Question 1

Alpha Zeta is considering purchasing some new equipment costing $390,000. The equipment will be depreciated on a straight line basis to a zero book value over the four-year life of the project. Projected net income for the four years is $18,900, $21,300, $26,700, and $25,000. What is the average accounting rate of return?
A) 11.78 percent
B) 11.93 percent
C) 12.01 percent
D) 12.49 percent
E) 13.20 percent

Accepted Answer

The average accounting rate of return is calculated by dividing the average annual net income by the initial investment. The average annual net income is the sum of the net income for each year divided by the number of years. The initial investment is the cost of the equipment.In this case, the average annual net income is ($18,900 + $21,300 + $26,700 + $25,000) / 4 = $23,225. The initial investment is $390,000. Therefore, the average accounting rate of return is $23,225 / $390,000 = 11.78%.

Question 2

Today, Crunchy Snacks is investing $487,000 in a new oven. As a result, the company expects its cash flows to increase by $62,000 a year for the next two years and by $98,000 a year for the following three years. How long must the firm wait until it recovers all of its initial investment?
A) 3.97 years
B) 4.18 years
C) 4.46 years
D) 4.70 years
E) The project never pays back.

Accepted Answer

The answer of Today, Crunchy Snacks is investing $487,000 in...

Question 3

The Auto Shop is buying some new equipment at a cost of $218,900. This equipment will be depreciated on a straight line basis to a zero book value its 8-year life. The equipment is expected to generate net income of $36,000 a year for the first four years and $22,000 a year for the last four years. What is the average accounting rate of return?
A) 15.48 percent
B) 17.76 percent
C) 18.09 percent
D) 23.72 percent
E) 26.50 percent

Accepted Answer

The answer of The Auto Shop is buying some new...

Question 4

A project has the following cash flows. What is the payback period? 
A) 2.38 years
B) 2.49 years
C) 2.60 years
D) 3.01 years
E) 3.33 years

Accepted Answer

The answer of A project has the following cash flows....

Question 5

A project has the following cash flows. What is the payback period? 
A) 2.48 years
B) 2.59 years
C) 2.96 years
D) 3.21 years
E) 3.43 years

Accepted Answer

The answer of A project has the following cash flows....

Question 6

You are considering an equipment purchase costing $177,000. This equipment will be depreciated straight line to zero over its 3-year life. What is the average accounting return if this equipment produces the following net income? 
A) 12.29 percent
B) 14.38 percent
C) 16.56 percent
D) 17.44 percent
E) 21.00 percent

Accepted Answer

The answer of You are considering an equipment purchase costing...

Question 7

Services United is considering a new project that requires an initial cash investment of $75,000. The project will generate cash inflows of $26,500, $32,700, $18,500, and $10,000 over each of the next four years, respectively. How long will it take to recover the initial investment?
A) 2.74 years
B) 2.85 years
C) 2.99 years
D) 3.27 years
E) 3.68 years

Accepted Answer

The answer of Services United is considering a new project...

Question 8

An investment has an initial cost of $320,000 and a life of four years. This investment will be depreciated by $60,000 a year and will generate the net income shown below. Should this project be accepted based on the average accounting rate of return (AAR) if the required rate is 9 percent? Why or why not? 
A) Yes; because the AAR less than 9 percent
B) Yes; because the AAR is 9 percent
C) Yes; because the AAR is greater than 9 percent
D) No; because the AAR is 9 percent
E) No; because the AAR is greater than 9 percent

Accepted Answer

To calculate the AAR, we need to first find the average net income over the life of the investment by adding up the net income for each year and dividing by the number of years:

Average net income = (150,000 + 180,000 + 200,000 + 220,000) / 4 = 187,500

Then we divide the average net income by the initial cost of the investment and multiply by 100 to get the AAR in percentage:

AAR = (187,500 / 320,000) x 100 = 58.59%

Since the required rate of return is 9 percent and the AAR is greater than 9 percent, the project should be accepted based on the average accounting rate of return. Therefore, the best choice is C.

Question 9

The Drive-Thru requires an average accounting return (AAR) of at least 17 percent on all fixed asset purchases. Currently, it is considering some new equipment costing $168,000. This equipment will have a 4-year life over which time it will be depreciated on a straight line basis to a zero book value. The annual net income from this equipment is estimated at $8,100, $10,300, $17,900, and $19,600 for the four years. Should this purchase occur based on the accounting rate of return? Why or why not?
A) Yes; because the AAR is less than 17 percent
B) Yes; because the AAR is equal to 17 percent
C) Yes; because the AAR is greater than 17 percent
D) No; because the AAR is less than 17 percent
E) No; because the AAR is greater than 17 percent

Accepted Answer

To calculate the AAR, we need to divide the average annual net income by the average investment.

The average annual net income for the 4-year period is (8100 + 10300 + 17900 + 19600) / 4 = $14,975.

The average investment is the initial investment divided by 2, since the equipment is depreciated on a straight-line basis to a zero book value. Therefore, the average investment is $84,000 ($168,000 / 2).

Therefore, the AAR is ($14,975 / $84,000) * 100 = 17.82%.

Since the AAR is less than the required rate of 17 percent, the purchase should not occur based on the accounting rate of return. Therefore, the answer is D.

Question 10

The Budget Place is considering opening a new store at a start up cost of $700,000. The initial investment will be depreciated straight line to zero over the 15-year life of the project. What is the average accounting rate of return? 
A) 13.05 percent
B) 13.68 percent
C) 14.01 percent
D) 14.59 percent
E) 14.76 percent

Accepted Answer

The answer of The Budget Place is considering opening a...

Question 11

A project has the following cash flows. What is the internal rate of return? 
A) 9.75 percent
B) 10.28 percent
C) 10.60 percent
D) 10.67 percent
E) 11.23 percent

Accepted Answer

The answer of A project has the following cash flows....

Question 12

What is the net present value of the following cash flows if the relevant discount rate is 8.8 percent? 
A) $1,482.15
B) $3,385.96
C) $23,507.19
D) $54,211.40
E) $68,278.59

Accepted Answer

The answer of What is the net present value of...

Question 13

An investment has an initial cost of $3.2 million. This investment will be depreciated by $900,000 a year over the 3-year life of the project. Should this project be accepted based on the average accounting rate of return if the required rate is 10.5 percent? Why or why not? 
A) Yes; because the AAR is 10.5 percent
B) Yes; because the AAR is less than 10.5 percent
C) Yes; because the AAR is greater than 10.5 percent
D) No; because the AAR is greater than 10.5 percent
E) No; because the AAR is less than 10.5 percent

Accepted Answer

The average accounting rate of return (AAR) is calculated by dividing the average annual income by the initial investment. In this case, the average annual income is the total depreciation over the 3-year life of the project, which is $900,000 * 3 = $2.7 million. Therefore, the AAR is $2.7 million / $3.2 million = 0.84375 or 84.375%. Since the required rate of return is 10.5%, the AAR is less than the required rate, indicating that the project should be rejected. Therefore, the correct answer is E.

Question 14

Lester's Feed Mill is spending $230,000 to update its facility. The company estimates that this investment will improve its cash inflows by $46,500 a year for 10 years. What is the payback period?
A) 4.03 years
B) 4.95 years
C) 5.39 years
D) 5.67 years
E) The project never pays back.

Accepted Answer

The payback period is calculated by dividing the initial investment by the annual cash inflow: $230,000 / $46,500 = 4.95 years.

Question 15

Major Importers would like to spend $211,000 to expand its warehouse. However, the company has a loan outstanding that must be repaid in 2.5 years and thus will need the $211,000 at that time. The warehouse expansion project is expected to increase the cash inflows by $48,000 in the first year, $139,000 in the second year, and $210,000 a year for the following two years. Should the firm expand at this time? Why or why not?
A) Yes; because the money will be recovered in 1.69 years
B) Yes; because the money will be recovered in 1.87 years
C) Yes; because the money will be recovered in 2.11 years
D) No; because the project never pays back
E) No; because the money will not be recovered in time to repay the loan

Accepted Answer

The answer of Major Importers would like to spend $211,000...

Question 16

An investment has an initial cost of $410,000 and will generate the net income amounts shown below. This investment will be depreciated straight line to zero over the 4-year life of the project. Should this project be accepted based on the average accounting rate of return if the required rate is 16 percent? Why or why not? 
A) Yes; because the AAR is equal to 16 percent
B) Yes; because the AAR is greater than 16 percent
C) Yes; because the AAR is less than 16 percent
D) No; because the AAR is greater than 16 percent
E) No; because the AAR is less than 16 percent

Accepted Answer

To calculate the average accounting rate of return (AAR), we need to divide the average annual net income by the initial investment cost.

Average annual net income = Total net income / Number of years 
Total net income = Sum of all net income amounts 
Number of years = 4

Using the formula above, we get:

Average annual net income = ($100,000 + $120,000 + $150,000 + $200,000) / 4 = $142,500

AAR = Average annual net income / Initial investment cost x 100% 
AAR = $142,500 / $410,000 x 100% = 34.76%

The AAR is greater than the required rate of return of 16%, which means that the project should not be accepted based on the AAR method. Therefore, the correct answer is E.

Question 17

What is the payback period for a project with the following cash flows? 
A) 2.56 years
B) 2.89 years
C) 3.17 years
D) 3.74 years
E) never

Accepted Answer

The answer of What is the payback period for a...

Question 18

EEG, Inc. is considering a new project that will require an initial cash investment of $388,000. The project will produce no cash flows for the first two years. The projected cash flows for years 3 through 7 are $69,000, $88,000, $102,000, $140,000, and $160,000, respectively. How long will it take the firm to recover its initial investment in this project?
A) 3.81 years
B) 3.98 years
C) 5.57years
D) 5.92 years
E) The project never pays back.

Accepted Answer

The cumulative cash flows become positive in year 6. By the end of year 5, the cumulative cash flow is $399,000, which exceeds the initial investment of $388,000. Therefore, the payback period is between 5 and 6 years, specifically 5.92 years.

Question 19

What is the payback period for a $27,500 investment with the following cash flows? 
A) 3.54 years
B) 3.89 years
C) 4.22 years
D) 4.54 years
E) The project never pays back.

Accepted Answer

The answer of What is the payback period for a...

Question 20

The Blue Goose is considering a project with an initial cost of $42,700. The project will produce cash inflows of $8,000 a year for the first two years and $12,000 a year for the following three years. What is the payback period?
A) 2.87 years
B) 3.23 years
C) 3.41 years
D) 3.79 years
E) 4.23 years

Accepted Answer

The answer of The Blue Goose is considering a project...

Quiz 8: Net Present Value and Other Investment Criteria

Today, Crunchy Snacks is investing $487,000 in a new oven. As a result, the company expects its cash flows to increase by $62,000 a year for the next two years and by $98,000 a year for the following three years. How long must the firm wait until it recovers all of its initial investment?

A project has the following cash flows. What is the payback period?

A project has the following cash flows. What is the payback period?

You are considering an equipment purchase costing $177,000. This equipment will be depreciated straight line to zero over its 3-year life. What is the average accounting return if this equipment produces the following net income?

Services United is considering a new project that requires an initial cash investment of $75,000. The project will generate cash inflows of $26,500, $32,700, $18,500, and $10,000 over each of the next four years, respectively. How long will it take to recover the initial investment?

The Budget Place is considering opening a new store at a start up cost of $700,000. The initial investment will be depreciated straight line to zero over the 15-year life of the project. What is the average accounting rate of return?

A project has the following cash flows. What is the internal rate of return?

What is the net present value of the following cash flows if the relevant discount rate is 8.8 percent?

An investment has an initial cost of $3.2 million. This investment will be depreciated by $900,000 a year over the 3-year life of the project. Should this project be accepted based on the average accounting rate of return if the required rate is 10.5 percent? Why or why not?

Lester's Feed Mill is spending $230,000 to update its facility. The company estimates that this investment will improve its cash inflows by $46,500 a year for 10 years. What is the payback period?

What is the payback period for a project with the following cash flows?

What is the payback period for a $27,500 investment with the following cash flows?

The Blue Goose is considering a project with an initial cost of $42,700. The project will produce cash inflows of $8,000 a year for the first two years and $12,000 a year for the following three years. What is the payback period?