131

Questions

15

True/False

97

Choices

19

Essay

Quiz Mode

Quiz Mode is disabled becuase you need to unlock this quiz first.

Quiz Mode allows you to practice the quiz as a real exam, you'll have a timer, answers will be hidden, you'll be allowed to fill your answers, get the result at the end and store your results.

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%.

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

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.

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

Answer:

False

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

Answer:

False

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

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

Discounted cash flow techniques automatically provide for recovery of initial

investment.

True/False

The salvage value of new equipment should not be considered when using the internal

rate of return method to evaluate a project.

True/False

Because of the uncertainty and large cost involved in investments in automated

equipment, any intangible benefits from these projects should be ignored.

True/False

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

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

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

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

In the payback method, depreciation is added back to net operating income when

computing the net annual cash flow.

True/False

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

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

the cash flow.

True/False

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

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

project, then:

Multiple Choice

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

Multiple Choice

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

rate:

Multiple Choice

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

The assumption that the cash flows from an investment project are reinvested at the

company's discount rate applies to:

Multiple Choice

The net present value of a proposed investment is negative. Therefore, the discount

rate used must be:

Multiple Choice

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

The net present value (NPV) method of investment project analysis assumes that the

project's cash flows are reinvested at the:

Multiple Choice

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

analysis except:

Multiple Choice

In capital budgeting computations, discounted cash flow methods:

Multiple Choice

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

Multiple Choice

The investment required for the project profitability index should:

Multiple Choice

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

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

should be:

Multiple Choice

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

(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

(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

(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

(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

(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

(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

(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

(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

(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

(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

(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

(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

(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

(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

(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

(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

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

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

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

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

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

(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

(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

(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

(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

(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

(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

(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

(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

(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

(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

(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

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

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

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

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

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

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

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

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

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

Multiple Choice

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

approach?

Multiple Choice

Within what range does the internal rate of return fall?

Multiple Choice

What is the simple rate of return for automating operations?

Multiple Choice

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

The net present value of the project is closest to:

Multiple Choice

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

Multiple Choice

The payback period of this investment is closest to:

Multiple Choice

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

Multiple Choice

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

closest to:

Multiple Choice

The net present value of overhauling the present system is:

Multiple Choice

The net present value of the new system alternative is:

Multiple Choice

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

is:

Multiple Choice

If the new equipment is purchased, the present value of the annual cash operating costs

associated with this alternative is:

Multiple Choice

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

Multiple Choice

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

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

Multiple Choice

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

closest to:

Multiple Choice

Under option 2, the present value of all cash flows associated with maintenance costs

is closest to:

Multiple Choice

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

cash receipts?

Multiple Choice

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

cash expenses?

Multiple Choice

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

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

The net present value of the project is closest to:

Multiple Choice

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

cash receipts?

Multiple Choice

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

cash expenses?

Multiple Choice

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

from the salvage value in the final year?

Multiple Choice

from the salvage value in the final year?

Multiple Choice

The net present value of the project is closest to:

Multiple Choice

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

cash receipts?

Multiple Choice

The net present value of the project is closest to:

Multiple Choice

(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

(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

(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

(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.

Essay

(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.

Essay

(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.

Essay

(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?

Essay

(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.

Essay

(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.

Essay

(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.

Essay

(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.

Essay

(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.

Essay

(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?

Essay

(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.

Essay

(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.

Essay

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?

Essay

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?

Essay

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.

Essay