Deck 20: Capital Investment Decisions and the Time Value of Money

Question 1

Increasing a cash flow in year ten will increase a project's net present value and will always decrease a project's payback period.

Answer 1

False

Question 2

Which of the following methods cannot be used if the discount rate has not yet been determined?

A) Payback period
B) Internal rate of return
C) Accounting rate of return
D) Net present value

Answer 2

Net present value

Question 3

Which of the following statements is incorrect?

A) The payback method ignores the time value of money.
B) The internal rate of return is the actual return on the investment.
C) The net present value method and the profitability index will always result in the same project preference ranking.
D) The profitability index incorporates the time value of money.

Answer 3

The net present value method and the profitability index will always result in the same project preference ranking.

Question 4

Simms Manufacturing is considering two alternative investment proposals with the following data:
$$\begin{array} { | l | l | l | } \hline & \text { Proposal X } & \text { Proposal Y } \\\hline \text { Investment } & \$ 620,000 & \$ 400,000 \\\hline \text { Useful life } & 8 \text { years } & 8 \text { years } \\\hline \begin{array} { l } \text { Estimated annual net } \\\text { cash inflows for 8 years }\end{array} & \$ 130,000 & \$ 80,000 \\\hline \text { Residual value } & \$ 60,000 & \$ 0 \\\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \\\hline \text { Required rate of return } & 14 \% & 10 \% \\\hline\end{array}$$ What is the accounting rate of return for Proposal Y?

A) 15.0%
B) 16.0%
C) 20.0%
D) 40.0%

Question 5

Logan, Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:
$$\begin{array} { | l | l | l | } \hline & \text { Investment A } & \text { Investment B } \\\hline \text { Initial capital investment } & \$ 60,000 & \$ 90,000 \\\hline \text { Estimated useful life } & 3 \text { years } & 3 \text { years } \\\hline \text { Estimated residual value } & - 0 - & - 0 - \\\hline \begin{array} { l } \text { Estimated annual net cash inflow } \\\text { For 3 years }\end{array} & \$ 25,000 & \$ 40,000 \\\hline \text { Required rate of return } & 10 \% & 12 \% \\\hline\end{array}$$ The present value factors of $1 due 3 years from now
$$\begin{array} { | l | l | } \hline 8 \% & 0.794 \\\hline 10 \% & 0.751 \\\hline 12 \% & 0.712 \\\hline 14 \% & 0.675 \\\hline\end{array}$$

A) 0.4 years
B) 2.4 years
C) 2.5 years
D) 3.0 years

Question 6

Logan, Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:
$$\begin{array} { | l | l | l | } \hline & \text { Investment A } & \text { Investment B } \\\hline \text { Initial capital investment } & \$ 60,000 & \$ 90,000 \\\hline \text { Estimated useful life } & 3 \text { years } & 3 \text { years } \\\hline \text { Estimated residual value } & - 0 - & - 0 - \\\hline \begin{array} { l } \text { Estimated annual net cash inflow } \\\text { For 3 years }\end{array} & \$ 25,000 & \$ 40,000 \\\hline \text { Required rate of return } & 10 \% & 12 \% \\\hline\end{array}$$ The present value factors of $1 due 3 years from now:
$$\begin{array} { | l | l | } \hline 8 \% & 0.794 \\\hline 10 \% & 0.751 \\\hline 12 \% & 0.712 \\\hline 14 \% & 0.675 \\\hline\end{array}$$

A) 0.44 years
B) 2.25 years
C) 2.35 years
D) 3.00 years

Question 7

Sun Company is considering purchasing new equipment costing $350,000. Sun's management has
Estimated that the equipment will generate cash flows as follows:
$$\begin{array} { | l | l | } \hline \text { Year 1 } & \$ 100,000 \\\hline \text { Year 2 } & \$ 100,000 \\\hline \text { Year 3 } & \$ 125,000 \\\hline \text { Year 4 } & \$ 125,000 \\\hline \text { Year 5 } & \$ 75,000 \\\hline\end{array}$$ If the discount rate is 10%, what is the internal rate of return?

A) 10%
B) Greater than 10%
C) Less than 10%
D) The internal rate of return can't be determined.

Question 8

Sun Company is considering purchasing new equipment costing $350,000. Sun's management has
Estimated that the equipment will generate cash flows as follows:
$$\begin{array} { | l | l | } \hline \text { Year 1 } & \$ 100,000 \\\hline \text { Year 2 } & \$ 100,000 \\\hline \text { Year 3 } & \$ 125,000 \\\hline \text { Year 4 } & \$ 125,000 \\\hline \text { Year 5 } & \$ 75,000 \\\hline\end{array}$$ What is the profitability index of the equipment if the discount rate is 10%?
Note: Present value and future value tables are needed.

A) 1.14
B) .14
C) .45
D) .52

Question 9

Which of the following statements is incorrect?

A) Increasing the discount rate will decrease the profitability index.
B) Decreasing the discount rate will increase the net present value.
C) Increasing the discount rate will not affect the payback period.
D) Increasing the discount rate will increase the internal rate of return.

Question 10

Which of the following is not descriptive of the accounting rate of return method?

A) It is based on accrual accounting figures.
B) It measures the profitability of the asset over its entire life.
C) It shows how the investment will affect operating income.
D) It incorporates the time value of money.

Question 11

Which of the following statements regarding the payback method is incorrect?

A) It ignores the time value of money.
B) It ignores cash flows occurring after the payback period.
C) It is based on the accrual accounting concept.
D) It is relatively easy to compute.

Question 12

An investment opportunity costing $500,000 has a profitability index of 1.05. Which of the followingstatements is incorrect?

A) The present value of the future net cash flows is $525,000.
B) The net present value is $25,000.
C) The internal rate of return is greater than the discount rate.
D) The accounting rate of return is at least 5%.

Question 13

An investment opportunity costing $750,000 has a net present value of $112,500. Which of thefollowing statements is correct?

A) The profitability index is .15.
B) The present value of the net future cash flows is $862,500.
C) The internal rate of return is less than the discount rate.
D) A decrease in the discount rate would decrease the net present value.

Question 14

Starr Corporation is contemplating an investment in new equipment costing $598,000. The equipment will be depreciated on a straight-line basis over a six-year life and is expected to have a salvage value of $19,000. The equipment is expected to generate additional revenues of $440,000 while increasing cash operating expenses by $310,000 per year. What is the accounting rate of return associated with the equipment investment?

A) 38.9%
B) 11.2%
C) 10.9%
D) 9.8%

Question 15

Lennon Corporation is contemplating an investment in new equipment costing $650,000. The equipment will be depreciated on a straight-line basis over a seven-year life and is expected to have a salvage value of $20,000. The equipment is expected to increase cash operating expenses by $200,000 per year. How much would the annual revenues have to be in order to achieve an accounting rate of return of 10%?

A) $322,500
B) $355,000
C) $393,500
D) $323,500

Question 16

McCartney Corporation is contemplating an investment in new machinery costing $300,000. Themachine will be depreciated on a straight-line basis over a five-year life and is expected to increaserevenues by $284,000 and cash operating expenses by $220,000 per year. How much would themachine's salvage value need to be in order to achieve an accounting rate of return of 8%?

A) $40,000
B) $50,000
C) $100,000
D) $75,000

Question 17

Which of the following statements is correct?

A) A decrease in the discount rate will result in a decrease in the payback period.
B) An increase in the discount rate will result in an increase in the accounting rate of return.
C) A decrease in the discount rate will result in a decrease in the net present value.
D) An increase in the discount rate will not change the internal rate of return.

Question 18

Beecher Corporation is contemplating an investment project costing $200,000. The project is estimatedto have a four-year life, generate annual operating income of $35,000, and have a salvage value of$20,000 after four years. What is the project's payback period?

A) 2.25 years
B) 2.35 years
C) 2.5 years
D) 5.7 years

Question 19

You are currently 25 and would like to retire at age 45 and be able to withdraw from your savings $150,000 at the end of each year from then until age 85. You plan to save by making equal investments for the next 20 years. You believe you will earn 10% per year on your investments and will leave the money invested at 10% until it is completely used up at age 85.
Note: Present value and future value tables are needed.
How much money will you need to accumulate by the time you retire?

A) $1,009,200
B) $1,277,100
C) $1,466,850
D) $6,789,000

Question 20

You are currently 25 and would like to retire at age 45 and be able to withdraw from your savings $150,000 at the end of each year from then until age 85. You plan to save by making equal investments for the next 20 years. You believe you will earn 10% per year on your investments and will leave the money invested at 10% until it is completely used up at age 85.
Note: Present value and future value tables are needed.
How much money will you need to put into the investment at the end of each year from age 25 until age 45 to reach your goal?

A) $3,314
B) $25,611
C) $172,287
D) $218,561

Question 21

Simms Manufacturing is considering two alternative investment proposals with the following data:
$$\begin{array} { | l | l | l | } \hline & \text { Proposal X } & \text { Proposal Y } \\\hline \text { Investment } & \$ 620,000 & \$ 400,000 \\\hline \text { Useful life } & 8 \text { years } & 8 \text { years } \\\hline \begin{array} { l } \text { Estimated annual net } \\\text { cash inflows for 8 years }\end{array} & \$ 130,000 & \$ 80,000 \\\hline \text { Residual value } & & \\\hline \text { Depreciation method } & \$ 60,000 & \$ 0 \\\hline \text { Required rate of return } & \text { Straight-line } & \text { Straight-line } \\\hline\end{array}$$ What is the total present value of future cash inflows from Proposal Y?
Note: Present value and future value tables are needed.

A) $266,750
B) $426,800
C) $436,800
D) $536,800

Question 22

Simms Manufacturing is considering two alternative investment proposals with the following data:
$$\begin{array} { | l | l | l | } \hline & \text { Proposal X } & \text { Proposal Y } \\\hline \text { Investment } & \$ 620,000 & \$ 400,000 \\\hline \text { Useful life } & 8 \text { years } & 8 \text { years } \\\hline \begin{array} { l } \text { Estimated annual net } \\\text { cash inflows for 8 years }\end{array} & \$ 130,000 & \$ 80,000 \\\hline \text { Residual value } & & \\\hline \text { Depreciation method } & \$ 60,000 & \$ 0 \\\hline \text { Required rate of return } & \text { Straight-line } & \text { Straight-line } \\\hline\end{array}$$ Note: Present value and future value tables are needed.
What is the total present value of future cash inflows from Proposal X?

A) $278,340
B) $603,070
C) $614,230
D) $624,130

Question 23

Simms Manufacturing is considering two alternative investment proposals with the following data:
$$\begin{array} { | l | l | l | } \hline & \text { Proposal X } & \text { Proposal Y } \\\hline \text { Investment } & \$ 620,000 & \$ 400,000 \\\hline \text { Useful life } & 8 \text { years } & 8 \text { years } \\\hline \begin{array} { l } \text { Estimated annual net } \\\text { cash inflows for 8 years }\end{array} & \$ 130,000 & \$ 80,000 \\\hline \text { Residual value } & & \\\hline \text { Depreciation method } & \$ 60,000 & \$ 0 \\\hline \text { Required rate of return } & \text { Straight-line } & \text { Straight-line } \\\hline\end{array}$$ Note: Present value and future value tables are needed .
What is the net present value of Proposal Y?

A) $0
B) $26,800 positive
C) $136,800 positive
D) $133, 250 negative

Question 24

Simms Manufacturing is considering two alternative investment proposals with the following data:
$$\begin{array} { | l | l | l | } \hline & \text { Proposal X } & \text { Proposal Y } \\\hline \text { Investment } & \$ 620,000 & \$ 400,000 \\\hline \text { Useful life } & 8 \text { years } & 8 \text { years } \\\hline \begin{array} { l } \text { Estimated annual net } \\\text { cash inflows for 8 years }\end{array} & \$ 130,000 & \$ 80,000 \\\hline \text { Residual value } & & \\\hline \text { Depreciation method } & \$ 60,000 & \$ 0 \\\hline \text { Required rate of return } & \text { Straight-line } & \text { Straight-line } \\\hline\end{array}$$ Note: Present value tables are needed.
What is the net present value of Proposal X?

A) $3,070 positive
B) $4,130 positive
C) $3,070 negative
D) $4,130 negative

Question 25

Simms Manufacturing is considering two alternative investment proposals with the following data:
$$\begin{array} { | l | l | l | } \hline & \text { Proposal X } & \text { Proposal Y } \\\hline \text { Investment } & \$ 620,000 & \$ 400,000 \\\hline \text { Useful life } & 8 \text { years } & 8 \text { years } \\\hline \begin{array} { l } \text { Estimated annual net } \\\text { cash inflows for 8 years }\end{array} & \$ 130,000 & \$ 80,000 \\\hline \text { Residual value } & & \\\hline \text { Depreciation method } & \$ 60,000 & \$ 0 \\\hline \text { Required rate of return } & \text { Straight-line } & \text { Straight-line } \\\hline\end{array}$$ Note: Present value and future value tables are needed.
Using the net present value model, which alternative should Simms select, and why?

A) Proposal Y, because its net present value is $22,670 higher than the net present value of Proposal X.
B) Proposal Y, because it is the only alternative with a positive net present value.
C) Proposal X, because it is the only alternative with a positive net present value.
D) Both proposals are equivalent when using the net present value model.

Question 26

Which of the following statements is incorrect?

A) The present value of a dollar three years from today is greater than the present value of a dollar four years from today.
B) An increase in a project's future cash flows will result in an increase in the project's net present value.
C) An annuity is a series of equal cash flows over equal time intervals.
D) A decrease in the discount rate will result in an increase in the internal rate of return.

Question 27

You won the lottery and have a number of choices as to how to take the money. Which choice yields a greater present value? Note: Present value and future value tables are needed

A) $10,000 a year at the end of each of the next 6 years using a 6% discount rate
B) $60,000 (lump sum) now using a 6% discount rate
C) $90,000 (lump sum) 7 years from now using an 6% discount rate
D) $90,000 (lump sum) 7 years from now using an 8% discount rate

Question 28

You are currently age 25 and would like to retire at age 45 and be able to withdraw from yoursavings $75,000 at the end of each year from then until age 85. You plan to save by making equalinvestments at the end of each year for the next 20 years. You believe you will earn 10% per year onyour investments. Note: Present value and future value tables are needed

A) How much money will you need to have saved when you are ready to retire?
B) How much will you need to invest each year to reach your retirement savings goal?

Question 29

An increase in a project's discount rate will result in an increase in the project's net present value.

Question 30

A project with a positive net present value earns more than the required rate of return.

Question 31

The internal rate of return is the actual rate of return on the investment.

Question 32

The internal rate of return is the discount rate that would create a net present value of zero.

Question 33

If a project's internal rate of return exceeds the hurdle rate, the investment in the project should be considered.

Question 34

The profitability index is calculated by dividing the present value of net cash inflows from the investment by the cost of the investment.

Question 35

An increase in a project's salvage value will result in an increase in the project's net present value
and internal rate of return.

Question 36

The net present value method differs from the internal rate of return method because it does not determine the project's actual rate of return.

Question 37

Which of the following statements is incorrect?

A) The net present value is positive if the present value of the future cash inflows is positive.
B) The profitability index is greater than one when the net present value is positive.
C) The internal rate of return exceeds the discount rate when the net present value is positive.
D) A decrease in the discount rate will increase the net present value.

Question 38

Atlantic Company is considering investing in specialized equipment costing $360,000. The equipment has a useful life of 5 years and a residual value of $45,000. Depreciation is calculated using the straight- line method. The expected net cash inflows from the investment are:
$$\begin{array} { | l | r | } \hline \text { Year 1 } & \$ 160,000 \\\hline \text { Year 2 } & 130,000 \\\hline \text { Year 3 } & 100,000 \\\hline \text { Year 4 } & 55,000 \\\hline \text { Year 5 } & 40,000 \\\hline & \$ 485,000 \\\hline \begin{array} { l } \text { Atlantic Company's required rate of } \\\text { return is 14\%. }\end{array} & \\\hline\end{array}$$ Note: Present value tables are needed.
What is the net present value of the investment?

A) $2,220 positive
B) $24,465 positive
C) $48,930 positive
D) $7,288 negative

Question 39

Atlantic Company is considering investing in specialized equipment costing $360,000. The equipment has a useful life of 5 years and a residual value of $45,000. Depreciation is calculated using the straight- line method. The expected net cash inflows from the investment are:
$$\begin{array} { | l | r | } \hline \text { Year 1 } & \$ 160,000 \\\hline \text { Year 2 } & 130,000 \\\hline \text { Year 3 } & 100,000 \\\hline \text { Year 4 } & 55,000 \\\hline \text { Year 5 } & 40,000 \\\hline & \$ 485,000 \\\hline \begin{array} { l } \text { Atlantic Company's required rate of } \\\text { return is 14\%. }\end{array} & \\\hline\end{array}$$ Note: Present value tables are needed.
Is the internal rate of return of the investment equal to, higher than, or lower than 14%?

A) Equal to 14%
B) Higher
C) Lower
D) Cannot be determined from the given data

Question 40

Logan, Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:
$$\begin{array} { | l | l | l | } \hline & \text { Investment A } & \text { Investment B } \\\hline \text { Initial capital investment } & \$ 60,000 & \$ 90,000 \\\hline \text { Estimated useful life } & 3 \text { years } & 3 \text { years } \\\hline \text { Estimated residual value } & - 0 - & - 0 - \\\hline \begin{array} { l } \text { Estimated annual net cash inflow } \\\text { For 3 years }\end{array} & \$ 25,000 & \$ 40,000 \\\hline \text { Required rate of return } & 10 \% & 12 \% \\\hline\end{array}$$ The present value factors of $1 due 3 years from now are:
$$\begin{array} { | l | l | } \hline 8 \% & 0.794 \\\hline 10 \% & 0.751 \\\hline 12 \% & 0.712 \\\hline 14 \% & 0.675 \\\hline 16 \% & 0.641 \\\hline\end{array}$$ The annuity present value factors of $1 per year due at the end of each of 3 years are:
$$\begin{array} { | l | l | } \hline 8 \% & 2.577 \\\hline 10 \% & 2.487 \\\hline 12 \% & 2.402 \\\hline 14 \% & 2.322 \\\hline 16 \% & 2.246 \\\hline\end{array}$$

A) 8%
B) 10%
C) 12%
D) 14%

Question 41

Logan, Inc. is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:
$$\begin{array} { | l | l | l | } \hline & \text { Investment A } & \text { Investment B } \\\hline \text { Initial capital investment } & \$ 60,000 & \$ 90,000 \\\hline \text { Estimated useful life } & 3 \text { years } & 3 \text { years } \\\hline \text { Estimated residual value } & - 0 - & - 0 - \\\hline \begin{array} { l } \text { Estimated annual net cash inflow } \\\text { For 3 years }\end{array} & \$ 25,000 & \$ 40,000 \\\hline \text { Required rate of return } & 10 \% & 12 \% \\\hline\end{array}$$ The present value factors of $1 due 3 years from now are:
$$\begin{array} { | l | l | } \hline 8 \% & 0.794 \\\hline 10 \% & 0.751 \\\hline 12 \% & 0.712 \\\hline 14 \% & 0.675 \\\hline 16 \% & 0.641 \\\hline\end{array}$$ The annuity present value factors of $1 per year due at the end of each of 3 years are:
$$\begin{array} { | l | l | } \hline 8 \% & 2.577 \\\hline 10 \% & 2.487 \\\hline 12 \% & 2.402 \\\hline 14 \% & 2.322 \\\hline 16 \% & 2.246 \\\hline\end{array}$$

A) ($164)
B) $6,072
C) $40,000
D) $61,528

Question 42

Head, Inc. is deciding whether to automate one phase of its production process. The equipment has a six- year life and will cost $450,000. Projected net cash inflows from the equipment are as follows:
(Note: Present value tables are needed.)
$$\begin{array} { | l | l | } \hline \text { Year 1 } & \$ 130,000 \\\hline \text { Year 2 } & \$ 125,000 \\\hline \text { Year 3 } & \$ 110,000 \\\hline \text { Year 4 } & \$ 100,000 \\\hline \text { Year 5 } & \$ 95,000 \\\hline \text { Year 6 } & \$ 90,000 \\\hline\end{array}$$ Head, Inc.'s hurdle rate is 12%. Assume residual value is zero. What is the net present value of the equipment investment?

A) $7,130
B) $9,286
C) $75,000
D) $457,130

Question 43

Head, Inc. is deciding whether to automate one phase of its production process. The equipment has a six- year life and will cost $450,000. Projected net cash inflows from the equipment are as follows:
(Note: Present value tables are needed.)
$$\begin{array} { | l | l | } \hline \text { Year 1 } & \$ 130,000 \\\hline \text { Year 2 } & \$ 125,000 \\\hline \text { Year 3 } & \$ 110,000 \\\hline \text { Year 4 } & \$ 100,000 \\\hline \text { Year 5 } & \$ 95,000 \\\hline \text { Year 6 } & \$ 90,000 \\\hline\end{array}$$ Head, Inc.'s hurdle rate is 12%. Assume the residual value is zero. If Head, Inc. decides to refurbish the equipment at a cost of $50,000 at the end of year 6, it could be used for one more year and would have a $30,000 residual value. Assume the cash inflow in year 7 is $40,000. What is the NPV of the refurbishment?

A) $6,290
B) $7,130
C) $13,560
D) $18,080

Question 44

Which one of the following capital budgeting models would most likely not be affected by a change in salvage value?

A) Payback
B) Internal rate of return
C) Net present value
D) Profitability index

Question 45

Which of the following capital budgeting methods ignores both cash flows and the time value of money?

A) Payback and the Accounting rate of return
B) Payback and net present value
C) Accounting rate of return and internal rate of return
D) Net present value and internal rate of return

Question 46

Which of the following statements is incorrect if a project has a profitability index greater than one?

A) The internal rate of return exceeds the discount rate.
B) The present value of the future cash flows exceeds the initial investment.
C) The net present value is positive.
D) The accounting rate of return is greater than one.

Question 47

Sun Company is considering purchasing new equipment costing $350,000. Sun's management has
Estimated that the equipment will generate cash flows as follows:
$$\begin{array} { | l | l | } \hline \text { Year 1 } & \$ 100,000 \\\hline \text { Year 2 } & \$ 100,000 \\\hline \text { Year 3 } & \$ 125,000 \\\hline \text { Year 4 } & \$ 125,000 \\\hline \text { Year 5 } & \$ 75,000 \\\hline\end{array}$$ Note: Present value tables are needed.
What is the net present value of the equipment purchase using a 10% discount rate?

A) $49,425
B) $399,425
C) $159,091
D) $181,818

Question 48

Which of the following is not descriptive of the internal rate of return method?

A) It incorporates the time value of money.
B) It is the rate of return which would create a net present value of zero.
C) It ignores cash flows after the payback period.
D) It is the actual rate of return on the investment.

Question 49

Sullivan Company is considering the purchase of a new machine costing $80,000. Sullivan'smanagement is estimating that the new machine will generate additional cash flows of $12,000 a yearfor ten years and have a salvage value of $3,000 at the end of ten years. What is the machine's netpresent value assuming a discount rate of 8%? Note: Present value tables are needed.

A) $520
B) $1,909
C) $40,000
D) $81,909

Question 50

Which of the following statements is not correct if a project's discount rate equals the project'sinternal rate of return?

A) The net present value is zero.
B) The profitability index is 1.0.
C) The present value of the cash inflows equals the investment cost.
D) The profitability index is zero.

Question 51

The Wilbury Company has analyzed an investment opportunity and determined that the netpresent value is -$19,625. Wilbury's management estimated that the investment would generate cashinflows of $75,000 a year for five years. What was the initial cost of the investment assuming thatWilbury utilized a 12% discount rate? Note: Present value tables are needed.

A) $290,000
B) $250,750
C) $270,375
D) $309,625

Question 52

The Petty Company has analyzed an investment opportunity costing $270,000 and determinedthat the net present value is $1,420. Petty's management estimated that the investment wouldgenerate cash inflows of $50,000 a year for eight years and used a discount rate of 10%. What was thesalvage value associated with the investment opportunity? Note: Present value tables are needed.

A) $4,670
B) $10,000
C) $6,960
D) $3,919

Question 53

The Orbison Company has analyzed an investment opportunity costing $250,000 and determinedthat the net present value is -$5,040. Petty's management estimated that the investment wouldhave equal annual net cash flows for four years, a salvage value of $20,000 after four years, and used adiscount rate of 14%. What was the annual net cash flow associated with the investment opportunity?Note: Present value tables are needed.

A) $56,240
B) $87,520
C) $83,120
D) $80,000

Question 54

The Harrison Corporation has analyzed an investment opportunity costing $150,000 and determinedthat the net present value is $8,705. Harrison's management estimated that the investment wouldhave equal annual net cash flows for twelve years, a salvage value of $15,000 after twelve years, andused a discount rate of 12%. What was the annual net cash flow associated with the investmentopportunity? Note: Present value tables are needed.

A) $25,000
B) $25,600
C) $20,390
D) $23,200

Question 55

The Harrison Corporation has analyzed an investment opportunity costing $150,000 and determinedthat the net present value is $8,705. Harrison's management estimated that the investment wouldhave equal annual net cash flows for twelve years, a salvage value of $15,000 after twelve years, andused a discount rate of 12%. What was the internal rate of return associated with the investmentopportunity? Note: Present value tables are needed.

A) 12%
B) Greater than 12%
C) Less than 12%
D) The internal rate of return can't be determined.

Question 56

Mullen Company is considering acquiring a new machine for its manufacturing facility. The machine is expected to generate annual operating cash inflows of $150,000 for four years and have a salvage value of $50,000 after four years. What is the most that Mullen should be willing to pay for the machine, assuming that Mullen's minimum rate of return is 12%? Note: Present value tables are needed.

A) $413,087
B) $487,350
C) $455,550
D) $580,357

Question 57

McKenna Company is considering acquiring a new machine for its manufacturing facility. Themachine is expected to generate annual operating cash inflows of $100,000 for each of the first fouryears, $75,000 in both years five and six, and have a salvage value of $30,000 after six years. What isthe most that McKenna should be willing to pay for the machine, assuming that McKenna's minimum rate of return is 8%? Note: Present value tables are needed.

A) $448,425
B) $531,075
C) $365,500
D) $429,525

Question 58

McKenna Company is considering acquiring a new machine costing $400,000. The machine isexpected to generate annual operating cash inflows of $100,000 for each of the first four years, $75,000in both years five and six, and have a salvage value of $30,000 after six years. What is the present valueof the machine assuming that McKenna's minimum rate of return is 10%?

A) $5,875
B) $22,795
C) $106,420
D) $52,795

Question 59

DRJ Corporation is considering the acquisition of new equipment costing $650,000. DRJ has estimated the annual operating cash flows to be $125,000 for ten years and the net present value of the equipment to be $15,500. What was DRJ's estimate of the equipment's salvage value, assuming that DRJ used a 14% discount rate in the calculation of the net present value? Note: Present value tables are needed.

A) $13,500
B) $50,000
C) $57,500
D) $27,500

Question 60

Bogart Company is considering the following three investment opportunities:
Opportunity 1: Has an initial cost of $200,000 and the present value of its net cash inflows is $240,000.
Opportunity 2: Has an initial cost of $250,000 and the present value of its net cash inflows is $275,000.
Opportunity 3: Has an initial cost of $300,000 and the present value of its net cash inflows is $345,000.
Using the profitability index, rank the investment opportunities from most profitable to least profitable.

A) 3, 2, 1
B) 2, 3, 1
C) 2, 1, 3
D) 1, 3, 2

Question 61

Allegra Company is considering the following three investment opportunities:
Project 1: Has an initial cost of $500,000 and the present value of its net cash inflows is $550,000.
Project 2: Has an initial cost of $450,000 and the present value of its net cash inflows is $504,000.
Project 3: Has an initial cost of $550,000 and the present value of its net cash inflows is $594,000.
Using the net present value method, rank the projects from most profitable to least profitable.

A) 3, 1, 2
B) 1, 2, 3
C) 2, 3, 2
D) 2, 1, 3

Question 62

Allegra Company is considering the following three investment opportunities:
Project 1: Has an initial cost of $500,000 and the present value of its net cash inflows is $550,000.
Project 2: Has an initial cost of $450,000 and the present value of its net cash inflows is $504,000.
Project 3: Has an initial cost of $550,000 and the present value of its net cash inflows is $594,000.
Using the profitability index, rank the projects from most profitable to least profitable.

A) 3, 1, 2
B) 1, 2, 3
C) 2, 3, 2
D) 2, 1, 3

Question 63

Smith Corporation is considering the following three investment opportunities:
Project 1: Has an initial cost of $900,000 and the present value of its net cash inflows is $990,000.
Project 2: Has an initial cost of $950,000 and the present value of its net cash inflows is $1,026,000.
Project 3: Has an initial cost of $700,000 and the present value of its net cash inflows is $784,000.
Which of the following statements is correct?

A) Using the profitability index, the project ranking, from most profitable to least profitable would be 2, 1, and 3.
B) Using the net present value method, the project ranking, from most profitable to least profitable would be 2, 3, and 1.
C) Using the profitability index, the project ranking, from most profitable to least profitable would be 3, 1, and 2.
D) Using the net present value method, the project ranking, from most profitable to least profitable would be 3, 1, and 2.

Question 64

Jackson Corporation is considering the following three investment opportunities:
Investment 1: Has an initial cost of $300,000 and the present value of its net cash inflows is $345,000.
Investment 2: Has an initial cost of $500,000 and the present value of its net cash inflows is $550,000.
Investment 3: Has an initial cost of $700,000 and the present value of its net cash inflows is $756,000.
Which of the following statements is correct?

A) Using the profitability index, the investment ranking, from most profitable to least profitable would be 1, 2, and 3.
B) Using the net present value method, the investment ranking, from most profitable to least profitable would be 1, 2, and 3.
C) Using the profitability index, the investment ranking, from most profitable to least profitable would be 3, 1, and 2.
D) The profitability index and the net present value methods would both rank these investment opportunities in the same order.

Question 65

Which of the following statements is incorrect?

A) The payback period method ignores cash flows after the payback period.
B) The payback period treats a dollar received in year one equivalent to a dollar received in year four.
C) An increase in a project's salvage value would not result in a change in the accounting rate of return.
D) A decrease in the discount rate will result in an increase in the profitability index.

Question 66

Ignoring income taxes, which of the following statements regarding the internal rate of return is correct?

A) The internal rate of return is sensitive to changes in the discount rate.
B) The internal rate of return is not sensitive to changes in salvage value.
C) If the internal rate of return exceeds the required rate of return, the investment should be considered.
D) The internal rate of return is sensitive to a change in depreciation methods.

Question 67

Barwood Company is contemplating an investment opportunity costing $500,000. Barwood'smanagement has determined that the investment opportunity's profitability index is 1.15. Which ofthe following statements regarding the investment opportunity is incorrect?

A) The net present value is $75,000.
B) The present value of the net cash inflows is $575,000.
C) The internal rate of return is greater than the discount rate.
D) The internal rate of return is 15%.

Question 68

Which of the following does not properly describe the net present value method?

A) It considers cash flows over the life of the investment.
B) It incorporates the time value of money.
C) It is insensitive to changes in future cash flows.
D) It shows the excess or deficiency of the investment's present value of future net cash inflows relative to the cost of the initial investment.

Question 69

Which of the following will increase both the profitability index and the internal rate of return?

A) A decrease in the discount rate
B) An increase in the discount rate
C) An increase in the salvage value
D) An increase in operating income

Question 70

Bogart Company is considering the following three investment opportunities:
Opportunity 1: Has an initial cost of $200,000 and the present value of its net cash inflows is $240,000.
Opportunity 2: Has an initial cost of $250,000 and the present value of its net cash inflows is $275,000.
Opportunity 3: Has an initial cost of $300,000 and the present value of its net cash inflows is $345,000.
Using the net present value method, rank the investment opportunities from most profitable to least profitable.

A) 3, 1, 2
B) 1, 2, 3
C) 2, 1, 3
D) 1, 3, 2