Question 1

The cost of capital is called all of the following except:

Accepted Answer

All of these terms (cutoff rate, discount rate, and hurdle rate) refer to the cost of capital.

Question 2

Jiminez Company has two investment opportunities. Both investments cost $5,000 and will provide the following net cash flows: $\begin{array}{lcc}
\text { Year }& \text { Investment A} & \text { Investment B} \
1 & \$ 3,000 & \$ 3,000 \
2 & 3,000 & 4,000 \
3 & 3,000 & 2,000 \
4 & 3,000 & 1,000
\end{array}$ What is the total present value of Investment A's cash flows assuming an 8% minimum rate of return? ( PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round your intermediate calculations. Round your answer to the nearest whole dollar.)

Accepted Answer

The answer of Jiminez Company has two investment opportunities. Both...

Question 3

Jiminez Company has two investment opportunities. Both investments cost $5,100 and will provide the following net cash flows: $\begin{array}{lcc}
\text { Year }& \text { Investment A} & \text { Investment B} \
1 & \$ 3,050 & \$ 3,050 \
2 & 3,050 & 4,060 \
3 & 3,050 & 2,050 \
4 & 3,050 & 1,020
\end{array}$ What is the total present value of Investment A's cash flows assuming an 10% minimum rate of return? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round intermediate calculations. Round your answer to the nearest dollar.)

Accepted Answer

The answer of Jiminez Company has two investment opportunities. Both...

Question 4

Connor has $490,000 to invest in a 5-year annuity. Assuming the time value of money is 12%, what amount will Connor receive in cash each year?(PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Round your answer to the nearest dollar.)

Accepted Answer

The present value of the annuity is $490,000. The future value of $1 received at the end of each year for 5 years at 12% is $5.65026. Therefore, the amount Connor will receive in cash each year is $490,000 / $5.65026 = $86,728.

Question 5

Assuming equal time intervals between the payments and a constant rate of return, which of the following cash flow patterns represents an annuity? $\begin{array}{rrrrrrr}
&\text { Year } & \text { Year } & \text { Year } & \text { Year } 4 & \text { Year }5& \text { Year } 6 \
\text {A)}&\$ 1,000 & \$ 1,000 & \$ 1,000 & \$ 1,000 & \$ 1,000 & \$ 1,000 \
\text {B)}&\$ 500 & \$  0 & \$ 500& \$ 500 & \$500& \$0\
\text {C)}&\$100&\$200&\$300&\$400&\$500&\$600
\end{array}$

Accepted Answer

An annuity is a series of equal payments made at regular intervals. Option A has equal payments of $1,000 each year, fitting the definition of an annuity.

Question 6

Which of the following is not a major cash inflow from a capital investment?

Accepted Answer

Increase in working capital is not a major cash inflow from a capital investment as it is a cash outflow required to support the investment. Incremental revenue, cost savings, and salvage value are all major cash inflows that can contribute to the profitability of a capital investment.

Question 7

Harvey wants to determine the net present value for a proposed capital investment. He has determined the desired rate of return, the expected investment time period, a series of cash inflows of equal amount, the salvage value of the investment, and the required cash outflows. Which of the following tables would most likely be used to calculate the net present value of the investment?

Accepted Answer

To calculate the net present value (NPV) of an investment with equal cash inflows (an annuity), the salvage value at the end of the investment period (a lump sum), and initial cash outflows, both the present value of an annuity table (for the cash inflows) and the present value of a lump sum table (for the salvage value) would be used. The present value of annuity table helps in determining the current value of the series of equal cash inflows over the investment period, while the present value of a lump sum table is used to find the current value of the salvage value at the end of the investment period.

Question 8

Ashley projects that she can get $190,000 cash per year for 5 years on a real estate investment project. If Ashley wants to earn a rate of return of 10%, what is the maximum that she should pay for the investment?(PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Round your answer to the nearest dollar.)

Accepted Answer

The answer of Ashley projects that she can get $190,000...

Question 9

What amount of cash would result at the end of one year, if $15,000 is invested today and the rate of return is 8%? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Accepted Answer

Using the formula for future value: FV = PV x (1 + r)^n, where PV is the present value, r is the rate of return, and n is the number of periods, we get FV = $15,000 x (1 + 0.08)^1 = $16,200. Therefore, the correct choice is A.

Question 10

A cash flow that only occurs in equal amounts each year is referred to as:

Accepted Answer

An annuity is a cash flow that occurs in equal amounts each year. A lump sum is a single payment, and a perpetuity is a cash flow that occurs forever in equal amounts.

Question 11

For a capital investment project to be acceptable, it must generate a rate of return:

Accepted Answer

A capital investment project must generate a rate of return that is equal to or greater than the cost of capital. This ensures that the project will be able to generate enough revenue to cover its expenses and provide a return to the investors. The hurdle rate is the minimum rate of return required by investors, and a project must exceed this rate to be accepted. The conversion rate is not relevant to capital investment decisions. Therefore, option B is the correct answer.

Question 12

Which one of the following statements best describes an ordinary annuity?

Accepted Answer

An ordinary annuity is a series of equal cash flows collected or paid at the end of each period. The term "ordinary" implies that the payments are made at the end of each period. Therefore, option B is the correct answer. Option A describes an annuity due, where the payments are made at the beginning of each period. Option C describes a series of cash outflows, and Option D describes an annuity due with equal cash outflows.

Question 13

Connor has $300,000 to invest in a 5-year annuity. Assuming the time value of money is 10%, what amount will Connor receive in cash each year? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Round your answer to the nearest dollar.)

Accepted Answer

Using the PV of $1 table, we find the present value of an ordinary annuity of $1 for 5 years at 10% to be 3.791. 
Next, we use the PVA of $1 table to find the annuity payment necessary to accumulate $300,000 over 5 years at 10% to be $79,139. Therefore, Connor will receive $79,139 in cash each year for 5 years.

Question 14

What amount of cash would result at the end of one year, if $22,000 is invested today and the rate of return is 9%? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Round your answer to the nearest dollar.)

Accepted Answer

The future value of $22,000 at 9% for one year is $22,000 x 1.09 = $23,980.

Question 15

What amount of cash must be invested today in order to have $60,000 at the end of one year assuming the rate of return is 9%? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Accepted Answer

Using the formula for future value of a single sum: 
FV = PV(1 + r)^n 
where FV = $60,000, r = 9%, and n = 1 year. 
Therefore, 
$60,000 = PV(1 + 0.09)^1 
$60,000 = PV(1.09) 
PV = $55,045.87 
Rounding up, the answer is $55,046, which is closest to option C.

Question 16

Ashley projects that she can get $100,000 cash per year for 5 years on a real estate investment project. If Ashley wants to earn a rate of return of 12%, what is the maximum that she should pay for the investment? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Round your answer to the nearest dollar.)

Accepted Answer

To calculate the maximum amount Ashley should pay for the investment, we need to find the present value of the cash flows. Using a financial calculator or the present value tables, we can find the present value factor for an annuity of $100,000 per year for 5 years at a rate of 12% to be 3.6048. 
Present value = $100,000 x 3.6048 = $360,478 (rounded to the nearest dollar)
Therefore, the maximum amount Ashley should pay for the investment is $360,478. The best choice is C.

Question 17

Assuming equal time intervals between the payments and a constant rate of return, which of the following cash flow patterns represents an annuity? $\begin{array}{rrrrrrr}
&\text { Year } & \text { Year } & \text { Year } & \text { Year } 4 & \text { Year }5& \text { Year } 6 \
\text {A)}&\$ 1,360 & \$ 1,360 & \$ 1,360 & \$ 1,360 & \$ 1,360 & \$ 1,360 \
\text {B)}&\$ 1,040 & \$  0 & \$ 1,040 & \$ 1,040 & \$ 1,040 & \$0\
\text {C)}&\$280&\$380&\$480&\$580&\$680&\$780
\end{array}$

Accepted Answer

An annuity is a series of equal payments made at regular intervals. Option A has equal payments of $1,360 each year, fitting the definition of an annuity.

Question 18

When calculating the present value of an ordinary annuity, it is assumed that:

Accepted Answer

The answer of When calculating the present value of an...

Question 19

A customary assumption in capital budgeting analysis is that:

Accepted Answer

The assumption is that the desired rate of return includes the effects of compounding, which means that the time value of money is taken into account. The other options (B, C, and D) assume certain scenarios that are not typically assumed in capital budgeting analysis.

Question 20

What amount of cash must be invested today in order to have $33,000 at the end of one year assuming the rate of return is 9%? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Round your answer to the nearest dollar.)

Accepted Answer

The answer of What amount of cash must be invested...

Quiz 16: Planning for Capital Investments