Deck 10: Decentralization

Question 1

The internal rate of return for a project is the discount rate that makes the net present value of the project equal to zero.

Answer 1

True

Question 2

The preference rule for ranking projects by the profitability index is: the higher the profitability index,the more desirable the project.

Answer 2

True

Question 3

In comparing two investment alternatives,the difference between the net present values of the two alternatives obtained using the total cost approach will be the same as the net present value obtained using the incremental cost approach.

Answer 3

True

Question 4

The payback method of making capital budgeting decisions gives full consideration to the time value of money.

Question 5

If new equipment is replacing old equipment,any salvage received from sale of the old equipment should not be considered in computing the payback period of the new equipment.

Question 6

The present value of a cash flow decreases as it moves further into the future.

Question 7

An increase in the discount rate will result in an increase in the present value of a given cash flow.

Question 8

One of the strengths of the simple rate of return method is that it takes into account the time value of money in computing the return on an investment project.

Question 9

The discount rate used in net present value analysis should normally match or exceed the company's minimum required rate of return.

Question 10

Preference decisions in capital budgeting involve selecting from alternative projects that have already be determined as acceptable investments.

Question 11

A post audit of an investment project can provide feedback as to the quality of an entity's capital budgeting process.

Question 12

When using internal rate of return to evaluate investment projects,if the internal rate of return is less than the required rate of return,the project should be accepted.

Question 13

One of the strengths of the simple rate of return method is that it uses data about cash flows rather than accounting net income.

Question 14

Screening decisions in capital budgeting involve determining whether a project meets some minimal pre-set standard of acceptance.

Question 15

A major limitation of the payback method is that it cannot be used in situations where future budgeted cash flows are uneven.

Question 16

When the net present value method is used,the internal rate of return is the discount rate used to compute the net present value of a project.

Question 17

The present value of a given sum to be received in five years will be exactly twice as great as the present value of an equal sum to be received in ten years.

Question 18

The payback period is the length of time it takes for an investment to recoup its own initial cost out of the cash receipts it generates.

Question 19

The cost of capital is the average rate of return a company must pay on its short-term bank borrowings.

Question 20

Projects with shorter payback periods are always more profitable than projects with longer payback periods.

Question 21

In the simple rate of return method,depreciation expense is excluded from the calculation of incremental expenses.

Question 22

Suppose an investment has cash inflows of R dollars at the end of each year for two years.The present value of these cash inflows using a 12% discount rate will be:

A) greater than under a 10% discount rate.
B) less than under a 10% discount rate.
C) equal to that under a 10% discount rate.
D) sometimes greater than under a 10% discount rate and sometimes less;it depends on R.

Question 23

A piece of equipment has a cost of $20,000.The equipment will provide cost savings of $3,500 each year for ten years,after which time it will have a salvage value of $2,500.If the company's discount rate is 12%,the equipment's net present value is?

A) ($225).
B) $580.
C) $2,275.
D) $17,500.

Question 24

White Company's required rate of return on capital budgeting projects is 12%.The company is considering an investment opportunity which would yield a cash flow of $10,000 in five years.What is the most that the company should be willing to invest in this project?

A) $2,774.
B) $5,670.
C) $17,637.
D) $36,050.

Question 25

Which statement below is true about the evaluation of an investment having uneven cash flows using the payback method?

A) It cannot be done.
B) It can be done only by matching cash inflows and investment outflows on a year-by-year basis.
C) It will produce essentially the same results as those obtained through the use of discounted cash flow techniques.
D) It requires the use of a sophisticated calculator or computer software.

Question 26

After-tax cash flows are computed as equal to pre-tax cash flows X (1 + tax rate).

Question 27

Given the following data: Based on the data given,the annual cost savings would be:

A) $1,630.00.
B) $2,123.89.
C) $2,200.00.
D) $2,553.89.

Question 28

The present value of the capital cost allowance tax shield is deducted from the total of the net present values of all other cash flows to determine the final projected net cash flows of a planned depreciable asset acquisition.

Question 29

In order to receive $12,000 at the end of three years and $10,000 at the end of five years,how much must be invested now if you can earn 14% rate of return?

A) $8,100.
B) $12,978.
C) $13,290.
D) $32,054.

Question 30

The payback method measures:

A) how quickly investment dollars may be recovered.
B) the cash flow from an investment.
C) the economic life of an investment.
D) the profitability of an investment.

Question 31

The capital budgeting method that divides a project's annual incremental net income by the initial investment is the:

A) internal rate of return method.
B) the simple (or accounting)rate of return method.
C) the payback method.
D) the net present value method.

Question 32

The following data pertain to an investment in equipment: At the completion of the project,the working capital will be released for use elsewhere.What is the net present value of the project,using a discount rate of 10%?

A) ($1,729).
B) $606.
C) $1,729.
D) $8,271.

Question 33

The nominal cost of capital does not include a factor for expected inflation.

Question 34

Which of the statements below is correct about an increase in the discount rate?

A) Will increase the present value of future cash flows.
B) Will have no effect on net present value.
C) Will reduce the present value of future cash flows.
D) Is one method of compensating for reduced risk.

Question 35

An investment project that requires a present investment of $210,000 will have cash inflows of "R" dollars each year for the next five years.The project will terminate in five years.Consider the following statements (ignore income tax considerations): I)If "R" is less than $42,000,the payback period exceeds the life of the project.
II)If "R" is greater than $42,000,the payback period exceeds the life of the project.
III)If "R" equals $42,000,the payback period equals the life of the project.
Which statement(s)is (are)true?

A) Only I and II.
B) Only I and III.
C) Only II and III.
D) I,II,and III.

Question 36

Some investment projects require that a company expand its working capital at the initiation of a project to service the greater volume of business that will be generated.Assuming a project in which the increased working capital will no longer be required after the end of the project,under the net present value method,these changes in working capital should be treated as:

A) an initial cash outflow for which no discounting is necessary.
B) a future cash inflow for which discounting is necessary.
C) both an initial cash outflow for which no discounting is necessary and a future cash inflow for which discounting is necessary.
D) irrelevant to the net present value analysis.

Question 37

Which one of the following statements about the payback method of capital budgeting is correct?

A) The payback method does not consider the time value of money.
B) The payback method considers cash flows after the payback has been reached.
C) The payback method uses discounted cash flow techniques.
D) The payback method will lead to the same decision as other methods of capital budgeting.

Question 38

The following data pertain to an investment proposal: The working capital would be released for use elsewhere when the project is completed.What is the net present value of the project,using a discount rate of 8%?

A) ($251).
B) $251.
C) $2,566.
D) $5,251.

Question 39

Parks Company is considering an investment proposal in which a working capital investment of $10,000 would be required.The investment would provide cash inflows of $2,000 per year for six years.The working capital would be released for use elsewhere when the project is completed.If the company's discount rate is 10%,the investment's net present value is:

A) ($1,290).
B) $1,290.
C) $2,000.
D) $4,350.

Question 40

For what reason are the net present value and internal rate of return methods of capital budgeting superior to the payback method?

A) Both the methods are easier to implement.
B) Both the methods consider the time value of money.
C) Both the methods require less input.
D) Both the methods reflect the effects of depreciation and income taxes.

Question 41

Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions.The auto was purchased for $9,000 and will have a 6-year useful life and a $3,000 salvage value.Delivering prescriptions (which the pharmacy has never done before)should increase gross revenues by at least $5,000 per year.The cost of these prescriptions to the pharmacy will be about $2,000 per year.The pharmacy depreciates all assets using the straight-line method.The payback period for the auto is:

A) 1.2 years.
B) 1.8 years.
C) 2.0 years.
D) 3.0 years.

Question 42

The following data pertain to an investment proposal: The net present value of the proposed investment is:

A) $1,720.
B) $2,025.
C) $2,154.
D) $6,064.

Question 43

A company with $800,000 in operating assets is considering the purchase of a machine that costs $75,000 and which is expected to reduce operating costs by $20,000 each year.The payback period for this machine in years is closest to:

A) 0.27 years.
B) 3.75 years.
C) 10.7 years.
D) 40 years.

Question 44

Sam Weller is thinking of investing $70,000 to start a bookstore.Sam plans to withdraw $15,000 from the business at the end of each year for the next five years.At the end of the fifth year,Sam plans to sell the business for $110,000 cash.At a 12% discount rate,what is the net present value of the investment?

A) $46,445.
B) $54,075.
C) $62,370.
D) $70,000.

Question 45

Perkins Company is considering several investment proposals,as shown below: In what order do the proposals rank in terms of preference using the profitability index?

A) D,B,C,A
B) B,D,C,A
C) B,D,A,C
D) A,C,B,D

Question 46

The Jason Company is considering the purchase of a machine that will increase revenues by $32,000 each year.Cash outflows for operating this machine will be $6,000 each year.The cost of the machine is $65,000.It is expected to have a useful life of five years with no salvage value.For this machine,the simple rate of return is:

A) 9.2%.
B) 20%.
C) 40%.
D) 49.2%.

Question 47

Jarvey Company is studying a project that would have a ten-year life and would require a $450,000 investment in equipment that has no salvage value.The project would provide net income each year as follows for the life of the project: The company's required rate of return is 12%.What is the payback period for this project?

A) 2 years
B) 3 years
C) 4.28 years
D) 9 years

Question 48

The following data pertain to an investment: The net present value of the proposed investment is:

A) ($3,430).
B) $0.
C) $621.
D) $3,355.

Question 49

Stratford Company purchased a machine with an estimated useful life of seven years.The machine will generate cash inflows of $90,000 each year over the next seven years.If the machine has no salvage value at the end of seven years,and assuming the company's discount rate is 10%,what is the purchase price of the machine if the net present value of the investment is $170,000?

A) $170,000.
B) $221,950.
C) $268,120.
D) $438,120.

Question 50

Information on four investment proposals is given below: In what order do the proposals in terms of preference according to the profitability index?

A) 3,4,1,2.
B) 1,2,3,4.
C) 1,3,2,4.
D) 2,1,4,3.

Question 51

Horn Corporation is considering investing in a four-year project.Cash inflows from the project are expected to be as follows: Year 1,$2,000;Year 2,$2,200;Year 3,$2,400;Year 4,$2,600.If using a discount rate of 8%,the project has a positive net present value of $500.What was the amount of the original investment?

A) $1,411.
B) $2,411.
C) $7,054.
D) $8,054.

Question 52

Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine.The new machine would cost $450,000 and would have a ten-year useful life.Unfortunately,the new machine would have no salvage value.The new machine would cost $20,000 per year to operate and maintain,but would save $100,000 per year in labour and other costs.The old machine can be sold now for scrap for $50,000.The simple rate of return on the new machine is closest to:

A) 7.78%.
B) 8.75%.
C) 20.00%.
D) 22.22%.

Question 53

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

A) 5%.
B) 10%.
C) 15%.
D) 20%.

Question 54

The Whitton Company uses a discount rate of 16%.The company has an opportunity to buy a machine now for $18,000 that will yield cash inflows of $10,000 per year for each of the next three years.The machine would have no salvage value.The net present value of this machine to the nearest whole dollar is:

A) ($9,980).
B) $4,460.
C) $12,000.
D) $22,460.

Question 55

The Keego Company is planning a $200,000 equipment investment that has an estimated five-year life with no estimated salvage value.The company has projected the following annual cash flows for the investment. Assuming that the cash inflows occur evenly over each year,the payback period for the investment is:

A) 0.75 years.
B) 1.67 years.
C) 2.50 years.
D) 4.91 years.

Question 56

The payback period for the investment is closest to:

A) 0.2 years.
B) 1.0 years.
C) 3.0 years.
D) 5.0 years.

Question 57

Boston Company is contemplating the purchase of a new machine on which the following information has been gathered: The company's discount rate is 16%,and the machine will be depreciated using the straight-line method.Given these data,the machine has a net present value of:

A) ($26,100).
B) ($23,900).
C) $0.
D) $26,100.

Question 58

The Higgins Company has just purchased a piece of equipment at a cost of $120,000.This equipment will reduce operating costs by $40,000 each year for the next eight years.This equipment replaces old equipment that was sold for $8,000 cash.The new equipment has a payback period of:

A) 2.8 years.
B) 3.0 years.
C) 8.0 years.
D) 10.0 years.

Question 59

The net present value on this investment is closest to:

A) $76,750.
B) $80,000.
C) $91,600.
D) $400,000.

Question 60

Benz Company is considering the purchase of a machine that costs $100,000 and has a useful life of 18 years with no salvage value.The company's required discount rate is 12%.If the machine's net present value is $5,850,then the annual cash inflows associated with the machine must be (round to the nearest whole dollar):

A) $13,760.
B) $14,600.
C) $42,413.
D) it is impossible to determine from the data given.

Question 61

The net present value of project X is:

A) ($11,708).
B) $2,915.
C) $5,283.
D) $6,317.

Question 62

The net present value of this investment would be?

A) ($14,350).
B) $77,200.
C) $107,250.
D) $200,000.

Question 63

The net present value of Project B is closest to:

A) $55,005.
B) $77,805.
C) $105,005.
D) $127,805.

Question 64

What would the annual net cash inflows from this project have to be in order to justify investing in remodelling?

A) $14,495.
B) $16,147.
C) $29,158.
D) $35,842.

Question 65

The immediate cash outflow required for this project would be:

A) $90,000.
B) $120,000.
C) $130,000.
D) $150,000.

Question 66

The total net present value of the proposed equipment acquisition is closest to:

A) ($1,600).
B) $0.
C) $21,760.
D) $78,240.

Question 67

The present value of all future operating cash inflows is closest to:

A) $278,700.
B) $348,400.
C) $452,300.
D) $480,000.

Question 68

The net present value of project Y is closest to:

A) ($11,708).
B) $11,708.
C) $15,110.
D) $30,250.

Question 69

The net present value of the alternative of purchasing the new system is:

A) ($1,236,495).
B) ($1,169,895).
C) ($1,076,495).
D) ($969,895).

Question 70

The present value of the net operating cash flows (sales less cash operating expenses)arising from the rebuilding and sale of the alternators (rounded to the nearest dollar)is:

A) $577,950.
B) $582,735.
C) $591,950.
D) $596,735.

Question 71

The payback period is:

A) 2.50 years.
B) 2.75 years.
C) 3.00 years.
D) 5.00 years.

Question 72

The payback period for the investment would be:

A) 0.25 years.
B) 2.41 years.
C) 4 years.
D) 10 years.

Question 73

The net present value of the alternative of overhauling the present system is:

A) ($1,279,316).
B) ($1,194,036).
C) ($1,119,316).
D) $801,284.

Question 74

The net present value of Project A is closest to:

A) $67,610.
B) $74,450.
C) $81,290.
D) $82,241.

Question 75

The present value of the net cash flows (all cash inflows less all cash outflows)occurring during year 4 is:

A) $27,320.
B) $40,000.
C) $42,790.
D) $54,640.

Question 76

The present value of the net cash flows (all cash inflows less all cash outflows)occurring during year 6 is closest to:

A) $107,200.
B) $152,300.
C) $195,900.
D) $270,000.

Question 77

The simple rate of return on the investment would be:

A) 10%.
B) 15%.
C) 25%.
D) 35%.

Question 78

The net present value of all cash flows associated with this investment (rounded to the nearest dollar)is:

A) $362,950.
B) $377,950.
C) $382,735.
D) $392,950.

Question 79

The net present value is closest to:

A) $20,400.
B) $28,400.
C) $80,000.
D) $50,000.

Question 80

If the incremental cost approach rather than the total cost approach is used to evaluate alternatives,which statement below is true?

A) The net book value of the present machine will become relevant to the analysis.
B) The College will reject both these alternatives as they both have negative net present values.
C) If the College chooses between these alternatives,the purchase of the new system will be selected.
D) The incremental cost approach would facilitate an easy comparison of these two alternatives with any others the College might decide to consider.