Deck 10: Capital Budgeting

Question 1

Sam Jones has an engineering firm.He wants to build a new headquarters building.The building will cost $1,500,000.He will put down $1,050,000 and have a bank finance the remainder at prime plus 2 percent.The prime lending rate is currently 8.5 percent.Sam will withdraw the money for the down payment from his mutual fund account where he has earned 13% for the last ten years.What is Sam's weighted average cost of capital?

A)11.25%
B)12.25%
C)10.5%
D)8)5%

Answer 1

12.25%

Question 2

Which of the following is a start- up cost?

A)tax factor costs
B)sales taxes
C)utility costs
D)recruiting employees

Answer 2

recruiting employees

Question 3

Capital budgeting investments are feasible if,after capital budgeting analysis,the

A)present value of the benefits > the present value of the costs.
B)present value of the costs > the present value of the benefits.
C)present value of the costs < the present value of the benefits.
D)both A and C above
E)both A and B above

Answer 3

both A and C above

Question 4

Cheryl Peck purchased a computer network for her classroom.The computer network cost $100,000.She estimates that she can charge $500 for one session in the classroom.Cheryl knows that enrollment will increase over time.She estimates 50 students the first year,75 students the second year,100 students the third year,and 150 students the fourth year.If her cost of capital is 12 percent,what is the approximate present value of the benefits?

A)$187,500
B)$135,471
C)$119,156
D)Cannot tell without more information.

Question 5

Sam Jones has an engineering firm.He wants to build a new headquarters building.The building will cost $1,500,000.He will finance the entire building himself,even though bank financing is at prime plus 2 percent.The prime lending rate is currently 8.5 percent.Sam will withdraw the money for the building from his mutual fund account where he has earned 13% for the last ten years.What is Sam's weighted average cost of capital?

A)10.5%
B)13.00%
C)11.25%
D)8)5%

Question 6

The local printing company purchases a new copy machine for $150,000 that reduces the cost of making a color copy by ten cents a copy.The copy machine can be depreciated straight line for seven years and the company is in the 28 percent income tax bracket.The owner believes he can sell the machine for $10,000 at the end of seven years.Approximately how much will this company save on an annual basis in income taxes?

A)$42,000
B)$39,200
C)$2,800
D)$5,600

Question 7

Sam Jones has an engineering firm.He wants to build a new headquarters building.The building will cost $1,500,000.He will put down $450,000 and have a bank finance the remainder at prime plus 2 percent.The prime lending rate is currently 8.5 percent.Sam will withdraw the money for the down payment from his mutual fund account where he has earned 13% for the last ten years.What percentage of the building is being financed by the bank?

A)13%
B)70%
C)10.5%
D)30%

Question 8

Which of the following is not part of the three step process of controlling?

A)establish standards for measuring the project.
B)take corrective action if required.
C)measure actual performance against the standards established.
D)take corrective action in every case.

Question 9

If Joe Doe invests $40,000 in franchise and is able to generate $20,000 a year in benefits for 8 years,the following holds true:

A)The 20,000 received in year 2 is worth more than the 20,000 received in year 5.
B)The 20,000 received in year 8 is worth more than the 20,000 received in year 4.
C)The 20,000 received in year 1 is worth less than the 20,000 received in year 3.
D)none of the above

Question 10

In capital budgeting the future monies or benefits should be measured in

A)the cash balance in our checking account before taxes.
B)before tax cash flows.
C)the sum of after tax cash flows and accounting income.
D)after tax cash flows.

Question 11

Cheryl Peck purchased a computer network for her classroom.The computer network cost $100,000.She estimates that she can charge $500 for one session in the classroom.Cheryl knows that enrollment will increase over time.She estimates 50 students the first year,75 students the second year,100 students the third year,and 150 students the fourth year.If her cost of capital is 12 percent,what is the approximate payback period for this investment?

A)2)75 years
B)1)19 years
C)1)87 years
D)4)00 years

Question 12

The local printing company purchases a new copy machine that reduces the cost of making a color copy by ten cents a copy.It normally makes 50,000 color copies a year and is in the 28 percent income tax bracket.The total benefits that this company will expect to realize is

A)$6,400.
B)$3,600.
C)$5,000.
D)$1,400.

Question 13

Cheryl Peck purchased a computer network for her classroom.The computer network cost $100,000.She estimates that she can charge $500 for one session in the classroom.Cheryl knows that enrollment will increase over time.She estimates 50 students the first year,75 students the second year,100 students the third year,and 150 students the fourth year.If her cost of capital is 16 percent,what is the approximate present value of the benefits?

A)$187,500
B)$122,881
C)$119,156
D)$135,471

Question 14

Cheryl Peck purchased a computer network for her classroom.The computer network cost $100,000.She estimates that she can charge $500 for one session in the classroom.Cheryl knows that enrollment will increase over time.She estimates 50 students the first year,75 students the second year,100 students the third year,and 150 students the fourth year.If her cost of capital is 16 percent,what is the approximate net present value?

A)$87,500
B)$22,881
C)$35,471
D)$19,156

Question 15

George William buys a machine for his business.The machine costs $150,000.George estimates that the machine can produce $40,000 cash inflow per year for the next five years.George's cost of capital is 10 percent.What is the approximate present value of the future cash flow for George?

A)$191,632
B)$151,632
C)$166,796
D)$174,212

Question 16

The local printing company purchases a new copy machine that reduces the cost of making a color copy by ten cents a copy.It normally makes 50,000 color copies a year and is in the 28 percent income tax bracket.The tax consequence of this investment will be

A)an increase in income tax paid.
B)a decrease in income tax paid.
C)no difference in income tax paid.
D)cannot tell with the information provided.

Question 17

George William buys a machine for his business.The machine costs $150,000.George estimates that the machine can produce $40,000 cash inflow per year for the next five years.George's cost of capital is 10 percent.What is the approximate net present value?

A)$16,796
B)$24,212
C)$31,632
D)$1,632

Question 18

Anna Taylor buys a machine for her business.The machine costs $150,000.Anna estimates that the machine can produce $40,000 cash inflow per year for the next five years.Her cost of capital is 12 percent.What is the approximate profitability index of this investment?

A)0)96
B)1)10
C)1)08
D)1)22

Question 19

George William buys a machine for his business.The machine costs $150,000.George estimates that the machine can produce $40,000 cash inflow per year for the next five years.George's cost of capital is 10 percent.What is the payback for this investment?

A)3)75 years
B)5 years
C)1)25 years
D)9)43 years

Question 20

All of the following assets are not considered in capital budgeting except

A)purchase of trucks.
B)purchase of stocks.
C)purchase of inventory.
D)purchase of bonds.

Question 21

Anna Taylor buys a machine for her business.The machine costs $150,000.Anna estimates that the machine can produce $40,000 cash inflow per year for the next five years.Her cost of capital is 12 percent.What is the approximate present value of the future cash flow for Anna?

A)$161,492
B)$144,192
C)$164,456
D)$184,192

Question 22

George William buys a machine for his business.The machine costs $150,000.George estimates that the machine can produce $40,000 cash inflow per year for the next five years.George's cost of capital is 12 percent.What is the approximate internal rate of return?

A)10.43%
B)9)43%
C)8)95%
D)11.59%

Question 23

The acquisition of all the following assets are considered in capital budgeting except

A)purchase of trucks.
B)purchase of office equipment.
C)bringing a new product to market.
D)purchase of inventory.

Question 24

The local printing company purchases a new copy machine that reduces the cost of making a color copy by ten cents a copy.It normally makes 50,000 color copies a year and is in the 28 percent income tax bracket.The annual taxes on this purchase will be

A)$6,400.
B)$3,600.
C)$1,400.
D)$5,000.

Question 25

George William buys a machine for his business.The machine costs $150,000.George estimates that the machine can produce $40,000 cash inflow per year for the next five years.George's cost of capital is 10 percent.What is the accounting rate of return?

A)26.67%
B)133%
C)75%
D)375%

Question 26

Cheryl Peck purchased a computer network for her classroom.The computer network cost $100,000.She estimates that she can charge $500 for one session in the classroom.Cheryl knows that enrollment will increase over time.She estimates 50 students the first year,75 students the second year,100 students the third year,and 150 students the fourth year.If her cost of capital is 16 percent,what is the approximate profitability index?

A)1)88
B)1)08
C)1)19
D)1)23

Question 27

George William buys a machine for his business.The machine costs $150,000.George estimates that the machine can produce $40,000 cash inflow per year for the next five years.George's cost of capital is 10 percent.What is the approximate internal rate of return?

A)10.43%
B)11.59%
C)8)95%
D)9)43%

Question 28

Which of the following government actions would require a capital budgeting decision?

A)an increase in the number of wheel chair ramps available for customers entering our business
B)an increase in factoring requirements imposed by our bank
C)an increase in collection service fees imposed by our collection agency
D)an increase in sales taxes on all items sold after the first of next year

Question 29

The IRR can be used for investments

A)that produce a lump sum future value.
B)that produce unequal cash flows.
C)that produce equal cash flows.
D)all of the above.

Question 30

You own a restaurant and just negotiated a decrease in the cost of steaks by 25 cents a steak.You normally sell 300,000 steak dinners a year.Your business pays an average of 30 percent in income taxes.What is the annual benefit of this increased efficiency?

A)$22,500
B)$75,000
C)$52,500
D)$210,000

Question 31

Sam Jones has an engineering firm.He wants to build a new headquarters building.The building will cost $1,500,000.He will put down $450,000 and have a bank finance the remainder at prime plus 2 percent.The prime lending rate is currently 8.5 percent.Sam will withdraw the money for the down payment from his mutual fund account where he has earned 13% for the last ten years.What is Sam's weighted average cost of capital?

A)11.25%
B)8)5%
C)13.00%
D)10.5%

Question 32

Cheryl Peck purchased a computer network for her classroom.The computer network cost $100,000.She estimates that she can charge $500 for one session in the classroom.Cheryl knows that enrollment will increase over time.She estimates 50 students the first year,75 students the second year,100 students the third year,and 150 students the fourth year.If her cost of capital is 12 percent,what is the approximate profitability index?

A)1)35
B)1)05
C)1)88
D)1)19

Question 33

You own a restaurant and just negotiated a decrease in the cost of steaks by 25 cents a steak.You normally sell 300,000 steak dinners a year.Your business pays an average of 30 percent in income taxes.What is the annual tax cost of this increased efficiency?

A)$75,000
B)$22,500
C)$52,500
D)$210,000

Question 34

The local printing company purchases a new copy machine for $150,000 that reduces the cost of making a color copy by ten cents a copy.The copy machine can be depreciated straight line for seven years and the company is in the 28 percent income tax bracket.The owner believes he can sell the machine for $10,000 at the end of seven years.What is this company's total tax savings due to depreciation?

A)$39,200
B)$2,800
C)$5,600
D)$42,000

Question 35

Which of the following is not a step in the capital budgeting decision?

A)corrective action
B)making a decision to minimize the greatest future benefit
C)post audit
D)evaluating the data
E)formulating a proposal

Question 36

Start- up costs include all of the following except

A)training costs of employees.
B)changes in inventory storage space.
C)investment costs in accounts receivable.
D)service agreement costs.

Question 37

Anna Taylor buys a machine for her business.The machine costs $150,000.Anna estimates that the machine can produce $40,000 cash inflow per year for the next five years.Her cost of capital is 12 percent.Based upon the net present value of this investment,Anna should

A)invest in the machine if she can get a higher cost of capital.
B)not invest in the machine.
C)invest in the machine.
D)Cannot tell without additional information.

Question 38

Which of the following costs must be considered in evaluating a capital budgeting decision?

A)tax factor costs
B)working capital commitment costs
C)start- up costs
D)all of the above

Question 39

Cheryl Peck purchased a computer network for her classroom.The computer network cost $100,000.She estimates that she can charge $500 for one session in the classroom.Cheryl knows that enrollment will increase over time.She estimates 50 students the first year,75 students the second year,100 students the third year,and 150 students the fourth year.If her cost of capital is 12 percent,what is her accounting rate of return?

A)46.88%
B)33.87%
C)64.87%
D)78.33%

Question 40

Sam Jones has an engineering firm.He wants to build a new headquarters building.The building will cost $1,500,000.He will put down $450,000 and have a bank finance the remainder at prime plus 2 percent.The prime lending rate is currently 8.5 percent.Sam will withdraw the money for the down payment from his mutual fund account where he has earned 13% for the last ten years.What percentage of the building is being equity financed?

A)30%
B)10.5%
C)13%
D)70%

Question 41

A benefit resulting from reducing taxable income is equal to the amount of taxes paid.

Question 42

Future monies or benefits should be measured in before tax dollars.

Question 43

Future monies or benefits should be measured in after tax dollars.

Question 44

Anna Taylor buys a machine for her business.The machine costs $150,000.Anna estimates that the machine can produce $40,000 cash inflow per year for the next five years.Her cost of capital is 12 percent.What is the approximate net present value?

A)$14,456
B)$11,492
C)$34,192
D)$(5,808)

Question 45

Job shifts occurred in the early twenty first century because of the decreased price of communication and transportation.

Question 46

Capital rationing is a constraint placed on the number of investments that can be made in a given time period.

Question 47

Start- up costs are all the dollars spent to get the project under way.

Question 48

The weighted average cost of capital is the interest rate that is used in calculating the net present value for capital budgeting.

Question 49

The cost of capital to the lender consists of the opportunity cost on the amount of equity invested in the business.

Question 50

Cheryl Peck purchased a computer network for her classroom.The computer network cost $100,000.She estimates that she can charge $500 for one session in the classroom.Cheryl knows that enrollment will increase over time.She estimates 50 students the first year,75 students the second year,100 students the third year,and 150 students the fourth year.If her cost of capital is 12 percent,what is the approximate net present value of her investment?

A)$87,500
B)$19,156
C)$35,471
D)Cannot tell without more information.

Question 51

George William buys a machine for his business.The machine costs $150,000.George estimates that the machine can produce $40,000 cash inflow per year for the next five years.George's cost of capital is 10 percent.What is the approximate Profitability Index for this investment?

A)1)01
B)1)16
C)0)91
D)1)11

Question 52

Setting up a communication center in India requires a capital budgeting decision.

Question 53

The cost of capital to the borrower consists of the opportunity cost on the amount of equity invested in the business.

Question 54

Capital budgeting is the method we use to justify the acquisition of those items that have a useful life of less than one year.

Question 55

The NPV is positive when using a specific interest rate,The IRR will be greater than that interest rate used.

Question 56

A mutually exclusive investment is one where several investments are chosen and one is ultimately sacrificed or excluded.

Question 57

The accounting rate of return uses cash flow.

Question 58

The last step involved in capital budgeting is taking corrective action.

Question 59

If the present value of the benefits received are less than the present value of the costs incurred,then a company should make the decision to invest in the project.

Question 60

Which of the following requires a Capital Budgeting decision?

A)setting up a call center in India
B)buying legal pads for office use
C)buying a pen for office use
D)none of the above

Question 61

Capital budgeting investments are based on the assumption that rates of return on investments as well as current inflation rates will remain the same during the useful life of the investment.

Question 62

A benefit resulting from reducing taxable income is equal to the amount of taxes saved.

Question 63

The profitability index is the ratio of the present value of the cost to the present value of the benefits.

Question 64

The first step involved in the capital budgeting decision is formulating the proposal.

Question 65

We can compute the IRR by using a calculator and the input of two variables.

Question 66

Working capital consists of cash,marketable securities,accounts receivable,and inventory.

Question 67

The net present value is zero at the IRR.

Question 68

A mutually exclusive investment is one where one investment is chosen and the others are ultimately sacrificed or excluded.

Question 69

Capital budgeting investments are based on the assumption that rates of return on investments will vary,but current inflation rates will remain the same during the useful life of the investment.

Question 70

Capital Budgeting decisions pertain to domestic decisions only.

Question 71

Working capital consists of the cost of cash only.

Question 72

The Accounting rate of return is always the rate to use when finding the profitability of a project.

Question 73

Capital rationing is a constraint placed on the amount of funds that can be invested in a given time period.

Question 74

The profitability index is the ratio of the present value of the benefits to the present value of the costs.

Question 75

Payback normally considers the time value of money.

Question 76

When making a capital budgeting decision,we must arrive at a forecast of future interest rates.

Question 77

Payback does not consider the time value of money.

Question 78

If the present value of the benefits received outweigh the present value of the costs incurred,then a company should make the decision to invest in the project.

Question 79

Capital budgeting is the method we use to justify the acquisition of those items that have a useful life in excess of one year.

Question 80

The IRR is the rate that allows the present value of the benefits to exactly equal the present value of the costs.