were $400,000 and were all cash expenses. The tax rate was 30%.
The after-tax net cash inflow at Seidelman last year was:

Multiple Choice
expand_more
A) $600,000
B) $200,000
C) $60,000
D) $140,000
Answer:

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Q70

Sales of the Kotter Company during the past year were all cash sales. Similarly, all
expenses were paid in cash. The tax rate was 30%. If the after-tax net cash inflow
from these operations last year was $15,000, and if the total before-tax cash sales were
$60,000, then the total before-tax cash expenses must have been:

Multiple Choice
expand_more
A) $21,429
B) $27,000
C) $45,000
D) $38,571
Answer:

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Q71

Which of the following statements is correct?

Multiple Choice
expand_more
A) Project B is preferred over Project C according to the project profitability index.
B) Project B is preferred over Project A according to the internal rate of return.
C) Project C is preferred over Project A according to the project profitability index.
D) Project A is preferred over Project C according to a net present value ranking.
Answer:

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Q72

Which project has the highest ranking according to the net present value and the
project profitability index criteria?
Net Present Value Profitability Index

Multiple Choice
expand_more
A) Project B Project B
B) Project A Project A
C) Project B Project A
D) Project C Project C
Answer:

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Q73

The payback period for the investment is:

Multiple Choice
expand_more
A) 0.27 years
B) 3.75 years
C) 10.00 years
D) 2.13 years
Answer:

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Q74

The simple rate of return on the investment is:

Multiple Choice
expand_more
A) 26.67%
B) 16.67%
C) 36.67%
D) 10.00%
Answer:

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Q75

The net present value of this investment is:

Multiple Choice
expand_more
A) $40,000
B) $3,625
C) $57,831
D) $95,800
Answer:

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Q76

The internal rate of return on the investment is closest to:

Multiple Choice
expand_more
A) 23%
B) 25%
C) 24%
D) 21%
Answer:

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Q77

What is the net present value of automating operations using the incremental cost
approach?

Multiple Choice
expand_more
A) $11,940
B) $56,940
C) $(104,106)
D) $112,684
Answer:

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Q78

Within what range does the internal rate of return fall?

Multiple Choice
expand_more
A) 6% to 8%
B) 10% to 12%
C) 12% to 14%
D) 18% to 20%
Answer:

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Q79

What is the simple rate of return for automating operations?

Multiple Choice
expand_more
A) 3.8%
B) 12.1%
C) 14.5%
D) 22.9%
Answer:

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Q80

What will be the effect on the net present value of the decision to automate operations
if 60,000 jars instead of 50,000 jars are expected to be sold each year? (Assume no
change in cost structure or selling price.)

Multiple Choice
expand_more
A) no effect
B) $52,030 decrease
C) $63,179 increase
D) $115,208 increase
Answer:

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Q81

The net present value of this investment is:

Multiple Choice
expand_more
A) $5,760
B) $6,440
C) $12,200
D) $13,000
Answer:

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Q82

The payback period of this investment is:

Multiple Choice
expand_more
A) 4 years
B) 1 year
C) 10 years
D) 5 years
Answer:

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Q83

The simple rate of return of this investment is:

Multiple Choice
expand_more
A) 8%
B) 20%
C) 12%
D) 10%
Answer:

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Q84

The payback period on this investment is:

Multiple Choice
expand_more
A) 3.00 years
B) 2.75 years
C) 1.50 years
D) 4.00 years
Answer:

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Q85

The net present value of the project is closest to:

Multiple Choice
expand_more
A) $364,090
B) $372,065
C) $339,090
D) $389,090
Answer:

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Q86

If the discount rate is 12%, the net present value of the investment is closest to:

Multiple Choice
expand_more
A) $330,000
B) $539,365
C) $119,365
D) $420,000
Answer:

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Q87

The payback period of this investment is closest to:

Multiple Choice
expand_more
A) 5.0 years
B) 3.2 years
C) 1.9 years
D) 2.8 years
Answer:

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Q88

If the discount rate is 17%, the net present value of the investment is closest to:

Multiple Choice
expand_more
A) $45,811
B) $385,811
C) $301,000
D) $117,341
Answer:

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Q89

The payback period of this investment, rounded off to the nearest tenth of a year, is
closest to:

Multiple Choice
expand_more
A) 3.9 years
B) 3.6 years
C) 3.1 years
D) 5.0 years
Answer:

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Q90

The net present value of overhauling the present system is:

Multiple Choice
expand_more
A) $(321,084)
B) $(532,516)
C) $(560,536)
D) $(592,516)
Answer:

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Q91

The net present value of the new system alternative is:

Multiple Choice
expand_more
A) $(483,095)
B) $(583,095)
C) $(596,395)
D) $(536,395)
Answer:

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Q92

The net present value of Project A is:

Multiple Choice
expand_more
A) $51,000
B) $60,120
C) $55,560
D) $94,450
Answer:

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Q93

The net present value of Project B is:

Multiple Choice
expand_more
A) $90,355
B) $76,115
C) $36,115
D) $54,355
Answer:

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Q94

If the new equipment is purchased, the present value of all cash flows that occur now
is:

Multiple Choice
expand_more
A) $(48,000)
B) $(39,000)
C) $(41,000)
D) $(37,000)
Answer:

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Q95

If the new equipment is purchased, the present value of the annual cash operating costs
associated with this alternative is:

Multiple Choice
expand_more
A) $(28,840)
B) $(19,160)
C) $(14,420)
D) $(36,050)
Answer:

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Q96

If the equipment is rebuilt, the present value of all cash flows that occur now is:

Multiple Choice
expand_more
A) $(55,000)
B) $(25,000)
C) $(16,000)
D) $(23,000)
Answer:

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Q97

Under option 1, the present value of all cash outflows associated with buying the
property, erecting the building, and installing the fixtures is closest to:

Multiple Choice
expand_more
A) $(200,000)
B) $(491,400)
C) $(600,000)
D) $(387,200)
Answer:

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Q98

Under option 1, the net present value of all cash flows is closest to:

Multiple Choice
expand_more
A) $(456,000)
B) $(600,000)
C) $(300,000)
D) $(507,000)
Answer:

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Q99

Under option 2, the present value of all the annual lease payments of $70,000 is
closest to:

Multiple Choice
expand_more
A) $(466,200)
B) $(408,900)
C) $(483,700)
D) $(910,000)
Answer:

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Under option 2, the present value of all cash flows associated with maintenance costs
is closest to:

Multiple Choice
expand_more
A) $(23,400)
B) $(52,000)
C) $(70,100)
D) $(4,000)
Answer:

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When computing the net present value of the project, what are the annual after-tax
cash receipts?

Multiple Choice
expand_more
A) $410,000
B) $196,800
C) $459,200
D) $60,589
Answer:

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When computing the net present value of the project, what are the annual after-tax
cash expenses?

Multiple Choice
expand_more
A) $254,000
B) $206,500
C) $88,500
D) $383,500
Answer:

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When computing the net present value of the project, what is the annual amount of the
depreciation tax shield? In other words, by how much does the depreciation deduction
reduce taxes each year in which the depreciation deduction is taken?

Multiple Choice
expand_more
A) $82,000
B) $35,143
C) $63,778
D) $27,333
Answer:

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When computing the net present value of the project, what is the after-tax cash flow
from the salvage value in the final year?

Multiple Choice
expand_more
A) $28,700
B) $41,000
C) $0
D) $12,300
Answer:

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The net present value of the project is closest to:

Multiple Choice
expand_more
A) $635,299
B) $647,468
C) $818,544
D) $806,375
Answer:

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When computing the net present value of the project, what are the annual after-tax
cash receipts?

Multiple Choice
expand_more
A) $441,000
B) $189,000
C) $378,000
D) $58,800
Answer:

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When computing the net present value of the project, what are the annual after-tax
cash expenses?

Multiple Choice
expand_more
A) $85,200
B) $200,000
C) $198,800
D) $369,200
Answer:

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When computing the net present value of the project, what is the annual amount of the
depreciation tax shield? In other words, by how much does the depreciation deduction
reduce taxes each year in which the depreciation deduction is taken?

Multiple Choice
expand_more
A) $65,333
B) $28,000
C) $36,000
D) $84,000
Answer:

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When computing the net present value of the project, what is the after-tax cash flow
from the salvage value in the final year?

Multiple Choice
expand_more
A) $84,000
B) $25,200
C) $0
D) $58,800
Answer:

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When computing the net present value of the project, what is the after-tax cash flow
from the salvage value in the final year?

Multiple Choice
expand_more
A) $48,000
B) $14,400
C) $33,600
D) $0
Answer:

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The net present value of the project is closest to:

Multiple Choice
expand_more
A) $299,470
B) $288,483
C) $117,329
D) $128,316
Answer:

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When computing the net present value of the project, what are the annual after-tax
cash receipts?

Multiple Choice
expand_more
A) $116,000
B) $163,100
C) $188,714
D) $69,900
Answer:

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The net present value of the project is closest to:

Multiple Choice
expand_more
A) $11,065
B) $60,302
C) $63,090
D) $13,854
Answer:

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(Ignore income taxes in this problem.) Tranter, Inc., is considering a project that
would have a ten-year life and would require a $1,500,000 investment in equipment.
At the end of ten years, the project would terminate and the equipment would have no
salvage value. The project would provide net operating income each year as follows:
Sales ........................................................... $2,000,000
Less variable expenses .............................. 1,100,000
Contribution margin .................................. 900,000
Less fixed expenses:
Fixed out-of-pocket cash expenses ........ $500,000
Depreciation ........................................... 150,000 650,000
Net operating income ................................ $ 250,000
All of the above items, except for depreciation, represent cash flows. The company's
required rate of return is 12%.
Required:
a. Compute the project's net present value.
b. Compute the project's internal rate of return to the nearest whole percent.
c. Compute the project's payback period.
d. Compute the project's simple rate of return.

Essay
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Answer:

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(Ignore income taxes in this problem.) Allen Company's required rate of return is
12%. The company is considering the purchase of three machines as indicated below.
Consider each machine independently.
Required:
a. Machine A will cost $15,000 and have a life of 8 years. Its salvage value will be
$1,000 and cost savings are projected at $3,000 per year. Compute the machine's
net present value.
b. How much would Allen Company be willing to pay for Machine B if the machine
promises annual cash inflows of $6,000 per year for 10 years?
c. Machine C has a projected life of 12 years. What is the machine's internal rate of
return, to the nearest whole percent, if it costs $18,000 and will save $2,500
annually in cash operating costs? Would you recommend purchase? Explain.

Essay
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Answer:

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(Ignore income taxes in this problem.) Five years ago, the City of Paranoya spent
$30,000 to purchase a computerized radar system called W.A.S.T.E. (Watching Aliens
Sent To Earth). Recently, a sales rep from W.A.S.T.E. Radar Company told the city
manager about a new and improved radar system that can be purchased for $50,000.
The rep also told the manager that the company would give the city $10,000 in trade
on the old system. The new system will last 10 years. The old system will also last that
long but only if a $4,000 upgrade is done in 5 years. The manager assembled the
following information to use in the decision as to which system is more desirable:
Old System New System
Cost of radar system ...................... $30,000 $50,000
Current salvage value .................... $10,000 –
Salvage value in 10 years .............. $5,000 $8,000
Annual operating costs .................. $34,000 $29,000
Upgrade required in 5 years .......... $4,000 –
Discount rate .................................. 14% 14%
Required:
a. What is the City of Paranoya's net present value for the decision described above?
Use the total cost approach.
b. Should the City of Paranoya purchase the new system or keep the old system?

Essay
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(Ignore income taxes in this problem.) The following data concern an investment
project:
Investment in equipment ..................... $10,000
Net annual cash inflows ...................... $2,400
Working capital required ..................... $5,000
Salvage value of the equipment ........... $1,000
Life of the project ................................ 8 years
Required rate of return ........................ 10%
The working capital will be released for use elsewhere at the conclusion of the project.
Required:
Compute the project's net present value.

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(Ignore income taxes in this problem.) Five years ago, Joe Sarver purchased 600
shares of 9%, $100 par value preferred stock for $75 per share. Sarver received
dividends on the stock each year for five years, and finally sold the stock for $90 per
share. Instead of purchasing the preferred stock, Sarver could have invested the funds
in a money market certificate yielding a 16% rate of return.
Required:
Determine whether or not the preferred stock provided at least the 16% rate of return
that could have been received on the money market certificate.

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(Ignore income taxes in this problem.) Big Blue Co. is considering three investment
opportunities having cash flows as described below:
• Project I would require an immediate cash outlay of $10,000 and would result in
cash savings of $3,000 each year for 8 years.
• Project II would require cash outlays of $3,000 per year and would provide a cash
inflow of $30,000 at the end of 8 years.
• Project III would require a cash outlay of $10,000 now and would provide a cash
inflow of $30,000 eight years from now.
Required:
If Big Blue has a required rate of return of 14%, determine which, if any, of the three
projects is acceptable. Use the NPV method.

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(Ignore income taxes in this problem.) Axillar Beauty Products Corporation is
considering the production of a new conditioning shampoo which will require the
purchase of new mixing machinery. The machinery will cost $375,000, is expected to
have a useful life of 10 years, and is expected to have a salvage value of $50,000 at the
end of 10 years. The machinery will also need a $35,000 overhaul at the end of year 6.
A $40,000 increase in working capital will be needed for this investment project. The
working capital will be released at the end of the 10 years. The new shampoo is
expected to generate net cash inflows of $85,000 per year for each of the 10 years.
Axillar's discount rate is 16%.
Required:
a. What is the net present value of this investment opportunity?
b. Based on your answer to (a) above, should Axillar go ahead with the new
conditioning shampoo?

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(Ignore income taxes in this problem.) Lajara Inc. has provided the following data
concerning a proposed investment project:
Initial investment ........................... $850,000
Life of the project .......................... 8 years
Annual net cash inflows ................ $255,000
Salvage value ................................. $128,000
The company uses a discount rate of 13%.
Required:
Compute the net present value of the project.

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(Ignore income taxes in this problem.) Burba Inc. is considering investing in a project
that would require an initial investment of $200,000. The life of the project would be 8
years. The annual net cash inflows from the project would be $60,000. The salvage
value of the assets at the end of the project would be $30,000. The company uses a
discount rate of 17%.
Required:
Compute the net present value of the project.

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(Ignore income taxes in this problem.) Grossett Corporation has provided the
following data concerning a proposed investment project:
Initial investment ............................. $160,000
Life of the project ............................ 6 years
Working capital required ................. $35,000
Annual net cash inflows .................. $56,000
Salvage value ................................... $24,000
The company uses a discount rate of 10%. The working capital would be released at
the end of the project.
Required:
Compute the net present value of the project.

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(Ignore income taxes in this problem.) Woolfolk Corporation is considering investing
$210,000 in a project. The life of the project would be 9 years. The project would
require additional working capital of $46,000, which would be released for use
elsewhere at the end of the project. The annual net cash inflows would be $42,000.
The salvage value of the assets used in the project would be $32,000. The company
uses a discount rate of 17%.
Required:
Compute the net present value of the project.

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(Ignore income taxes in this problem.) Allen Company's required rate of return is
14%. The company is considering the purchase of a new machine that will save
$10,000 per year in cash operating costs. The machine will cost $40,000 and will have
an 8-year useful life with zero salvage value. Straight-line depreciation will be used.
Required:
Compute the machine's internal rate of return to the nearest whole percent. Would you
recommend purchase of the machine? Explain.

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(Ignore income taxes in this problem.) The management of an amusement park is
considering purchasing a new ride for $40,000 that would have a useful life of 10
years and a salvage value of $5,000. The ride would require annual operating costs of
$21,000 throughout its useful life. The company's discount rate is 13%. Management
is unsure about how much additional ticket revenue the new ride would generateparticularly
since customers pay a flat fee when they enter the park that entitles them
to unlimited rides. Hopefully, the presence of the ride would attract new customers.
Required:
How much additional revenue would the ride have to generate per year to make it an
attractive investment?

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(Ignore income taxes in this problem.) Swaggerty Company is considering purchasing
a machine that would cost $462,000 and have a useful life of 7 years. The machine
would reduce cash operating costs by $115,500 per year. The machine would have no
salvage value.
Required:
a. Compute the payback period for the machine.
b. Compute the simple rate of return for the machine.

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(Ignore income taxes in this problem.) Alesi Company is considering purchasing a
machine that would cost $243,600 and have a useful life of 8 years. The machine
would reduce cash operating costs by $76,125 per year. The machine would have a
salvage value of $60,900 at the end of the project.
Required:
a. Compute the payback period for the machine.
b. Compute the simple rate of return for the machine.

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A company is considering purchasing an asset for $60,000 that would have a useful
life of 5 years and would have a salvage value of $7,000. For tax purposes, the entire
original cost of the asset would be depreciated over 5 years using the straight-line
method and the salvage value would be ignored. The asset would generate annual net
cash inflows of $27,000 throughout its useful life. The project would require
additional working capital of $1,000, which would be released at the end of the
project. The company's tax rate is 30% and its discount rate is 10%.
Required:
What is the net present value of the asset?

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Management is considering purchasing an asset for $50,000 that would have a useful
life of 5 years and no salvage value. For tax purposes, the entire original cost of the
asset would be depreciated over 5 years using the straight-line method. The asset
would generate annual net cash inflows of $20,000 throughout its useful life. The
project would require additional working capital of $7,000, which would be released
at the end of the project. The company's tax rate is 30% and its discount rate is 13%.
Required:
What is the net present value of the asset?

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Partida Inc. has provided the following data concerning a proposed investment project:
Initial investment ............... $861,000
Annual cash receipts .......... $603,000
Life of the project .............. 5 years
Annual cash expenses ........ $332,000
Salvage value ..................... $129,000
The company's tax rate is 30%. For tax purposes, the entire initial investment without
any reduction for salvage value will be depreciated over 3 years. The company uses a
discount rate of 11%.
Required:
Compute the net present value of the project.

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