Question 1

If a project's net present value is negative,the internal rate of return is:

Accepted Answer

The internal rate of return (IRR) is the discount rate at which the project's net present value (NPV) is zero. If NPV is negative (i.e., the project's cash outflows exceed its cash inflows), this means that the IRR is less than the discount rate. This is because a lower discount rate would result in a less negative NPV (or potentially positive NPV), and therefore the IRR must be lower than the discount rate to result in a negative NPV.

Question 2

Thomas Inc.has two independent investment opportunities,each requiring an initial investment of $15,000.The company's hurdle rate is 14 percent.The cash inflows for each investment are provided below.
$\begin{array}{crc} 
& \text { Investment A } & \text { Investment B } \
\text { Year 1 } & \$ 20,000 & \$ 70,000 \
\text { Year 2 } & 30,000 & 50,000 \
\text { Year 3 } & 50,000 & 40,000 \
\text { Year 4 } & 70,000 \
\text { Total inflows } & \$ 170,000 & 10,000 \
\end{array}$
Without making any calculations,which investment will have the higher net present value?

Accepted Answer

Investment B will have a higher net present value because it generates most of its cash inflows early on, which means the cash flows can be reinvested sooner at the hurdle rate, enhancing the investment's value.

Question 3

Which of the following statements is true regarding the time value of money concept?

Accepted Answer

The time value of money concept refers to the idea that a dollar received today is worth more than a dollar received in the future, due to the potential to invest or earn interest on the money in the meantime. Therefore, option B is the correct answer. Option A is incorrect because the value of money changes over time due to inflation and other factors. Option C is incorrect because a dollar received today can be invested or earn interest, increasing its value over time. Option D is incorrect because the value of a dollar paid in the future depends on the prevailing interest rates and inflation at that time.

Question 4

Vista Company wants to replace one of its older production machines.The estimated cost is $180,000.Using a discount rate of 18%,the company calculates a net present value of the new machine to be negative $10,000.Based on this information which of the following statements is true?

Accepted Answer

The net present value of the new machine is negative, which means that the cost of the machine is higher than the expected return on the investment. However, if the actual purchase price is less than $170,000, the net present value will be positive and the investment will be profitable. Therefore, option C is the correct choice. Option A is incorrect as a higher discount rate would decrease the net present value further. Option B is incorrect as the discount rate does not represent the guaranteed rate of return, but rather the rate at which future cash flows are discounted. Option D is incorrect as the internal rate of return is not given in the information provided.

Question 5

If a project's net present value is positive,the internal rate of return is:

Accepted Answer

If a project's net present value is positive, it means that the project's expected cash inflows exceed the cost of the investment, discounted to the present. This implies that the project is expected to generate a return that is greater than the discount rate. Therefore, the internal rate of return must also be greater than the discount rate, as it is the discount rate at which the project's net present value would be zero.

Question 6

Assume you receive $15,000 in four years and the annual interest rate is four percent.Using the present value formula,how much is that worth in today's dollars (rounded to the nearest dollar)?

Accepted Answer

Using the present value formula:

PV = FV / (1 + r)^n

where PV is present value, FV is future value, r is the annual interest rate, and n is the number of years.

Plugging in the values:

PV = $15,000 / (1 + 0.04)^4
PV = $12,821.52

Rounding to the nearest dollar:

PV = $12,822

Therefore, the answer is D.

Question 7

Inglewood Inc.would like to purchase a specialized production machine for $3,500,000.The machine is expected to have a life of three years,and a salvage value of $200,000.Annual maintenance costs will total $200,000.Annual material savings are predicted to be $900,000.The company's required rate of return is 20 percent.
Ignoring the time value of money,what is the net cash inflow or (outflow)resulting from this investment opportunity?

Accepted Answer

Ignoring the time value of money, we can simply add up the cash inflows and outflows over the three years.

Cash Inflows: 
Annual material savings = $900,000 x 3 = $2,700,000
Salvage value = $200,000

Total cash inflows = $2,900,000

Cash Outflows:
Initial machine purchase = $3,500,000
Annual maintenance costs = $200,000 x 3 = $600,000

Total cash outflows = $4,100,000

Net cash outflow = Total cash inflows - Total cash outflows = $2,900,000 - $4,100,000 = -$1,200,000

The negative sign indicates a net cash outflow or investment of $1,200,000.

Question 8

If a project's net present value is zero,the internal rate of return is:

Accepted Answer

If a project's net present value is zero, it means that the present value of its cash inflows is equal to the present value of its cash outflows, discounted at the project's required rate of return or discount rate. At this point, the project has neither a positive nor a negative impact on the firm's wealth. The internal rate of return is defined as the discount rate that makes the net present value of a project equal to zero. Hence, if the net present value is zero, the internal rate of return must be equal to the discount rate that was used to calculate the net present value. Therefore, the answer is B - equal to the discount rate.

Question 9

Assume you receive $4,800 in two years and the annual interest rate is four percent.Using the present value formula,how much is that amount worth in today's dollars (rounded to the nearest dollar)?

Accepted Answer

The present value (PV) is calculated using the formula: PV = FV / (1 + r)^n, where FV is the future value ($4,800), r is the annual interest rate (0.04), and n is the number of years (2). PV = $4,800 / (1 + 0.04)^2 = $4,800 / 1.0816 ≈ $4,438.

Question 10

Assume that you invest $100,000 today at an annual rate of eight percent for four years.How much will you have at the end of four years (rounded to the nearest dollar)?

Accepted Answer

The future value of an investment is calculated using the formula FV = PV(1 + r)^n, where FV is the future value, PV is the present value, r is the annual interest rate, and n is the number of years. Plugging in the given values: FV = $100,000(1 + 0.08)^4 = $136,048.64, which rounds to $136,049.

Question 11

Assume that you invest $10,000 today at an annual rate of five percent for three years.How much will you have at the end of three years (rounded to the nearest dollar)?

Accepted Answer

The calculation for compound interest is

A = P(1 + r/n)^(nt)

where A is the final amount, P is the principal (starting) amount, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the number of years.

Using this formula, we can calculate that the final amount after three years is:

A = 10,000(1 + 0.05/1)^(1*3) 
A = 10,000(1.05)^3 
A = 11,576.25

Rounding to the nearest dollar, we get:

Answer: A
 The final amount is $11,576.

Question 12

If a project has an internal rate of return of 25% and a negative net present value,which of the following statements is true regarding the discount rate used for the net present value computation?

Accepted Answer

A project with an internal rate of return (IRR) of 25% implies that the project is generating a return of 25% on its invested capital. A negative net present value (NPV) indicates that the discounted cash flows of the project are not sufficient to cover the initial investment. Therefore, the discount rate used for the NPV computation must be greater than the IRR, which is 25%, to result in a negative NPV. Thus, the required rate of return must have been greater than 25%. Option D is the correct answer.

Question 13

Roske Company is considering a project with an initial investment of $40,000 and annual cash inflows of $8,000 per year for seven years.The company's cost of capital is 12 percent.Factors for a 12 percent interest rate for seven years are shown below:
Future Value of $1 2.211
Present Value of $1 0.452
Future Value of an Annuity 10.089
Present Value of an Annuity 4.564
Using the net present value (NPV)to evaluate this proposal,the company should:

Accepted Answer

The NPV is calculated as follows:NPV = -Initial investment + Present value of cash inflowsNPV = -$40,000 + $8,000 x 4.564NPV = -$40,000 + $36,512NPV = -$3,488Since the NPV is negative, the company should reject the proposal.

Question 14

Fusion Inc.would like to purchase a new machine for $85,000.The machine is expected to generate a cost savings of $23,000 per year for five years.The company's cost of capital is 10 percent.Factors for a 10 percent interest rate for five years are shown below:
$$\begin{array} { l l } 
\text { Future Value of } \$ 1 & 1.611 \
\text { Present Value of } \$ 1 & 0.621 \
\text { Future Value of an Annuity } & 6.105 \
\text { Present Value of an Annuity } & 3.791
\end{array}$$
Using the net present value (NPV)to evaluate this proposal,the company should:

Accepted Answer

The NPV is calculated as follows:NPV = -Initial Investment + Present Value of Future Cash FlowsNPV = -$85,000 + $23,000 x 3.791NPV = $2,193Since the NPV is positive, the company should invest in the proposal.

Question 15

Under the net present value (NPV)method,cash flows are assumed to be reinvested at:

Accepted Answer

Under the NPV method, cash flows are assumed to be reinvested at the company's discount rate. This is because the discount rate represents the cost of capital for the company and is used to evaluate the profitability of potential investments. Therefore, it is assumed that any cash flows generated from an investment will be reinvested at the same rate as the company's cost of capital.

Question 16

Assume you receive $60,000 in five years and the annual interest rate is six percent.Using the present value formula,how much is that worth in today's dollars (rounded to the nearest dollar)?

Accepted Answer

The present value formula is:

Present Value = Future Value / (1 + r)^n

Plugging in the given values, we get:

Present Value = 60,000 / (1 + 0.06)^5 = 44,835

Therefore, the answer is choice C.

Question 17

Philly Company wants to buy a new machine and has narrowed its options to two choices.Both machines cost $160,000.The following data shows the expected cash inflows from each machine:
$$\begin{array} { c c c } 
\text { Year } & \text { Machine 1 } & \text { Machine 2 } \
\hline 1 & \$ 80,000 & \$ 240,000 \
2 & 80,000 & 0 \
3 & 80,000 & 0
\end{array}$$
When calculating net present value,Philly uses the same cost of capital for both machines and both machines have a positive net present value.
Based on this information,which statement is true?

Accepted Answer

The answer of Philly Company wants to buy a new...

Question 18

Assume you receive $63,000 in three years and the annual interest rate is five percent.Using the present value formula,how much is that amount worth in today's dollars (rounded to the nearest dollar)?

Accepted Answer

To calculate the present value, we need to discount the $63,000 back to the present day using the formula PV = FV/(1+r)^n, where PV is the present value, FV is the future value, r is the annual interest rate, and n is the number of years. Plugging in the numbers, we get PV = $63,000/(1+0.05)^3 = $54,421.81 ≈ $54,422 rounded to the nearest dollar. Therefore, the correct choice is A.

Question 19

The appropriate rate to be used for evaluating a long-term investment proposal can be referred to as all of the following except:

Accepted Answer

"Cash flow rate" is not a commonly used term when referring to the appropriate rate for evaluating long-term investment proposals. The other options listed (required rate of return, discount rate, and hurdle rate) are all commonly used terms.

Question 20

Sanders Company would like to purchase a specialized production machine for $1,000,000.The machine is expected to have a life of five years,and a salvage value of $300,000.Annual maintenance costs will total $50,000.Annual labor savings are predicted to be $280,000.The company's required rate of return is 15 percent.
Ignoring the time value of money,what is the net cash inflow or (outflow)resulting from this investment opportunity?

Accepted Answer

The net cash inflow is calculated as follows: Total savings over 5 years = $280,000 * 5 = $1,400,000. Total maintenance costs over 5 years = $50,000 * 5 = $250,000. Salvage value = $300,000. Net cash inflow = $1,400,000 - $250,000 + $300,000 - $1,000,000 = $450,000.

Quiz 8: How Is Capital Budgeting Used to Make Decisions

If a project's net present value is negative,the internal rate of return is:

Which of the following statements is true regarding the time value of money concept?

Vista Company wants to replace one of its older production machines.The estimated cost is $180,000.Using a discount rate of 18%,the company calculates a net present value of the new machine to be negative $10,000.Based on this information which of the following statements is true?

If a project's net present value is positive,the internal rate of return is:

Assume you receive $15,000 in four years and the annual interest rate is four percent.Using the present value formula,how much is that worth in today's dollars (rounded to the nearest dollar) ?

If a project's net present value is zero,the internal rate of return is:

Assume you receive $4,800 in two years and the annual interest rate is four percent.Using the present value formula,how much is that amount worth in today's dollars (rounded to the nearest dollar) ?

Assume that you invest $100,000 today at an annual rate of eight percent for four years.How much will you have at the end of four years (rounded to the nearest dollar) ?

Assume that you invest $10,000 today at an annual rate of five percent for three years.How much will you have at the end of three years (rounded to the nearest dollar) ?

If a project has an internal rate of return of 25% and a negative net present value,which of the following statements is true regarding the discount rate used for the net present value computation?

Under the net present value (NPV) method,cash flows are assumed to be reinvested at:

Assume you receive $60,000 in five years and the annual interest rate is six percent.Using the present value formula,how much is that worth in today's dollars (rounded to the nearest dollar) ?

Assume you receive $63,000 in three years and the annual interest rate is five percent.Using the present value formula,how much is that amount worth in today's dollars (rounded to the nearest dollar) ?

The appropriate rate to be used for evaluating a long-term investment proposal can be referred to as all of the following except: