Deck 23: Capital Investment Decisions and the Time Value of Money

Question 1

Logy Ltd is evaluating two possible investments in depreciable plant assets.The company uses the straight-line method of depreciation.The following information is available:
$\begin{array}{|l|c|c|}\hline & \text { Investment A } & \text { Investment B } \\\hline \text { Initial capital investment } & \$ 104,000 & \$ 156,000 \\\hline \text { Estimated useful life } & 10 \text { years } & 10 \text { years } \\\hline \text { Estimated residual value } & 0& \$ 30,000 \\\hline \text { Eistimated anunual net cash inflow for } 10 \text { years } & \$ 23,000 & \$ 46,000 \\\hline\text { Required rate of return }&12\%&12\%\\\hline\end{array}$

Calculate the payback period for Investment B.

A) 3.57 years
B) 4.43 years
C) 1.96 years
D) 3.69 years

Answer 1

3.69 years

Question 2

Most capital budgeting methods focus on cash flows rather than profit.

Answer 2

True

Question 3

Which of the following is a common capital budgeting method?

A) Inventory turnover
B) Return on assets
C) Net present value
D) Debt-to-equity ratio

Answer 3

C

Question 4

After a company invests in capital assets,which of the following activities will it perform in order to compare the actual to the projected net cash inflows?

A) Pre and post analysis
B) Cash flow analysis
C) Post-cash flow
D) Post-audit

Question 5

Which of the following describes the purpose of a post-audit?

A) To screen initial investment alternatives
B) To determine the amount of the initial investment outlay
C) To determine whether investments are going as planned, or whether they should be abandoned
D) To evaluate the company's internal controls

Question 6

Which of the following BEST describes a post-audit?

A) An analysis of an investment's cash flows prior to committing to the initial investment
B) An audit of an operating unit of a company
C) An audit performed after financial statements have been issued
D) An analysis of an investment that is made after the investment is underway or completed

Question 7

Logy Ltd is evaluating two possible investments in depreciable plant assets.The company uses the straight-line method of depreciation.The following information is available:
$\begin{array}{|l|c|c|}\hline & \text { Investment A } & \text { Investment B } \\\hline \text { Initial capital investment } & \$ 104,000 & \$ 156,000 \\\hline \text { Estimated useful life } & 10 \text { years } & 10 \text { years } \\\hline \text { Estimated residual value } & 0& \$ 30,000 \\\hline \text { Eistimated anunual net cash inflow for } 10 \text { years } & \$ 23,000 & \$ 46,000 \\\hline\text { Required rate of return }&12\%&12\%\\\hline\end{array}$

Calculate the payback period for Investment A.

A) 2.58 years
B) 4.52 years
C) 1 year
D) 3.22 years

Question 8

Which of the following methods ignores the time value of money?

A) Internal rate of return
B) Return on assets
C) Payback
D) Net present value

Question 9

A post-audit is an analysis of an investment that is made after the investment is underway or completed.

Question 10

Short-term investment decisions are inherently riskier than long-term decisions because they have a shorter period in which to recoup the investment.

Question 11

Which of the following is TRUE regarding capital rationing decisions for capital assets?

A) Companies should always choose the investment with the highest accounting rate of return.
B) Companies should consider several different methods of evaluation before choosing an investment.
C) Companies should always choose the investment with the highest net present value.
D) Companies should always choose the investment with the shortest payback period.

Question 12

Which of the following is the ONLY capital budgeting method which uses accrual accounting information?

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

Question 13

Newman Automobiles Manufacturing is considering two alternative investment proposals with the following data:
$$\begin{array} { | l | c | c | } \hline & \text { Proposal X} & \text { Proposal Y } \\\hline \text { Investment } & \$ 11,000,000 & \$ 450,000 \\\hline \text { Useful life } & { 5 \text { years } } &{ \text { 5 years } } \\\hline \text { Estimated annual net cash inflows for 5 years } & \$ 2,200,000 & \$ 99,000 \\\hline \text { Residual value } & \$ 55,000 & \$ 26,000 \\\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \\\hline \text { Required rate of return } & 14 \% & 10 \% \\\hline\end{array}$$
Calculate accounting rate of return for Proposal Y.

A) 10.91%
B) 16.54%
C) 10.64%
D) 5.97%

Question 14

Which of the following capital budgeting models is most likely to be used if a company's goal is to maximise their operating profit?

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

Question 15

The payback method and the accounting rate of return method are often used to perform an initial screening of investments,rather than a detailed in-depth analysis.

Question 16

Which capital budgeting method uses accrual accounting,rather than net cash flows,as a basis for calculations?

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

Question 17

Capital budgeting methods which do NOT incorporate time value of money are generally used for the initial stage of screening investment alternatives.

Question 18

When projecting future cash flows of an investment,which of the following is TRUE?

A) Cash flow data must also include non-cash transactions like depreciation.
B) The initial investment is always treated separately from all other cash flows.
C) Cash inflows and cash outflows are treated separately, rather than being netted together.
D) Cash flows are typically projected by accounting personnel without input from other business functions.

Question 19

The further into the future the investment cash flows extend,the more likely it is that actual results will differ from the initial predictions.

Question 20

Which two methods are typically used for initial screening of investments,rather than for detailed in-depth analysis?

A) Accounting rate of return and net present value
B) Internal rate of return and net present value
C) Payback and accounting rate of return
D) Net present value and payback

Question 21

A company is evaluating three possible investments.The following information is provided by the company.
$\begin{array}{|l|l|l|l|} \hline & \text { Project A } & \text { Project B } & \text { Project C } \\\hline \text { Investment } & \$ 214,000 & \$ 54,000 & \$ 214,000 \\\hline \text { Salvage value } &0 & 22,000 & 24,000 \\\hline \text { Net cash flows: } & & & \\\hline \text { Year } 1 & 58,000 & 26,000 & 84,000 \\\hline \text { Year } 2 & 58,000 & 17,000 & 54,000 \\\hline \text { Year } 3 & 58,000 & 13,000 & 64,000 \\\hline \text { Year } 4 & 58,000 & 10,000 & 24,000 \\\hline \text { Year } 5 & 58,000 & 0& 0 \\\hline\end{array}$
What is the payback period for Project A? (Assume that the company uses the straight-line depreciation method.)

A) 2.7 years
B) 5.0 years
C) 3.7 years
D) 2.1 years

Question 22

Flip Flop company is considering investing in production-management software that costs $630,000,has $64,000 residual value and should lead to cost savings of $2,350,000 per year for its five-year life.Calculate the average amount invested in the asset that should be used for calculating the accounting rate of return?

A) $630,000
B) $347,000
C) $694,000
D) $64,000

Question 23

The accounting rate of return is the only capital budgeting method that uses accrual accounting.

Question 24

The payback method uses discounted cash flows to make investment decisions.

Question 25

Wilhelmina has just received an inheritance of $50 000 and she would like to put it into an investment portfolio for 20 years.To calculate the value of the investment at the end of the 20-year period,which of the following tables would be the best for her to use?

A) Future Value of $1
B) Present Value of $1
C) Present Value of an Annuity of $1
D) Future Value of an Annuity of $1

Question 26

A criticism of the accounting rate of return method is that it ignores the time value of money.

Question 27

Which of the following MOST accurately describes the term annuity?

A) An investment which grows in value over time
B) A term life insurance policy
C) An instalment loan with amortising principal payments
D) A stream of equal instalments of cash payments

Question 28

Paramount Company is considering purchasing new equipment costing $708,000.The company's management has estimated that the equipment will generate cash flows as follows:
$$\begin{array} { | r|r | } \hline \text { Year } 1 &\$ 202,000 \\\hline 2&202,000 \\\hline 3&254,000 \\\hline 4&254,000 \\\hline 5&150,000 \\\hline\end{array}$$
Residual value is zero.What is the payback period?

A) 3.5 years
B) 4.5 years
C) 3.2 years
D) 3.7 years

Question 29

A company is evaluating three possible investments.Each uses straight-line method of depreciation.Following information is provided by the company.
$\begin{array}{|l|l|l|l|} \hline & \text { Project A } & \text { Project B } & \text { Project C } \\\hline \text { Investment } & \$ 216,000 & \$ 50,000 & \$ 216,000 \\\hline \text { Salvage value } &0 & 18,000 &28,000 \\\hline \text { Net cash flows: } & & & \\\hline \text { Year } 1 & 58,000 & 24,000 & 100,000 \\\hline \text { Year } 2 & 58,000 & 15,000 & 70,000 \\\hline \text { Year } 3 & 58,000 & 11,000 &80,000 \\\hline \text { Year } 4 & 58,000 & 8,000 & 40,000 \\\hline \text { Year } 5 & 58,000 & 0& 0 \\\hline\end{array}$
What is the accounting rate of return for Project B?

A) 15.96%
B) 19.12%
C) 18.19%
D) 33.87%

Question 30

Caliber Company is considering the purchase of a new machine costing $838,000.The company's management is estimating that the new machine will generate additional cash flows of $190,000 a year for ten years and have a salvage value of $52,000 at the end of ten years.What is the machine's payback period?

A) 3.33 years
B) 5.37 years
C) 4.41 years
D) 6.7 years

Question 31

The payback method ignores cash flows after the payback period,whereas the accounting rate of return includes them.

Question 32

All else being equal,investments with longer payback periods are more desirable.

Question 33

Clapton Company is considering an investment in new equipment costing $934,000.The equipment will be depreciated on a straight-line basis over a 10-year life and is expected to have a salvage value of $110,000.The equipment is expected to generate net cash flows of $152,000 for each of the first five years and $108,000 for each of the last five years.What is the accounting rate of return associated with the equipment investment?

A) 10.38%
B) 9.91%
C) 9.12%
D) 10.03%

Question 34

Cortes Company is considering three investment opportunities with the following payback periods:
$$\begin{array} { | l | c | c | c | } \hline & \text { Project } X & \text { Project } Y & \text { Project } Z \\\hline \text { Payback period } & \text { 3 years } & 2.5 \text { years } & 2.8 \text { years } \\\hline\end{array}$$
Use the decision rule for payback to rank the projects from most desirable to least desirable,all else being equal.

A) Y, Z, X
B) X, Y, Z
C) Y, X, Z
D) Z, Y, X

Question 35

The payback method and the accounting accounting rate of return method are both conceptually better than the discounted cash flow models because they are based on cash flows.

Question 36

Which of the following describes the term time value of money?

A) When money is invested over time, it earns income and grows.
B) Money can only be used at certain times and for certain purposes.
C) Money loses its purchasing power over time through inflation.
D) Wasted time can result in wasted money.

Question 37

Software Hub is deciding whether to purchase new accounting software.The cost of the software package is $56,000 and its expected life is 10 years.The payback for this investment is four years.Assuming equal yearly cash flows,what are the expected annual net cash savings from the new software? (Assume the investment has zero salvage value.)

A) $14,000
B) $38,483
C) $5600
D) $224,000

Question 38

The accounting rate of return calculations ignores the time value of money,but the payback period does include consideration of the time value of money.

Question 39

The accounting rate of return method and the payback method are often used as preliminary screening measures,but are insufficient to fully evaluate a capital investment.

Question 40

Dartis Company is considering investing in a specialised equipment costing $650,000.The equipment has a useful life of 5 years and a residual value of $60,000.Depreciation is calculated using the straight-line method.The expected net cash inflows from the investment are given below.
$\begin{array}{|l|l|}\hline \text { Year } 1& \$ 202,000 \\\hline 2&157,000 \\\hline 3&169,000 \\\hline 4&102,000 \\\hline 5&140,000 \\\hline &\$ 770,000\\\hline \end{array}$
What is the accounting rate of return on the investment?

A) 12.2%
B) 5.07%
C) 11.08%
D) 10.14%

Question 41

At the internal rate of return (IRR),the present value of cash inflows will be equal to:

A) initial investment.
B) average operating profit.
C) residual value.
D) profit from the project.

Question 42

All else being equal,the shorter the investment period,the higher the total amount of interest earned.

Question 43

John wins the lottery and has the following three payout options for after-tax prize money:
1)$162,000 per year at the end of each of the next six years
2)$308,000 (lump sum)now
3)$520,000 (lump sum)six years from now
The required rate of return is 9%.What is the present value if he selects the first option? Round to nearest whole dollar.
Present value of annuity of $1:
$$\begin{array} { | r | r | r | r | } \hline & 8 \% & 9 \% & 10 \% \\\hline 1 & 0.926 & 0.917 & 0.909 \\\hline 2 & 1.783 & 1.759 & 1.736 \\\hline 3 & 2.577 & 2.531 & 2.487 \\\hline 4 & 3.312 & 3.24 & 3.17 \\\hline 5 & 3.993 & 3.89 & 3.791 \\\hline 6 & 4.623 & 4.486 & 4.355 \\\hline 7 & 5.206 & 5.033 & 4.868 \\\hline\end{array}$$
Present value of $1:
$$\begin{array} { | l | r | r | r | } \hline & { 8 \% } & { 9 \% } & 10 \% \\\hline 1 & 0.926 & 0.917 & 0.909 \\\hline 2 & 0.857 & 0.842 & 0.826 \\\hline 3 & 0.794 & 0.772 & 0.751 \\\hline 4 & 0.735 & 0.708 & 0.683 \\\hline 5 & 0.681 & 0.65 & 0.621 \\\hline 6 & 0.63 & 0.596 & 0.564 \\\hline 7 & 0.583 & 0.547 & 0.513 \\\hline\end{array}$$

A) $468,052
B) $810,000
C) $726,732
D) $470,000

Question 44

Which of the following is true of discounted cash flow methods like NPV and IRR?

A) They use simple interest calculations.
B) They focus on the payback period.
C) They comply with the requirements of GAAP.
D) They assume that cash flows will be reinvested when received.

Question 45

The term net present value means the difference between:

A) the present value of the net cash inflows and the investment's cost.
B) the future value of the cash flows and the present value of the cash flows.
C) the initial investment and the residual value.
D) the total net profit of the project and the initial investment.

Question 46

Lara is going to receive $10,000 a year at the end of each of the next five years from her insurer to meet her education cost.Using a discount rate of 14%,the present value of the receipts can be stated as:

A) PV = $10,000 (PV factor, i = 14%, n = 5).
B) PV = $10,000 (Annuity FV factor, i = 14%, n = 5).
C) PV = $10,000 (FV factor, i = 14%, n = 5).
D) PV = $10,000 (Annuity PV factor, i = 14%, n = 5).

Question 47

Paramount Company is considering purchasing new equipment costing $708,000.The management has estimated that the equipment will generate cash flows as follows:
$$\begin{array} { | r|r | } \hline \text { Year }1 & \$ 220,000 \\\hline 2&220,000 \\\hline 3&256,000 \\\hline 4&256,000 \\\hline 5&164,000 \\\hline\end{array}$$
Present value of $1:
$$\begin{array} { | l | r | r | r | r | r | } \hline &{ 6 \% } & { 7 \% } &{ 8 \% } & { 9 \% } & 10 \% \\\hline 1 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \\\hline 2 & 0.89 & 0.873 & 0.857 & 0.842 & 0.826 \\\hline 3 & 0.84 & 0.816 & 0.794 & 0.772 & 0.751 \\\hline 4 & 0.792 & 0.763 & 0.735 & 0.708 & 0.683 \\\hline 5 & 0.747 & 0.713 & 0.681 & 0.65 & 0.621 \\\hline\end{array}$$
The company's required rate of return is 8%.Using the factors in the table,calculate the present value of the cash inflows.(Round all calculations to the nearest whole dollar.)

A) $895,368
B) $39,160
C) $896,000
D) $768,000

Question 48

The following details are provided by Dopler Company:
$\begin{array}{|c|c|c|c|c|}\hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \\\hline \text { Initial investment } & \$ 426,000 & \$ 204,000 & \$ 570,000 & \$ 518,000 \\\hline \text { PV of cash inflows } & \$ 574,000 & \$ 400,000 & \$ 804,000 & \$ 390,000 \\\hline \text { Payback period (years) } & 3.6 & 3.2 & 4.0 & 2.0 \\\hline \text { NPV of project } & \$ 148,000 & \$ 196,000 & \$ 234,000 & \$ 128,000 \\\hline\end{array}$

What is the profitability index for Project C?

A) 1.23
B) 1.25
C) 1.37
D) 1.41

Question 49

Under conditions of limited resources,when a company is comparing several investments with different amounts of initial outlay,the decision should be made on the basis of:

A) highest NPV.
B) highest total cash inflows.
C) shortest payback period.
D) highest profitability index.

Question 50

The only difference between present value and future value is the amount of interest that is earned in the intervening time span.

Question 51

Which of the following best describes the profitability index?

A) the ratio of present value of net cash inflows to initial investment
B) an array of possible investment outcomes at different discount rates
C) an index of projects based on their net profit
D) the ratio of total cash inflows to initial investment

Question 52

Nobell Company is evaluating an investment of $1,000,000 which will yield net cash inflows of $142,369 per year for 10 years with no residual value.What is the internal rate of return?
Present value of annuity of $1:
$$\begin{array} { | r | r | r | r | r | } \hline &{ 5 \% } & { 6 \% } &{ 7 \% } & { 8 \% } \\\hline 1 & 0.952 & 0.943 & 0.935 & 0.926 \\\hline 2 & 1.859 & 1.833 & 1.808 & 1.783 \\\hline 3 & 2.723 & 2.673 & 2.624 & 2.577 \\\hline 4 & 3.546 & 3.465 & 3.387 & 3.312 \\\hline 5 & 4.329 & 4.212 & 4.1 & 3.993 \\\hline 6 & 5.076 & 4.917 & 4.767 & 4.623 \\\hline 7 & 5.786 & 5.582 & 5.389 & 5.206 \\\hline 8 & 6.463 & 6.21 & 5.971 & 5.747 \\\hline 9 & 7.108 & 6.802 & 6.515 & 6.247 \\\hline 10 & 7.722 & 7.36 & 7.024 & 6.71 \\\hline\end{array}$$

A) 6%
B) 7%
C) 9%
D) 8%

Question 53

Which of the following is true of discounted cash flow methods like NPV and IRR?

A) They use simple interest calculations.
B) They consider discounted cash flows.
C) They use net profit amounts rather than cash flows.
D) They focus on the payback period.

Question 54

If $14,000 is invested annually in an account with 9% interest compounding yearly,what will the balance of the account be after five years? Refer to the following Future Value table:
Future value of annuity of $1:
$$\begin{array} { | l | r | r | r | } \hline & { 7 \% } & 8 \% & 9 \% \\\hline 1 & 1.000 & 1.000 & 1.000 \\\hline 2 & 2.070 & 2.080 & 2.090 \\\hline 3 & 3.215 & 3.246 & 3.278 \\\hline 4 & 4.440 & 4.506 & 4.573 \\\hline 5 & 5.751 & 5.867 & 5.985 \\\hline 6 & 7.153 & 7.336 & 7.523 \\\hline 7 & 8.654 & 8.923 & 9.200 \\\hline\end{array}$$

A) $83,790
B) $24,464
C) $24,435
D) $23,450

Question 55

Compound interest assumes that all interest earned will be reinvested at the same rate of interest at which the investment was originally made.

Question 56

Nylan Manufacturing is considering two alternative investment proposals with the following details:
$\begin{array}{|l|c|c|}\hline & \text { Proposal X } & \text { Proposal Y } \\\hline \text { Investment } & \$ 724,000 & \$ 512,000 \\\hline \text { Useful life } & 5 \text { years } & 4 \text { year: } \\\hline\text { Estimated annual net cash inflows } & \$ 164,000 & \$ 92,000 \\\hline \text { Residual value } & \$ 66,000 &\$0 \\\hline \text { Depreciation method } & \text { Straight-line } & \text { Straight-line } \\\hline \text { Discount rate } & 10 \% & 9 \%\\\hline\end{array}$

What is the total present value of future cash inflows from Proposal Y?
Present value of annuity of $1:
$$\begin{array} { | r | r | r | r | } \hline & { 8 \% } & { 9 \% } & { 10 \% } \\\hline 1 & 0.926 & 0.917 & 0.909 \\\hline 2 & 1.783 & 1.759 & 1.736 \\\hline 3 & 2.577 & 2.531 & 2.487 \\\hline 4 & 3.312 & 3.24 & 3.17 \\\hline 5 & 3.993 & 3.89 & 3.791 \\\hline 6 & 4.623 & 4.486 & 4.35 \\\hline\end{array}$$

A) $298,080
B) $296,960
C) $273,152
D) $256,000

Question 57

Paramount Company is considering purchasing new equipment costing $706,000.Company's management has estimated that the equipment will generate cash flows as follows:
$$\begin{array} { | r|r | } \hline \text { Year } 1& \$ 204,000 \\\hline 2&204,000 \\\hline 3&252,000 \\\hline 4&252,000 \\\hline 5&164,000 \\\hline\end{array}$$
The company's required rate of return is 10%.Using the factors in the table below,calculate the present value of the cash inflows.Present value of $1:
$$\begin{array} { | l | r | r | r | r | r | } \hline &{ 6 \% } & { 7 \% } & { 8 \% } & { 9 \% } & 10 \% \\\hline 1 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \\\hline 2 & 0.89 & 0.873 & 0.857 & 0.842 & 0.826 \\\hline 3 & 0.84 & 0.816 & 0.794 & 0.772 & 0.751 \\\hline 4 & 0.792 & 0.763 & 0.735 & 0.708 & 0.683 \\\hline 5 & 0.747 & 0.713 & 0.681 & 0.65 & 0.621 \\\hline\end{array}$$

A) $786,685
B) $817,152
C) $775,512
D) $771,557

Question 58

The fact that invested cash earns profit over time is called the time value of money.

Question 59

Which of the following is the rate of return,based on discounted cash flows,that a company can expect to earn by investing in a capital asset?

A) accounting rate of return
B) bank interest rate
C) return on investment
D) internal rate of return

Question 60

John wins the lottery and has the following three payout options for after-tax prize money:
1)$56,000 per year at the end of each of the next six years
2)$300,000 (lump sum)now
3)$516,000 (lump sum)six years from now
The required rate of return is 9%.What is the present value if he selects the third option? Round to nearest whole dollar.
Present value of $1:
$$\begin{array} { | l | r | r | r | } \hline & { 8 \% } &{ 9 \% } & 10 \% \\\hline 1 & 0.926 & 0.917 & 0.909 \\\hline 2 & 0.857 & 0.842 & 0.826 \\\hline 3 & 0.794 & 0.772 & 0.751 \\\hline 4 & 0.735 & 0.708 & 0.683 \\\hline 5 & 0.681 & 0.65 & 0.621 \\\hline 6 & 0.63 & 0.596 & 0.564 \\\hline 7 & 0.583 & 0.547 & 0.513 \\\hline\end{array}$$

A) $85,867
B) $307,536
C) $89,003
D) $244,000

Question 61

The internal rate of return (IRR)is the rate of return,based on discounted cash flows,that a company can expect to earn by investing in a capital asset.

Question 62

Following details are provided by VPN Company.
$$\begin{array} { | c | c | } \hline \text { Initial investment } & \$ 5,000,000 \\\hline \text { Discount rate } & 15 \% \\\hline \text { Yearly cash flows } & \\\hline 1 & \$ 1,268,000 \\\hline 2 & \$ 1,358,000 \\\hline 3 & \$ 2,416,000 \\\hline 4 & \$ 1,170,000 \\\hline\end{array}$$
Refer to the following table for PV factors:
$$\begin{array} { | c | c | c | c | } \hline & 13 \% & 14 \% & 15 \% \\\hline 1 & 0.885 & 0.877 & 0.87 \\\hline 2 & 0.783 & 0.769 & 0.756 \\\hline 3 & 0.693 & 0.675 & 0.658 \\\hline 4 & 0.613 & 0.592 & 0.572 \\\hline\end{array}$$
What is the NPV of the project?

A) $590,000 positive
B) $596,759 negative
C) $611,224 negative
D) $624,318 positive

Question 63

Net present value is defined as the difference between the present value of the project's cash inflows and the investment's cost.

Question 64

When a company is evaluating an investment proposal with high risk,a low discount rate should be used,and vice versa.

Question 65

A company is considering an iron ore extraction project which requires an initial investment of $508,000 and will yield annual cash flows of $154,000 for 4 years.The company's hurdle rate is 9%.What is the NPV of the project?
Present value of annuity of$1.
$$\begin{array} { | c | r | r | r | } \hline & { 8 \% } &{ 9 \% } & { 10 \% } \\\hline 1 & 0.926 & 0.917 & 0.909 \\\hline 2 & 1.783 & 1.759 & 1.736 \\\hline 3 & 2.577 & 2.531 & 2.487 \\\hline 4 & 3.312 & 3.24 & 3.17 \\\hline 5 & 3.993 & 3.89 & 3.791 \\\hline 6 & 4.623 & 4.486 & 4.355 \\\hline 7 & 5.206 & 5.033 & 4.868 \\\hline 8 & 5.747 & 5.535 & 5.335 \\\hline 9 & 6.247 & 5.995 & 5.759 \\\hline 10 & 6.71 & 6.418 & 6.145 \\\hline\end{array}$$

A) positive $101,600
B) negative $9040
C) positive $9040
D) negative $101,600

Question 66

If a company uses a higher discount rate to calculate NPV of an investment,it reflects a higher level of perceived risk for the investment.

Question 67

The NPV method of evaluating capital investments suggests that a project with positive net cash inflows that exceed the cost of the investment should be accepted.

Question 68

Gamma Company is considering an investment proposal that would require an initial outlay of $816,000,and would yield yearly cash flows of $220,000 for 9 years.The company uses a discount rate of 10%.What is the NPV of the investment?
Present value of annuity of $1:
$$\begin{array} { | l | r | r | r | } \hline & { 8 \% } & { 9 \% } & { 10 \% } \\\hline 1 & 0.926 & 0.917 & 0.909 \\\hline 2 & 1.783 & 1.759 & 1.736 \\\hline 3 & 2.577 & 2.531 & 2.487 \\\hline 4 & 3.312 & 3.24 & 3.17 \\\hline 5 & 3.993 & 3.89 & 3.791 \\\hline 6 & 4.623 & 4.486 & 4.355 \\\hline 7 & 5.206 & 5.033 & 4.868 \\\hline 8 & 5.747 & 5.535 & 5.335 \\\hline 9 & 6.247 & 5.995 & 5.759 \\\hline\end{array}$$

A) $385,000
B) $248,333
C) $450,980
D) $408,000

Question 69

Discounted cash flow methods consider the time value of money while evaluating an investment proposal.

Question 70

Compound interest used in discounted cash flow calculations assumes that companies will reinvest future cash flows whenever they are received.

Question 71

When evaluating a potential investment,managers should use more than one measure for making a sound investment decision.

Question 72

The following details are provided by Dopler Company:
$\begin{array}{|l|c|c|c|c|}\hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \\\hline \text { Initial investment } & \$ 430,000 & \$ 204,000 & \$ 566,000 & \$ 500,000 \\\hline \text { PV of cash inflows } & \$ 578,000 & \$ 380,000 & \$ 802,000 & \$ 396,000 \\\hline \text { Payback period (years) } & 3,6 & 3.2 & 4.0 & 2.0 \\\hline \text { NPV of project } & \$ 148,000 & \$ 176,000 & \$ 236,000 & 104,000 \\\hline\end{array}$

What is the profitability index for Project B?

A) 1.96
B) 1.25
C) 1.86
D) 1.37

Question 73

Gamma Company is considering an investment of $504,000 in a land development project.It will yield cash flows of $216,000 for 5 years.The company uses a discount rate of 9%.What is the net present value of the investment?
Present value of annuity of $1:
$$\begin{array} { | l | r | r | r | } \hline & { 8 \% } & { 9 \% } & { 10 \% } \\\hline 1 & 0.926 & 0.917 & 0.909 \\\hline 2 & 1.783 & 1.759 & 1.736 \\\hline 3 & 2.577 & 2.531 & 2.487 \\\hline 4 & 3.312 & 3.24 & 3.17 \\\hline 5 & 3.993 & 3.89 & 3.791 \\\hline\end{array}$$

A) $216,000
B) $231,840
C) $332,640
D) $336,240

Question 74

Canbera Company is considering investing $450,000 in telecommunications equipment which would have an estimated life of five years with zero residual value.The cash flows are as shown below:
$$\begin{array} { | r | r | } \hline \text { Year 1 } & \$ 120,000 \\\hline 2 & \$ 235,000 \\\hline 3 & \$ 140,000 \\\hline 4 & \$ 98,000 \\\hline\end{array}$$
The present value of $1 factors are given below:
$$\begin{array} { | r | r | r | r | r | } \hline & 10 \% & 12 \% & 13 \% & 14 \% \\\hline 1 & 0.909 & 0.893 & 0.885 & 0.877 \\\hline 2 & 0.826 & 0.797 & 0.783 & 0.769 \\\hline 3 & 0.751 & 0.712 & 0.693 & 0.675 \\\hline 4 & 0.683 & 0.636 & 0.613 & 0.592 \\\hline 5 & 0.621 & 0.567 & 0.543 & 0.519 \\\hline\end{array}$$
The IRR of the project would be:

A) more than 13%
B) between 8% and 10%
C) less than 10%
D) between 12% and 13%

Question 75

The benefit foregone by not choosing an alternative course of action is known as an opportunity cost.

Question 76

Following details are provided by Dopler Company.
$$\begin{array} { | c | l | } \hline \text { Initial investment } & \$ 2,000,000 \\\hline \text { Discount rate } &12\% \\\hline \text { Yearly cash flows } & \\\hline 1 & \$ 208,000 \\\hline 2 & \$ 408,000 \\\hline 3 & \$ 408,000 \\\hline 4 & \$ 408,000 \\\hline 5 & \$ 208,000 \\\hline\end{array}$$
Refer to the following table for PV factors:
$$\begin{array} { | l | r | r | r | r | } \hline & { \mathbf { 1 0 } \% } & { \mathbf { 1 1 } \% } &{ \mathbf { 1 2 } \% } & { \mathbf { 1 3 } \% } \\\hline 1 & 0.909 & 0.901 & 0.893 & 0.885 \\\hline 2 & 0.826 & 0.812 & 0.797 & 0.783 \\\hline 3 & 0.751 & 0.731 & 0.712 & 0.693 \\\hline 4 & 0.683 & 0.659 & 0.636 & 0.613 \\\hline 5 & 0.621 & 0.593 & 0.567 & 0.543 \\\hline\end{array}$$
Calculate the NPV of the project.

A) $950,000 negative
B) $250,000 positive
C) $821,160 negative
D) $1,005,000 positive

Question 77

The following details are provided by Dopler Company:
$\begin{array}{|c|c|c|c|c|}\hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \\\hline \text { Initial investment } & \$ 426,000 & \$ 210,000 & \$ 568,000 & \$ 510,000 \\\hline \text { PV of cash inflows } & \$ 572,000 & \$ 388,000 & \$ 802,000 & \$ 404,000 \\\hline \text { Payback period (years) } & 3,6 & 3.2 & 4.0 & 2.0 \\\hline \text { NPV of project } & \$ 146,000 & \$ 178,000 & \$ 234,000 & 106,000 \\\hline\end{array}$
Which project has the highest profitability index?

A) Project A
B) Project B
C) Project C
D) Project D

Question 78

The following details are provided by Dopler Company:
$\begin{array}{|c|c|c|c|c|}\hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \\\hline \text { Initial investment } & \$ 440,000 & \$ 208,000 & \$ 552,000 & \$ 512,000 \\\hline \text { PV of cash inflows } & \$ 588,000 & \$ 384,000 & \$ 818,000 & \$ 408,000 \\\hline \text { Payback period (years) } & 3,6 & 3.2 & 4.0 & 2.0 \\\hline \text { NPV of project } & \$ 148,000 & \$ 176,000 & \$ 266,000 & 104,000 \\\hline\end{array}$

Calculate the profitability index for Project A.

A) 1.34
B) 0.94
C) 1.67
D) 1.08

Question 79

The residual value is discounted as a single lump sum because it will be received only once at the end of life of the asset.