Deck 10: Capital Budgeting

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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 5

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

Question 6

Payback does not consider the time value of money.

Question 7

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

Question 8

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

Question 9

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

Question 10

Future moneys or benefits should be measured in before -tax dollars.

Question 11

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

Question 12

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

Question 13

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

Question 14

Future moneys or benefits should be measured in after -tax dollars.

Question 15

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

Question 16

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 17

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

Question 18

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 19

Payback normally considers the time value of money.

Question 20

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 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

If you do not have a business or programmable calculator you can still find the IRR through the process of interpolation.

Question 27

Which of the following assets is considered in capital budgeting?

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

Question 28

The net present value is zero at the IRR.

Question 29

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

Question 30

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

Question 31

The accounting rate of return uses cash flow.

Question 32

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

Question 33

Capital Budgeting decisions pertain to domestic decisions only.

Question 34

In capital budgeting, the future moneys or benefits should be measured in

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

Question 35

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.

Question 36

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

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

Question 37

The IRR is the actual rate of return on an investment.

Question 38

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

Question 39

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

Question 40

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

Question 41

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

Question 42

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 the machine can be sold for $10,000 at the end of seven years. What is this company's total tax savings due to depreciation?

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

Question 43

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) 8.95%
B) 9.43%
C) 11.59%
D) 10.43%

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

Question 45

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) 1.11
B) 1.01
C) 0.91
D) 1.16

Question 46

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 47

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

Question 48

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) 11.59%
B) 10.43%
C) 9.43%
D) 8.95%

Question 49

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

Question 50

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

Question 51

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

Question 52

Start -up costs include all of the following EXCEPT

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

Question 53

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 54

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

Question 55

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) 1.08
B) 0.96
C) 1.10
D) 1.22

Question 56

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 the machine can be sold for $10,000 at the end of seven years. Approximately how much will this company save on an annual basis in income taxes?

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

Question 57

Which of the following is a start -up cost?

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

Question 58

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 59

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

Question 60

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

Question 61

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

Question 62

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 percent for the last ten years. What is Sam's weighted average cost of capital?

A) 10.5%
B) 11.25%
C) 8.5%
D) 12.25%

Question 63

Table 10 -1. Capital Budgeting Choices

Refer to Table 10 -1. Glen Write owns an engineering firm. He asked his employees for suggestions regarding equipment they thought the firm would need during the next year. They suggested the purchase of eight pieces of equipment. Glen calculated the net present value of each recommendation. Glen estimates that he will have no more than $150,000 to invest next year. Based on the projects chosen, how much will he actually invest?

A) $290,500
B) $136,250
C) $299,750
D) $145,000

Question 64

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) 1.19
B) 1.88
C) 1.35
D) 1.05

Question 65

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

Question 66

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

Question 67

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 percent for the last ten years. What percentage of the building is being financed by the bank?

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

Question 68

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

Question 69

Table 10 -1. Capital Budgeting Choices

Refer to Table 10 -1. Glen Write owns an engineering firm. He asked his employees for suggestions regarding equipment they thought the firm would need during the next year. They suggested the purchase of eight pieces of equipment. Glen calculated the net present value of each recommendation. Glen estimates that he will have no more than $150,000 to invest next year. Based on NPV, which of the following items should he purchase?

A) 2, 3, & 7
B) 1, 2, 3, & 4
C) 1, 2, & 8
D) 7 & 8

Question 70

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

Question 71

Table 10 -1. Capital Budgeting Choices

Refer to Table 10 -1. Glen Write owns an engineering firm. He asked his employees for suggestions regarding equipment they thought the firm would need during the next year. They suggested the purchase of eight pieces of equipment. Glen calculated the net present value of each recommendation. Glenn has a policy of purchasing only one item per year. Which alternative to capital budgeting is Glen using?

A) positive NPV
B) capital rationing
C) mutually exclusive
D) non -mutually exclusive

Question 72

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) 5 years
B) 1.25 years
C) 3.75 years
D) 9.43 years

Question 73

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 percent 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 74

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 percent for the last ten years. What percentage of the building is being equity financed?

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

Question 75

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

Question 76

Table 10 -1. Capital Budgeting Choices

Refer to Table 10 -1. Glen Write owns an engineering firm. He asked his employees for suggestions regarding equipment they thought the firm would need during the next year. They suggested the purchase of eight pieces of equipment. Glen calculated the net present value of each recommendation. Glenn has a policy of purchasing only one item per year. Based on NPV, which should he purchase?

A) 8
B) 6
C) 1
D) 5

Question 77

Table 10 -1. Capital Budgeting Choices

Refer to Table 10 -1. Glen Write owns an engineering firm. He asked his employees for suggestions regarding equipment they thought the firm would need during the next year. They suggested the purchase of eight pieces of equipment. Glen calculated the net present value of each recommendation. Glen estimates that he will have no more than $300,000 to invest next year. Based on NPV, which of the following items should he purchase?

A) 1, 2, 3, 4, 5, 6, & 8
B) 1, 2, 3, 4, 7, & 8
C) 1, 2, 3, 4, 5, 7, & 8
D) 1, 2, 4, 5, 6, & 7

Question 78

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 percent for the last ten years. What is Sam's weighted average cost of capital?

A) 11.25%
B) 13.00%
C) 10.5%
D) 8.5%

Question 79

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) 1.87 years
B) 2.75 years
C) 4.00 years
D) 1.19 years

Question 80

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) 1.23
D) 1.19