Deck 19: Capital Investment

Question 1

NPV reveals the wealth-maximization of a project more consistently than IRR.

Answer 1

True

Question 2

If the internal rate of return (IRR) is less than the cost of capital, then the investment is acceptable.

Answer 2

False

Question 3

In today's markets, long-term investments in technology and pollution prevention can provide significant competitive advantages.

Answer 3

True

Question 4

The payback period is the time required for a company to recover its initial investment.

Question 5

Computation of cash flows is the most critical step in the capital investment process.

Question 6

Net present value (NPV) is the difference between the present value of cash inflows and outflows associated with a project.

Question 7

The internal rate of return (IRR) is the most widely used capital investment technique because it's an easily understood concept.

Question 8

In an independent project, the required rate of return is used to calculate the future value of future cash flows.

Question 9

Capital investment decisions are concerned with planning, setting goals, arranging financing, and the selection of long-term assets.

Question 10

NPV is preferred to IRR because it assumes that each cash inflow is not reinvested at the required rate of return.

Question 11

Mutually exclusive projects are those which preclude the acceptance of all other competing projects.

Question 12

Discounting models for making capital decisions ignore the time value of money.

Question 13

Nondiscounting models for making capital investments explicitly consider the time value of money.

Question 14

The internal rate of return (IRR) is the interest rate that sets the present value of cash inflows of a project equal to the present value of a project's cost.

Question 15

The accounting rate of return considers the profitability of a project as well as the time value of money.

Question 16

Discounted cash flows are used by discounting models which are future cash flows expressed in terms of their present value.

Question 17

If the net present value is greater than zero, the investment is profitable and acceptable.

Question 18

Independent projects directly affect the cash flows of other projects once accepted or rejected.

Question 19

the two ways to compute after-tax cash flows are the income method and the composition method.

Question 20

When conflicting signals are received from using NPV and IRR, NPV always produces the correct signal to invest.

Question 21

Projects that if accepted or rejected do NOT affect the cash flows of projects are called:

A)Dependent projects
B)Mutually exclusive projects
C)Independent projects
D)Both b and c

Question 22

The __________ rate of return uses income instead of cash flows.

Question 23

The process of making capital investment decisions is often referred to as:

A)arbitrage funding.
B)capital budgeting.
C)benchmarking.
D)market capitalization.

Question 24

The difference between the present value of future cash flows and the initial investment outlay is called the __________ value.

Question 25

Mutually exclusive projects do not affect the __________ of other projects.

Question 26

NVP measures the __________ in a firm's wealth caused by a project.

Question 27

Capital investment decisions are concerned with planning, setting goals, arranging financing, and the selection of __________ assets.

Question 28

The accounting rate of return on original investment is calculated as

A)original investment/net income.
B)net income/debt.
C)average income/original investment.
D)assets/debt.

Question 29

Azimuth Company was considering the purchase of equipment. Details on the equipment are as follows: $$\begin{array} { c c r } \text { Year } & \text { Original Investment } & \text { Cash Flow } \\{ 0 } & \$ 200,000 \\1 & &\$ 40,000 \\2 & & 40,000 \\3 & & 60,000 \\4 & & 40,000 \\5 & & 60,000 \\6 & & 30,000\end{array}$$ What is the payback period in years, assuming no taxes are paid?

A)4.33
B)4.00
C)5.00
D)3.85

Question 30

Which of the following is the formula to calculate payback period?

A)Payback period = Original investment / Average net income
B)Payback period = Investment / Original investment
C)Payback period = Average net income / Original investment
D)Payback period = Original investment / Annual cash flow

Question 31

Excellent Manufacturing Company is considering the following investment proposal: $$\begin{array} { l l } \text { Original investment } & \$ 15,000 \\\text { Operations (per year for four years): } & \\\text { Cash receipts } &\$ 10,550 \\\text { Cash expenditures } &\$ 6,200 \\\text { Salvage value of equipment after three years } &\$ 1,200 \\\text { Discount rate } &9 \% \end{array}$$ The firm uses the straight-line method of depreciation with no mid-year convention. What is the payback period in years approximated to two decimal points, assuming no taxes are paid?

A)2.38 years
B)1.82 years
C)3.45 years
D)3.21 years

Question 32

When comparing the payback method and the accounting rate of return methods, which of the following is true? $$\begin{array} { | l | l | l| } \hline & { \text { Profitability } } &{ \text { Time Value of Money } } \\\hline \text { I } & \text { Ignored by both methods } & \text { Ignored by both methods } \\\hline \text { II } & \text { Ignored by both methods } & \begin{array} { l } \text { Used in accounting rate of return, ignored by } \\\text { payback method }\end{array} \\\hline \text { III } & \begin{array} { l } \text { Considered by accounting method, not } \\\text { by payback }\end{array} & \text { Ignored by both methods } \\\hline \text { IV } & \begin{array} { l } \text { Considered by accounting method, not } \\\text { by payback }\end{array} & \begin{array} { l } \text { Considered by both methods } \\\end{array}\\\hline\end{array}$$

A)IV
B)III
C)II
D)I

Question 33

The time required by a firm to recover its original investment is called the __________ period.

Question 34

Which of the following is an example of an independent project?

A)A manufacturing plant considering a major overhaul of an existing machine or replacing the existing machine with a new model.
B)A hospital considering the purchase of a new MRI machine and a new cardiac monitoring system.
C)A bank deciding between keeping a manual check sorting process or an automated sort process.
D)A retailer deciding between an inventory management system offered by two different vendors.

Question 35

RentitAll Management Services is considering an investment of $60,000. Data related to the investment are as follows: $$\begin{array} { c c } \text { Year } & \text { Cash Flow } \\\hline 1 & \$ 20,000 \\2 & 24,000 \\3 & 30,000 \\4 & 40,000 \\5 & 20,000\end{array}$$
Cost of capital is 18 percent. What is the payback period in years approximated to two decimal points, assuming no taxes are paid?

A)3.00
B)2.53
C)2.00
D)2.22

Question 36

The __________ rate of return sets the present value of cash inflows equal to the present value of a project's cost.

Question 37

The required __________ is used to calculate the present value of future cash flows.

Question 38

Projects that, if accepted preclude the acceptance of all other competing projects are called:

A)Mutually exclusive projects
B)Independent projects
C)Dependent projects
D)Both b and c

Question 39

Investment outlays may be affected by substantial resources required by __________ items.

Question 40

Accelerated methods of __________ are preferred because of the tax benefits created.

Question 41

Milagros Company is considering an investment in equipment for $60,000. Milagros uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent and the life of the equipment is five years with no salvage value. The expected income before depreciation and taxes is projected to be $30,000 per year. What is the payback period in years approximated to two decimal points?

A)4.00
B)2.63
C)2.00
D)1.00

Question 42

Edmundo Services is considering an investment of $25,000. Data related to the investment are as follows: $\begin{array}{cr}\text { Year } & \text { Cash Flow } \\1 & \$ 10,000 \\2 & 11,000 \\3 & 8,000 \\4 & 15,000 \\5 & 15,000\end{array}$ Cost of capital is 14 percent. What is the net present value of the investment, assuming no taxes are paid?

A)$14,825
B)$14,294
C)$25,000
D)$39,294

Question 43

Glare Company is considering the purchase of a new machine for $150,000. The machine generates annual revenues of $62,500 and annual expenses of $42,000, which include $8,100 of depreciation. What is the payback period in years on the machine approximated to one decimal point?

A)2.1 years
B)1.4 years
C)5.2 years
D)4.3 years

Question 44

Which of the following is true about a positive net present value?

A)It measures the increase in the value of a firm resulting from an investment.
B)It measures the rate at which the discount rate has decreased.
C)It indicates that an investment is not profitable and hence should be rejected.
D)It indicates that the cost of capital is less than the hurdle rate.

Question 45

Beduin Services is considering an investment of $25,000. Data related to the investment are as follows: $\begin{array}{cr}\text { Year } & \text { Cash Flow } \\\hline 1 & \$ 10,000 \\2 & 11,000 \\3 & 8,000 \\4 & 15,000 \\5 & 15,000\end{array}$ Cost of capital is 14 percent. What is the payback period in years approximated to two decimal points, assuming no taxes are paid?

A)2.12
B)4.00
C)3.00
D)2.50

Question 46

Anselmo Corp. is considering the purchase of a new machine for $76,000. The machine would generate an annual cash flow of $23,214 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention. What is the payback period in years for the machine approximated to two decimal points, assuming no taxes are paid?

A)3.00
B)3.27
C)9.48
D)4.00

Question 47

Joyous Corporation is considering an investment in equipment for $25,000. Data related to the investment are as follows: $$\begin{array}{l}\begin{array} { c c } &\text { Cash Flow before }\\\text { Year } & \text { Depreciation and Taxes } \\1 & \$ 12,500 \\2 & 12,500 \\3 & 12,500 \\4 & 12,500\end{array}\end{array}$$ Joyous uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent and the life of the equipment is four years with no salvage value. Cost of capital is 12 percent. What is the payback period in years approximated to two decimal points?

A)2.00
B)2.50
C)3.33
D)0.40

Question 48

Hollister Company is considering the purchase of a new machine for $60,000. The machine would generate an annual cash flow before depreciation and taxes of $25,647 for four years. At the end of four years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the accounting rate of return on the original investment in the machine approximated to two decimal points?

A)17.75%
B)12%
C)10.65%
D)25.65%

Question 49

A project requires an investment of $40,000 in equipment. Annual cash flows of $8,000 are expected to occur for the next eight years. No salvage value is expected. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes. The accounting rate of return on the original investment for the project is

A)6.25%.
B)7.50%.
C)16.00%.
D)20.00%.

Question 50

Spaniel Company is considering the purchase of a new machine for $80,000. The machine would generate an annual cash flow before depreciation and taxes of $28,778 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the accounting rate of return on the original investment in the machine approximated to two decimal points?

A)9.58%
B)19.17%
C)15.97%
D)35.97%

Question 51

Davidson, Inc., is considering the purchase of production equipment that costs $300,000. The equipment is expected to generate an annual cash flow of $100,000 and have a useful life of five years with no salvage value. The firm's cost of capital is 14 percent. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes. Payback for the project is

A)3.00 years.
B)3.50 years.
C)5.00 years.
D)2.38 years.

Question 52

A firm is evaluating a project that has a net present value of $0 when a discount rate of 9 percent is used. A discount rate of 7 percent will result in a

A)negative net present value.
B)positive net present value.
C)net present value of $0.
D)the question cannot be answered based upon the information provided.

Question 53

Evaristo Corporation is considering an investment in equipment for $45,000. Data related to the investment are as follows: $$\begin{array}{l}\begin{array} { c c } &\text { Cash Flow before }\\\text { Year } & \text { Depreciation and Taxes } \\\hline 1 & \$ 30,000 \\2 & 30,000 \\3 & 30,000 \\4 & 30,000 \\5 & 30,000\end{array}\end{array}$$ Cost of capital is 18 percent. Evaristo uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent, and the life of the equipment is five years with no salvage value. What is the payback period in years approximated to two decimal points?

A)1.00
B)0.67
C)1.50
D)2.08

Question 54

A firm is evaluating a project that has a net present value of $0 when a discount rate of 8 percent is used. A discount rate of 6 percent will result in a

A)negative net present value.
B)positive net present value.
C)net present value of $0.
D)the question cannot be answered based upon the information provided.

Question 55

Which of the following methods uses income instead of cash flows?

A)payback
B)accounting rate of return
C)internal rate of return
D)net present value

Question 56

Sansariff Company invests in a new piece of equipment costing $40,000. The equipment is expected to yield the following amounts per year for the equipment's four-year useful life: $\begin{array}{lc}\text { Cash revenues } & \$ 60,000 \\\text { Cash expenses } & (32,000) \\\text { Depreciation expenses (straight-line) } & (10,000) \\\text { Income provided from equipment } & \$ 18,000\\\text { Cost of capital }&14\%\end{array}$ What is the net present value of this investment in equipment, assuming no taxes are paid?

A)$(4,480)
B)$52,452
C)$41,592
D)$81,592

Question 57

Core Corp. is considering the purchase of a new machine for $85,000. The machine would generate an annual cash flow of $25,500 per year for six years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation with no mid-year convention. What is the net present value of the machine, assuming no taxes are paid? (Round your answers to two decimal places.)

A)$0
B)$11,670.50
C)$15,180.70
D)$(18,520.20)

Question 58

Melancholy Company is considering the purchase of production equipment that costs $800,000. The equipment is expected to generate an annual cash flow of $250,000 and have a useful life of five years with no salvage value. The firm's cost of capital is 12 percent. The company uses the straight-line method of depreciation with no mid-year convention. There are no income taxes. The payback period in years for the project is

A)3.20 years.
B)3.25 years.
C)2.90 years.
D)4.20 years.

Question 59

Gunslinger Company is considering the purchase of pipe cutting equipment. Data on the equipment are as follows: $$\begin{array} { l r } \text { Original investment } & \$ 35,000 \\\text { Net annual cash inflow } & \$ 8,000 \\\text { Expected economic life in years } & 5 \\\text { Salvage value at the end of five years } & \$ 3,500\end{array}$$ The company uses the straight-line method of depreciation with no mid-year convention. What is the accounting rate of return on original investment rounded to the nearest percent, assuming no taxes are paid?

A)22.86%
B)2.86%
C)18%
D)4.86%

Question 60

Los Gatos Shop is considering the purchase of a used wide-format printer costing $9,600. The wide-format printer would generate a net cash inflow of $4,000 per year for three years. At the end of three years, the printer would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation with no mid-year convention. What is the accounting rate of return on the original investment in the press to the nearest percent, assuming no taxes are paid?

A)8.33%
B)41.67%
C)75.00%
D)10.00%

Question 61

MakeitRite Company is considering the purchase of a new machine for $80,000. The machine would generate an annual cash flow before depreciation and taxes of $28,778 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the net present value for the machine?

A)$-0-
B)$5,318
C)$85,318
D)$23,744

Question 62

The present value of $4,000 to be received each year for three years and earning a 10 percent return (rounded) is

A)$11,120.
B)$9,948.
C)$9,822.
D)$9,200.

Question 63

Clemente Company is considering the purchase of a new machine for $160,000. The machine would generate an annual cash flow before depreciation and taxes of $62,588 for four years. At the end of four years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the net present value for the machine?

A)($45,952)
B)$162,640
C)$30,080
D)$2,640

Question 64

The present value of $10,000 to be received each year for ten years and earning a 14 percent return (rounded) is

A)$11,600.
B)$26,000.
C)$52,160.
D)$52,436.

Question 65

Jacuzzi Corporation is considering an investment in equipment for $25,000. Data related to the investment are as follows: $$\begin{array}{l}\begin{array} { c c } &\text { Cash Flow before }\\\text { Year } & \text { Depreciation and Taxes } \\1 & \$ 12,500 \\2 & 12,500 \\3 & 12,500 \\4 & 12,500\end{array}\end{array}$$ Jacuzzi uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent, and the life of the equipment is four years with no salvage value. Cost of capital is 12 percent. What is the net present value of the investment?

A)$5,370
B)$(2,222)
C)$12,962
D)$30,370

Question 66

The following information pertains to an investment by the Town of Sutton: $$\begin{array} { l r } \text { Investment } & \$ 140,000 \\\text { Annual revenues } & \$ 96,000 \\\text { Annual variable costs } & \$ 32,000 \\\text { Annual fixed out-of-pocket costs } & \$ 20,000 \\\text { Salvage value } & \$ 12,000 \\\text { Discount rate } & 12 \% \\\text { Expected life of project } & 8 \text { years }\end{array}$$ Ignore income taxes. The present value of the salvage value (rounded) is

A)$5,738.
B)$4,848.
C)$6,228.
D)$6,448.

Question 67

The present value of $20,000 to be received five years from now and earning a 6 percent return (rounded) is

A)$14,000.
B)$14,940.
C)$15,784.
D)$16,420.

Question 68

A firm is considering a project with an annual cash flow of $200,000. The project would have a 7-year life, and the company uses a discount rate of 10 percent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable?

A)$718,200
B)$1,400,000
C)$973,600
D)$200,000

Question 69

The present value of $7,500 to be received each year for five years and earning an 10 percent return (rounded) is

A)$28,433.
B)$8,250.
C)$14,717.
D)$33,750.

Question 70

The present value of $4,000 to be received three years from now and earning a 12 percent return (rounded) is

A)$2,848.
B)$2,520.
C)$4,880.
D)$5,440.

Question 71

Laramie Corporation is considering an investment in equipment for $20,000. Laramie uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent, and the life of the equipment is five years with no salvage value. The expected income before depreciation and taxes is projected to be $10,000 per year. The cost of capital is 20 percent. What is the net present value of the investment?

A)$(1,366)
B)$2,732
C)$22,991
D)$22,000

Question 72

The following information pertains to an investment: $$\begin{array} { l r } \text { Investment } & \$ 240,000 \\\text { Annual revenues } & \$ 140,000 \\\text { Annual variable costs } & \$ 30,000 \\\text { Annual fixed out-of-pocket costs } & \$ 22,000 \\\text { Salvage value } & \$ 54,000 \\\text { Discount rate } & 16 \% \\\text { Expected life of project } & 3 \text { years }\end{array}$$ Ignoring income taxes, the present value of the salvage value (rounded) is

A)$31,346.
B)$34,614.
C)$35,500.
D)$46,440.

Question 73

Spiritlight Ventures is considering the following investment: $$\begin{array} { l r } \text { Investment } & \$ 140,000 \\\text { Annual revenues } & \$ 96,000 \\\text { Annual variable costs } & \$ 32,000 \\\text { Annual fixed out-of-pocket costs } & \$ 20,000 \\\text { Salvage value } & \$ 12,000 \\\text { Discount rate } & 12 \% \\\text { Expected life of project } & 8 \text { years }\end{array}$$
Ignore income taxes. The present value of the annual cash flow (rounded) is

A)$218,592.
B)$204,884.
C)$152,538.
D)$136,822.

Question 74

The present value of $10,000 to be received ten years from now and earning a 12 percent return (rounded) is

A)$2,200.
B)$2,484.
C)$3,160.
D)$3,220.

Question 75

A firm is considering a project with an annual cash flow of $80,000. The project would have a 10-year life, and the company uses a discount rate of 8 percent. Ignoring income taxes, what is the maximum amount the company could invest in the project and have the project still be acceptable (rounded)?

A)$800,000
B)$536,800
C)$406,420
D)$727,208

Question 76

Galveston Corporation is considering an investment in equipment for $45,000. Data related to the investment are as follows: $$\begin{array}{l}\begin{array} { c c } &\text { Cash Flow before }\\\text { Year } & \text { Depreciation and Taxes } \\& \$ 30,000 \\2 & 30,000 \\3 & 30,000 \\4 & 30,000 \\5 & 30,000\end{array}\end{array}$$ Cost of capital is 18 percent. Galveston uses the straight-line method of depreciation with no mid-year convention. In addition, their tax rate is 40 percent, and the life of the equipment is five years with no salvage value. What is the net present value of the investment?

A)$67,543
B)$22,543
C)$48,810
D)$11,286

Question 77

Somozas Manufacturing Company is considering the following investment proposal: $\begin{array}{lr}\text { Original investment } & \$ 12,500 \\\text { Operations (per year for four years): } & \\\text { Cash receipts } & \$ 10,000 \\\text { Cash expenditures } & 5,500 \\\text { Salvage value of equipment after four years } & \$ 1,000 \\\text { Discount rate } & 12 \%\end{array}$ The firm uses the straight-line method of depreciation with no mid-year convention. What is the net present value for the investment, assuming no taxes are paid?

A)$500
B)$1,500
C)$12,500
D)$1,802.50

Question 78

A capital investment project requires an investment of $100,000 and has an expected life of four years. Annual cash flows at the end of each year are expected to be as follows: $$\begin{array} { c c } \text { Year } & \text { Amount } \\1 & \$ 40,000 \\2 & \$ 48,000 \\3 & \$ 76,000 \\4 & \$ 56,000\end{array}$$ Ignoring income taxes, the net present value of the project using a 8 percent discount rate is

A)$20,320
B)$49,680
C)($49,680)
D)($20,320)

Question 79

Los Gatos Shop is considering the purchase of a used wide-format printer costing $9,600. The wide-format printer would generate a net cash inflow of $4,000 per year for three years. At the end of three years, the printer would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation with no mid-year convention. What is the net present value for the press, assuming no taxes are paid?

A)$2,400
B)$9,948
C)$348
D)$9,600

Question 80

Canyon Company is considering an investment of $45,000. Data related to the investment are as follows: $$\begin{array} { c c } \text { Year } & \text { Cash Flow } \\\hline 1 & \$ 15,000 \\2 & 18,000 \\3 & 22,500 \\4 & 30,000 \\5 & 15,000\end{array}$$ Cost of capital is 18 percent. What is the net present value of the investment, assuming no taxes are paid?

A)$10,500
B)$55,500
C)$61,366
D)$16,367