Deck 10: Capital Budgeting Decisions

Question 1

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine } B \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.

-In comparing these two alternatives, which is the correct evaluation

A)Machine B should be purchased as the net present value of the costs of this alternative is the highest.
B)Machine B should be purchased as the net present value of the costs of this alternative is the lowest.
C)Machine A should be purchased as the net present value of the costs of this alternative is the lowest.
D)Machine A should be purchased as the net present value of the costs of this alternative is the highest.

Answer 1

Machine B should be purchased as the net present value of the costs of this alternative is the lowest.

Question 2

Reference: 10-05
The Sawyer Company has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: $$\begin{array} { | l | l | l | } \hline & \text { Project } X & \text { Project } Y \\\hline \text { Cost of equipment needed now } & \$ 80,000 & - \\\hline \text { Working capital requirement } & - & \$ 80,000 \\\hline \text { Annual cash operating inflows } & \$ 23,000 & \$ 18,000 \\\hline \text { Salvage value in 5 years } & \$ 6,000 & - \\\hline\end{array}$$ Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%.

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

Answer 2

$580.

Question 3

Reference: 10-08
Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | c | c | } \hline & \begin{array} { l } \text { Present } \\\text { System }\end{array} & \begin{array} { l } \text { Proposed New } \\\text { System }\end{array} \\\hline \text { Purchase cost new } & \$ 250,000 & \$ 300,000 \\\hline \text { Accumulated depreciation } & \$ 240,000 & - \\\hline \text { Overhaul costs needed now } & \$ 230,000 & - \\\hline \text { Annual cash operating costs } & \$ 180,000 & \$ 170,000 \\\hline \text { Salvage value now } & \$ 160,000 & - \\\hline \text { Salvage value at the end of 8 years } & \$ 152,000 & \$ 165,000 \\\hline \text { Working capital required } & - & \$ 200,000 \\\hline\end{array}$$ Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. The working capital required will be released in full at the end of the 8 years to be available for other purposes.

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

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

Answer 3

($1,076,495).

Question 4

Reference: 10-07
UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net operating cash flows (sales less cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow): $$\begin{array} { | l | l | } \hline \text { Years } 1 - 10 & \$ 90,000 \\\hline \text { Year } 11 & \$ ( 20,000 ) \\\hline \text { Year } 12 & \$ 100,000 \\\hline\end{array}$$ In addition to the above net operating cash flows, UR Company would purchase production equipment costing
$200,000 now to use in the rebuilding of the alternators. The equipment would have a 12-year life and a $15,000 salvage value. The company's discount rate is 10%.

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

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

Question 5

Reference: 10-05
The Sawyer Company has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: $$\begin{array} { | l | l | l | } \hline & \text { Project } X & \text { Project } Y \\\hline \text { Cost of equipment needed now } & \$ 80,000 & - \\\hline \text { Working capital requirement } & - & \$ 80,000 \\\hline \text { Annual cash operating inflows } & \$ 23,000 & \$ 18,000 \\\hline \text { Salvage value in 5 years } & \$ 6,000 & - \\\hline\end{array}$$ Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%.

-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. $$\begin{array} { | l | l | } \hline \text { Year } & \text { Cash Inflows } \\\hline 1 & \$ 120,000 \\\hline 2 & 60,000 \\\hline 3 & 40,000 \\\hline 4 & 40,000 \\\hline 5 & 40,000 \\\hline \text { Total } & \$ 300,000 \\\hline\end{array}$$ Assuming that the cash inflows occur evenly over each year, the payback period for the investment is:

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

Question 6

Reference: 10-02
Oriental Company has gathered the following data on a proposed investment project: $$\begin{array} { | l | l | } \hline \text { Investment in depreciable equipment } & \$ 200,000 \\\hline \text { Annual net cash flows } & \$ 50,000 \\\hline \text { Life of the equipment } & 10 \text { years } \\\hline \text { Salvage value } & \$ 20 \\\hline \text { Discount rate } & 10 \% \\\hline\end{array}$$ The company uses straight-line depreciation on all equipment.

-The payback period for the investment is closest to:

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

Question 7

Reference: 10-12
Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year.
The payback method measures:

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

Question 8

Reference: 10-12
Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year.

-The following data pertain to an investment: $$\begin{array} { | l | l | } \hline \text { Cost of the investment } & \$ 18,955 \\\hline \text { Life of the project } & 5 \text { years } \\\hline \text { Annual cost savings } & \$ 5,000 \\\hline \text { Estimated salvage value } & \$ 1,000 \\\hline \text { Discount rate } & 10 \% \\\hline\end{array}$$ The net present value of the proposed investment is:

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

Question 9

$$\text { Reference: 10-01 }$$ Shields Company has gathered the following data on a proposed investment project: $$\begin{array} { | l | l | } \hline \text { Investment required in equipment } & \$ 400,000 \\\hline \text { Annual cash inflows } & \$ 80,000 \\\hline \text { Salvage value } & \$ \quad 0 \\\hline \text { Life of the investment } & 10 \text { years } \\\hline \text { Discount rate } & 10 \% \\\hline\end{array}$$

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

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

Question 10

Reference: 10-02
Oriental Company has gathered the following data on a proposed investment project: $$\begin{array} { | l | l | } \hline \text { Investment in depreciable equipment } & \$ 200,000 \\\hline \text { Annual net cash flows } & \$ 50,000 \\\hline \text { Life of the equipment } & 10 \text { years } \\\hline \text { Salvage value } & \$ 20 \\\hline \text { Discount rate } & 10 \% \\\hline\end{array}$$ The company uses straight-line depreciation on all equipment.

-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)$2,000.
C)$4,350.
D)$1,290.

Question 11

Reference: 10-02
Oriental Company has gathered the following data on a proposed investment project: $$\begin{array} { | l | l | } \hline \text { Investment in depreciable equipment } & \$ 200,000 \\\hline \text { Annual net cash flows } & \$ 50,000 \\\hline \text { Life of the equipment } & 10 \text { years } \\\hline \text { Salvage value } & \$ 20 \\\hline \text { Discount rate } & 10 \% \\\hline\end{array}$$ The company uses straight-line depreciation on all equipment.

-The simple rate of return on the investment would be:

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

Question 12

Reference: 10-12
Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year.
Once the internal rate of return on a project is known, it is compared to which of th? following?

A)The cost of capital rate.
B)The tax rate.
C)The net present value of the project.
D)The tax shield.

Question 13

Reference: 10-12
Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year.
Buy-Rite Pharmacy has purchased a small auto for delivering prescriptions. was purchased for $9,000 and will have a 6-year useful life and a $3,000 salvage value. 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)1.8 years.
B)3.0 years.
C)2.0 years.
D)1.2 years.

Question 14

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine } B \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.

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

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

Question 15

Reference: 10-12
Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year.
The Whitton Company uses a discount rate of 16%. 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)$4,460.
B)$22,460.
C)($9,980).
D)$12,000.

Question 16

$$\text { Reference: } 10 - 08$$ Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | c | } \hline & \begin{array} { l } \text { Present } \\\text { System }\end{array} & \begin{array} { l } \text { Proposed New } \\\text { System }\end{array} \\\hline \text { Purchase cost new } & \$ 250,000 & \$ 300,000 \\\hline \text { Accumulated depreciation } & \$ 240,000 & - \\\hline \text { Overhaul costs needed now } & \$ 230,000 & - \\\hline \text { Annual cash operating costs } & \$ 180,000 & \$ 170,000 \\\hline \text { Salvage value now } & \$ 160,000 & - \\\hline \text { Salvage value at the end of 8 years } & \$ 152,000 & \$ 165,000 \\\hline \text { Working capital required } & - & \$ 200,000 \\\hline\end{array}$$ Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. The working capital required will be released in full at the end of the 8 years to be available for other purposes.

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

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

Question 17

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine } B \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.

-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: $$\begin{array} { | l | c | c | } \hline \text { Sales } & & \$ 500,000 \\\hline \text { Less cash variable expenses } & & 200,000 \\\hline \text { Contribution margin } & & 300,000 \\\hline \text { Less fixed expenses: } & & \\\hline \text { Fixed cash expenses } & \$ 150,000 & \\\hline \text { Depreciation expenses } & 45,000 & 195,000 \\\hline \text { Net income } & & \$ 105,000 \\\hline\end{array}$$ The company's required rate of return is 12%. What is the payback period for this project?

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

Question 18

$$\text { Reference: 10-01 }$$ Shields Company has gathered the following data on a proposed investment project: $$\begin{array} { | l | l | } \hline \text { Investment required in equipment } & \$ 400,000 \\\hline \text { Annual cash inflows } & \$ 80,000 \\\hline \text { Salvage value } & \$ \quad 0 \\\hline \text { Life of the investment } & 10 \text { years } \\\hline \text { Discount rate } & 10 \% \\\hline\end{array}$$

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

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

Question 19

Reference: 10-05
The Sawyer Company has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: $$\begin{array} { | l | l | l | } \hline & \text { Project } X & \text { Project } Y \\\hline \text { Cost of equipment needed now } & \$ 80,000 & - \\\hline \text { Working capital requirement } & - & \$ 80,000 \\\hline \text { Annual cash operating inflows } & \$ 23,000 & \$ 18,000 \\\hline \text { Salvage value in 5 years } & \$ 6,000 & - \\\hline\end{array}$$ Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%.

-The net present value of project X is:

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

Question 20

Reference: 10-12
Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year.
What is the simple rate of return on the initial investment?

A)24%.
B)28%.
C)36%.
D)16%.

Question 21

$$\text { Reference: } 10 - 02$$ Oriental Company has gathered the following data on a proposed investment project: $$\begin{array} { | l | l | } \hline \text { Investment in depreciable equipment } & \$ 200,000 \\\hline \text { Annual net cash flows } & \$ 50,000 \\\hline \text { Life of the equipment } & 10 \text { years } \\\hline \text { Salvage value } & \$ 20 \\\hline \text { Discount rate } & 10 \% \\\hline\end{array}$$ The company uses straight-line depreciation on all equipment.

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

Question 22

Reference: 10-04
The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials
used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
What would the annual net cash inflows from this project have to be in order to justify investing in remodelling?

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

Question 23

Reference: 10-06
The Becker Company is interested in buying a piece of equipment that it needs. The following data have been assembled concerning this equipment: $$\begin{array} { | l | c | } \hline \text { Cost of required equipment } & \$ 250,000 \\\hline \text { Working capital required } & \$ 100,000 \\\hline \text { Annual operating cash inflows } & \$ 80,000 \\\hline \text { Cash repair at end of 4 years } & \$ 40,000 \\\hline \text { Salvage value at end of 6 years } & \$ 90,000 \\\hline\end{array}$$ This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be released for use elsewhere. The company's discount rate is 10%.

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

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

Question 24

Reference: 10-06
The Becker Company is interested in buying a piece of equipment that it needs. The following data have been assembled concerning this equipment: $$\begin{array} { | l | c | } \hline \text { Cost of required equipment } & \$ 250,000 \\\hline \text { Working capital required } & \$ 100,000 \\\hline \text { Annual operating cash inflows } & \$ 80,000 \\\hline \text { Cash repair at end of 4 years } & \$ 40,000 \\\hline \text { Salvage value at end of 6 years } & \$ 90,000 \\\hline\end{array}$$ This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be released for use elsewhere. The company's discount rate is 10%.

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

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

Question 25

Reference: 10-14
Jimbob Co. is considering two alternatives to replace a delivery truck. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | r | } \hline & \text { Truck A } & \text { Truck B } \\\hline \text { Purchase cost new } & \$ 50,000 & \$ 70,000 \\\hline \text { Major repairs end of year 2 } & \$ 10,000 & 8,000 \\\hline \text { Annual cash operating costs } & \$ 20,000 & \$ 18,000 \\\hline \text { Salvage value at the end of 3 years } & \$ 15,000 & \$ 20,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both trucks are expected to have a useful life of three years.

-The payback period would be closest to?

A)3.0 years.
B)3.33 years.
C)8.0 years.
D)2.9 years.

Question 26

$$\text { Reference: } 10 - 02$$ Oriental Company has gathered the following data on a proposed investment project: $$\begin{array} { | l | l | } \hline \text { Investment in depreciable equipment } & \$ 200,000 \\\hline \text { Annual net cash flows } & \$ 50,000 \\\hline \text { Life of the equipment } & 10 \text { years } \\\hline \text { Salvage value } & \$ 20 \\\hline \text { Discount rate } & 10 \% \\\hline\end{array}$$ The company uses straight-line depreciation on all equipment.

-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)$268,120.
C)$438,120.
D)$221,950.

Question 27

$$\text { Reference: } 10 - 02$$ Oriental Company has gathered the following data on a proposed investment project: $$\begin{array} { | l | l | } \hline \text { Investment in depreciable equipment } & \$ 200,000 \\\hline \text { Annual net cash flows } & \$ 50,000 \\\hline \text { Life of the equipment } & 10 \text { years } \\\hline \text { Salvage value } & \$ 20 \\\hline \text { Discount rate } & 10 \% \\\hline\end{array}$$ The company uses straight-line depreciation on all equipment.

-How can the internal rate of return of a project be determined

A)By finding the discount rate that yields a net present value of zero.
B)By determining that the project cash flows are equal each year.
C)By some other method than listed above.
D)By determining that the project profitability index is greater than one.

Question 28

Reference: 10-14
Jimbob Co. is considering two alternatives to replace a delivery truck. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | r | } \hline & \text { Truck A } & \text { Truck B } \\\hline \text { Purchase cost new } & \$ 50,000 & \$ 70,000 \\\hline \text { Major repairs end of year 2 } & \$ 10,000 & 8,000 \\\hline \text { Annual cash operating costs } & \$ 20,000 & \$ 18,000 \\\hline \text { Salvage value at the end of 3 years } & \$ 15,000 & \$ 20,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both trucks are expected to have a useful life of three years.

-What is the amount of the difference in the net present values of the costs of these alternatives closest to?

A)$12,381.
B)$9,619.
C)$8,381.
D)$19,567.

Question 29

$$\text { Reference: } 10 - 05$$ The Sawyer Company has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: $$\begin{array} { | l | l | l | } \hline & \text { Project } X & \text { Project } Y \\\hline \text { Cost of equipment needed now } & \$ 80,000 & - \\\hline \text { Working capital requirement } & - & \$ 80,000 \\\hline \text { Annual cash operating inflows } & \$ 23,000 & \$ 18,000 \\\hline \text { Salvage value in 5 years } & \$ 6,000 & - \\\hline\end{array}$$ Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%.

-The net present value of project Y is closest to:

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

Question 30

Reference: 10-07
UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net operating cash flows (sales less cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow): $$\begin{array} { | l | l | } \hline \text { Years } 1 - 10 & \$ 90,000 \\\hline \text { Year } 11 & \$ ( 20,000 ) \\\hline \text { Year } 12 & \$ 100,000 \\\hline\end{array}$$ In addition to the above net operating cash flows, UR Company would purchase production equipment costing
$200,000 now to use in the rebuilding of the alternators. The equipment would have a 12-year life and a $15,000 salvage value. The company's discount rate is 10%.

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

Question 31

$$\text { Reference: } 10 - 02$$ Oriental Company has gathered the following data on a proposed investment project: $$\begin{array} { | l | l | } \hline \text { Investment in depreciable equipment } & \$ 200,000 \\\hline \text { Annual net cash flows } & \$ 50,000 \\\hline \text { Life of the equipment } & 10 \text { years } \\\hline \text { Salvage value } & \$ 20 \\\hline \text { Discount rate } & 10 \% \\\hline\end{array}$$ The company uses straight-line depreciation on all equipment.

-The payback period for the investment would be:

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

Question 32

Reference: 10-14
Jimbob Co. is considering two alternatives to replace a delivery truck. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | r | } \hline & \text { Truck A } & \text { Truck B } \\\hline \text { Purchase cost new } & \$ 50,000 & \$ 70,000 \\\hline \text { Major repairs end of year 2 } & \$ 10,000 & 8,000 \\\hline \text { Annual cash operating costs } & \$ 20,000 & \$ 18,000 \\\hline \text { Salvage value at the end of 3 years } & \$ 15,000 & \$ 20,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both trucks are expected to have a useful life of three years.

-The following data pertain to an investment in equipment: $$\begin{array} { | l | l | } \hline \text { Investment in the project } & \$ 10,000 \\\hline \text { Net annual cash inflows } & \$ 2,400 \\\hline \text { Working capital required } & \$ 5,000 \\\hline \text { Salvage value of the equipment } & \$ 1,000 \\\hline \text { Life of the project } & 8 \text { years } \\\hline\end{array}$$ 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)($1,729).
C)$606.
D)$8,271.

Question 33

Reference: 10-07
UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net operating cash flows (sales less cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow): $$\begin{array} { | l | l | } \hline \text { Years } 1 - 10 & \$ 90,000 \\\hline \text { Year } 11 & \$ ( 20,000 ) \\\hline \text { Year } 12 & \$ 100,000 \\\hline\end{array}$$ In addition to the above net operating cash flows, UR Company would purchase production equipment costing
$200,000 now to use in the rebuilding of the alternators. The equipment would have a 12-year life and a $15,000 salvage value. The company's discount rate is 10%.

-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.: 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. If "R" equals $42,000, the payback period equals the life of the project.
Which statement(s)is (are)true?

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

Question 34

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine B } \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.

-Which of the above costs are not relevant to the comparison of the alternatives

A)Salvage value at the end of 8 years.
B)Annual cash operating costs.
C)Purchase cost new.
D)Overhaul costs needed year 4.

Question 35

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine B } \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.

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

Question 36

Reference: 10-07
UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net operating cash flows (sales less cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow): $$\begin{array} { | l | l | } \hline \text { Years } 1 - 10 & \$ 90,000 \\\hline \text { Year } 11 & \$ ( 20,000 ) \\\hline \text { Year } 12 & \$ 100,000 \\\hline\end{array}$$ In addition to the above net operating cash flows, UR Company would purchase production equipment costing
$200,000 now to use in the rebuilding of the alternators. The equipment would have a 12-year life and a $15,000 salvage value. The company's discount rate is 10%.

-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)$596,735.
C)$582,735.
D)$591,950.

Question 37

Reference: 10-08
Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | c | c | } \hline & \begin{array} { l } \text { Present } \\\text { System }\end{array} & \begin{array} { l } \text { Proposed New } \\\text { System }\end{array} \\\hline \text { Purchase cost new } & \$ 250,000 & \$ 300,000 \\\hline \text { Accumulated depreciation } & \$ 240,000 & - \\\hline \text { Overhaul costs needed now } & \$ 230,000 & - \\\hline \text { Annual cash operating costs } & \$ 180,000 & \$ 170,000 \\\hline \text { Salvage value now } & \$ 160,000 & - \\\hline \text { Salvage value at the end of 8 years } & \$ 152,000 & \$ 165,000 \\\hline \text { Working capital required } & - & \$ 200,000 \\\hline\end{array}$$ Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. The working capital required will be released in full at the end of the 8 years to be available for other purposes.

-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 reflect the effects of depreciation and income taxes.
C)Both the methods consider the time value of money.
D)Both the methods require less input.

Question 38

$$\text { Reference: } 10 - 05$$ The Sawyer Company has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: $$\begin{array} { | l | l | l | } \hline & \text { Project } X & \text { Project } Y \\\hline \text { Cost of equipment needed now } & \$ 80,000 & - \\\hline \text { Working capital requirement } & - & \$ 80,000 \\\hline \text { Annual cash operating inflows } & \$ 23,000 & \$ 18,000 \\\hline \text { Salvage value in 5 years } & \$ 6,000 & - \\\hline\end{array}$$ Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%.

-Boston Company is contemplating the purchase of a new machine on which the following information has been gathered: $$\begin{array} { | l | l | } \hline \text { Cost of the machine } & \$ 38,900 \\\hline \text { Annual cash inflows expected } & \$ 10,000 \\\hline \text { Salvage value } & \$ 5,000 \\\hline \text { Life of the machine } & 6 \text { years } \\\hline\end{array}$$ 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)$0.
C)($23,900).
D)($26,100).

Question 39

$$\text { Reference: } 10 - 02$$ Oriental Company has gathered the following data on a proposed investment project: $$\begin{array} { | l | l | } \hline \text { Investment in depreciable equipment } & \$ 200,000 \\\hline \text { Annual net cash flows } & \$ 50,000 \\\hline \text { Life of the equipment } & 10 \text { years } \\\hline \text { Salvage value } & \$ 20 \\\hline \text { Discount rate } & 10 \% \\\hline\end{array}$$ The company uses straight-line depreciation on all equipment.

-The net present value of this investment would be?

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

Question 40

$$\text { Reference: } 10 - 05$$ The Sawyer Company has $80,000 to invest and is considering two different projects, X and Y. The following data are available on the projects: $$\begin{array} { | l | l | l | } \hline & \text { Project } X & \text { Project } Y \\\hline \text { Cost of equipment needed now } & \$ 80,000 & - \\\hline \text { Working capital requirement } & - & \$ 80,000 \\\hline \text { Annual cash operating inflows } & \$ 23,000 & \$ 18,000 \\\hline \text { Salvage value in 5 years } & \$ 6,000 & - \\\hline\end{array}$$ Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%.

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

Question 41

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine B } \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.

-The time value of money is ignored by which method

A)The net present value method.
B)The internal rate of return method.
C)The simple rate of return method.
D)Both the internal rate and simple rate of return methods.

Question 42

Reference: 10-03
Apex Corp. is planning to buy production machinery costing $100,000. This machinery's expected useful life is five years, with no residual value. Apex uses a discount rate of 10% and has calculated the following data pertaining to the purchase and operation of this machinery: $$\begin{array} { | c | c | } \hline \text { Year } & { \begin{array} { c } \text { Estimated } \\\text { annual net } \\\text { cash inflow }\end{array} } \\\hline 1 & \$ 60,000 \\\hline 2 & 30,000 \\\hline 3 & 20,000 \\\hline 4 & 20,000 \\\hline 5 & 20,000 \\\hline\end{array}$$

-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.:

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

Question 43

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine B } \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.

-Given the following data: $$\begin{array} { | l | l | } \hline \text { Present investment required } & \$ 12,000 \\\hline \text { Net present value } & \$ 430 \\\hline \text { Annual cost savings } & \$ ? \\\hline \text { Discount rate } & 12 \% \\\hline \text { Life of the project } & 10 \text { years } \\\hline\end{array}$$ Based on the data given, the annual cost savings would be:

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

Question 44

$$\text { Reference: } 10 - 08$$ Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | c | } \hline & \begin{array} { l } \text { Present } \\\text { System }\end{array} & \begin{array} { l } \text { Proposed New } \\\text { System }\end{array} \\\hline \text { Purchase cost new } & \$ 250,000 & \$ 300,000 \\\hline \text { Accumulated depreciation } & \$ 240,000 & - \\\hline \text { Overhaul costs needed now } & \$ 230,000 & - \\\hline \text { Annual cash operating costs } & \$ 180,000 & \$ 170,000 \\\hline \text { Salvage value now } & \$ 160,000 & - \\\hline \text { Salvage value at the end of 8 years } & \$ 152,000 & \$ 165,000 \\\hline \text { Working capital required } & - & \$ 200,000 \\\hline\end{array}$$ Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. The working capital required will be released in full at the end of the 8 years to be available for other purposes.

- $$\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { Cash Flow Over } \\\text { Life of Project }\end{array} & \begin{array} { l } \text { Time Value of } \\\text { Money }\end{array} \\\hline \text { A) } & \text { No } & \text { Yes } \\\hline \text { B) } & \text { No } & \text { No } \\\hline \text { C) } & \text { Yes } & \text { No } \\\hline \text { D) } & \text { Yes } & \text { Yes } \\\hline\end{array}$$

A)choice A.
B)choice B.
C)choice C.
D)choice D.

Question 45

$$\text { Reference: } 10 - 11$$ Purvell Company has just acquired a new machine. Data on the machine follow: $$\begin{array} { | l | l | } \hline \text { Purchase cost } & \$ 50,000 \\\hline \text { Annual cost savings } & \$ 15,000 \\\hline \text { Life of the machine } & 8 \text { years } \\\hline\end{array}$$ The company uses straight-line depreciation and a $5,000 salvage value. (The company considers salvage value in making depreciation deductions.) Assume cash flows occur uniformly throughout a year.

-The simple rate of return would be closest to?

A)17.5%.
B)30.0%.
C)18.75%.
D)12.5%.

Question 46

Reference: 10-01
Shields Company has gathered the following data on a proposed investment project: $$\begin{array} { | l | l | } \hline \text { Investment required in equipment } & \$ 400,000 \\\hline \text { Annual cash inflows } & \$ 80,000 \\\hline \text { Salvage value } & \$ \quad 0 \\\hline \text { Life of the investment } & 10 \text { years } \\\hline \text { Discount rate } & 10 \% \\\hline\end{array}$$

-The net present value on this investment is closest to:

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

Question 47

$$\text { Reference: } 10 - 03$$ Apex Corp. is planning to buy production machinery costing $100,000. This machinery's expected useful life is five years, with no residual value. Apex uses a discount rate of 10% and has calculated the following data pertaining to the purchase and operation of this machinery: $$\begin{array} { | c | c | } \hline \text { Year } & { \begin{array} { c } \text { Estimated } \\\text { annual net } \\\text { cash inflow }\end{array} } \\\hline 1 & \$ 60,000 \\\hline 2 & 30,000 \\\hline 3 & 20,000 \\\hline 4 & 20,000 \\\hline 5 & 20,000 \\\hline\end{array}$$

-The payback period is?

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

Question 48

$$\text { Reference: } 10 - 10$$ Fast Food, Inc. has purchased a new donut maker. It cost $16,000 and has an estimated life of 10 years with no salvage value. The following annual donut sales and expenses are projected: $$\begin{array} { | l | r | l | } \hline \text { Sales } & & \$ 22,000 \\\hline \text { Expenses: } & & \\\hline \text { Flour, etc., required in making donuts } & \$ 10,000 & \\\hline \text { Salaries } & 6,000 & \\\hline \text { Depreciation } & 1,600 & 17,600 \\\hline \text { Net income } & & \$ 4,400 \\\hline\end{array}$$

-The simple rate of return for the new machine is closest to:

A)27.5%.
B)20.0%.
C)37.5%.
D)80.0%.

Question 49

Reference: 10-14
Jimbob Co. is considering two alternatives to replace a delivery truck. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | r | } \hline & \text { Truck } A & \text { Truck } B \\\hline \text { Purchase cost new } & \$ 50,000 & \$ 70,000 \\\hline \text { Major repairs end of year } 2 & \$ 10,000 & 8,000 \\\hline \text { Annual cash operating costs } & \$ 20,000 & \$ 18,000 \\\hline \text { Salvage value at the end of 3 years } & \$ 15,000 & \$ 20,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both trucks are expected to have a useful life of three years.

-In comparing these two alternatives, which is the correct evaluation

A)Truck A should be purchased as the net present value of the costs of this alternative is the lowest.
B)Truck B should be purchased as the net present value of the costs of this alternative is the highest.
C)Truck B should be purchased as the net present value of the costs of this alternative is the lowest.
D)Truck A should be purchased as the net present value of the costs of this alternative is the highest.

Question 50

$$\text { Reference: } 10 - 09$$ Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects: $$\begin{array} { | l | l | l | } \hline & \text { Project } A & \text { Project } B \\\hline \text { Cost of equipment needed now } & \$ 120,000 & \$ 70,000 \\\hline \text { Working capital investment needed now } & - & \$ 50,000 \\\hline \text { Annual net operating cash inflows } & \$ 50,000 & \$ 45,000 \\\hline \text { Salvage value of equipment in 6 years } & \$ 15,000 & - \\\hline\end{array}$$ Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%.

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

Question 51

$$\text { Reference: } 10 - 06$$ The Becker Company is interested in buying a piece of equipment that it needs. The following data have been assembled concerning this equipment: $$\begin{array} { | l | l | } \hline \text { Cost of required equipment } & \$ 250,000 \\\hline \text { Working capital required } & \$ 100,000 \\\hline \text { Annual operating cash inflows } & \$ 80,000 \\\hline \text { Cash repair at end of 4 years } & \$ 40,000 \\\hline \text { Salvage value at end of 6 years } & \$ 90,000 \\\hline\end{array}$$ This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be released for use elsewhere. The company's discount rate is 10%.

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

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

Question 52

$$\text { Reference: } 10 - 10$$ Fast Food, Inc. has purchased a new donut maker. It cost $16,000 and has an estimated life of 10 years with no salvage value. The following annual donut sales and expenses are projected: $$\begin{array} { | l | r | l | } \hline \text { Sales } & & \$ 22,000 \\\hline \text { Expenses: } & & \\\hline \text { Flour, etc., required in making donuts } & \$ 10,000 & \\\hline \text { Salaries } & 6,000 & \\\hline \text { Depreciation } & 1,600 & 17,600 \\\hline \text { Net income } & & \$ 4,400 \\\hline\end{array}$$

-The payback period on the new machine is closest to:

A)3.6 years.
B)5.0 years.
C)1.4 years.
D)2.7 years.

Question 53

$$\text { Reference: } 10 - 03$$ Apex Corp. is planning to buy production machinery costing $100,000. This machinery's expected useful life is five years, with no residual value. Apex uses a discount rate of 10% and has calculated the following data pertaining to the purchase and operation of this machinery: $$\begin{array} { | c | c | } \hline \text { Year } & { \begin{array} { c } \text { Estimated } \\\text { annual net } \\\text { cash inflow }\end{array} } \\\hline 1 & \$ 60,000 \\\hline 2 & 30,000 \\\hline 3 & 20,000 \\\hline 4 & 20,000 \\\hline 5 & 20,000 \\\hline\end{array}$$

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

Question 54

Reference: 10-14
Jimbob Co. is considering two alternatives to replace a delivery truck. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | r | } \hline & \text { Truck } A & \text { Truck } B \\\hline \text { Purchase cost new } & \$ 50,000 & \$ 70,000 \\\hline \text { Major repairs end of year } 2 & \$ 10,000 & 8,000 \\\hline \text { Annual cash operating costs } & \$ 20,000 & \$ 18,000 \\\hline \text { Salvage value at the end of 3 years } & \$ 15,000 & \$ 20,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both trucks are expected to have a useful life of three years.

-The following data pertain to an investment proposal: $$\begin{array} { | l | l | } \hline \text { Investment in the project (equipment) } & \$ 14,000 \\\hline \text { Net annual cash inflows promised } & \$ 2,800 \\\hline \text { Working capital required } & \$ 5,000 \\\hline \text { Salvage value of the equipment } & \$ 1,000 \\\hline \text { Life of the project } & 10 \text { years } \\\hline\end{array}$$ 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)$2,566.
C)$5,251.
D)($251).

Question 55

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine } A & \text { Machine } B \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year } 4 & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.

-In considering the impact of inflation in capital budgeting net present value calculations, which of the following should be adjusted for anticipated inflation?

A)cash flows of future years.
B)cost of capital.
C)cash outflow at project start date.
D)A & B.

Question 56

Reference: 10-14
Jimbob Co. is considering two alternatives to replace a delivery truck. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | r | } \hline & \text { Truck } A & \text { Truck } B \\\hline \text { Purchase cost new } & \$ 50,000 & \$ 70,000 \\\hline \text { Major repairs end of year } 2 & \$ 10,000 & 8,000 \\\hline \text { Annual cash operating costs } & \$ 20,000 & \$ 18,000 \\\hline \text { Salvage value at the end of 3 years } & \$ 15,000 & \$ 20,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both trucks are expected to have a useful life of three years.

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

Question 57

$$\text { Reference: } 10 - 09$$ Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects: $$\begin{array} { | l | l | l | } \hline & \text { Project } A & \text { Project } B \\\hline \text { Cost of equipment needed now } & \$ 120,000 & \$ 70,000 \\\hline \text { Working capital investment needed now } & - & \$ 50,000 \\\hline \text { Annual net operating cash inflows } & \$ 50,000 & \$ 45,000 \\\hline \text { Salvage value of equipment in 6 years } & \$ 15,000 & - \\\hline\end{array}$$ Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%.

-The net present value of Project A is closest to?

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

Question 58

$$\text { Reference: } 10 - 08$$ Westland College has a telephone system that is in poor condition. The system either can be overhauled or replaced with a new system. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | c | } \hline & \begin{array} { l } \text { Present } \\\text { System }\end{array} & \begin{array} { l } \text { Proposed New } \\\text { System }\end{array} \\\hline \text { Purchase cost new } & \$ 250,000 & \$ 300,000 \\\hline \text { Accumulated depreciation } & \$ 240,000 & - \\\hline \text { Overhaul costs needed now } & \$ 230,000 & - \\\hline \text { Annual cash operating costs } & \$ 180,000 & \$ 170,000 \\\hline \text { Salvage value now } & \$ 160,000 & - \\\hline \text { Salvage value at the end of 8 years } & \$ 152,000 & \$ 165,000 \\\hline \text { Working capital required } & - & \$ 200,000 \\\hline\end{array}$$ Westland College uses a 10% discount rate and the total cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years. The working capital required will be released in full at the end of the 8 years to be available for other purposes.

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

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

Question 59

Reference: 10-03
Apex Corp. is planning to buy production machinery costing $100,000. This machinery's expected useful life is five years, with no residual value. Apex uses a discount rate of 10% and has calculated the following data pertaining to the purchase and operation of this machinery: $$\begin{array} { | c | c | } \hline \text { Year } & { \begin{array} { c } \text { Estimated } \\\text { annual net } \\\text { cash inflow }\end{array} } \\\hline 1 & \$ 60,000 \\\hline 2 & 30,000 \\\hline 3 & 20,000 \\\hline 4 & 20,000 \\\hline 5 & 20,000 \\\hline\end{array}$$

-The net present value is closest to?

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

Question 60

Reference: 10-06
The Becker Company is interested in buying a piece of equipment that it needs. The following data have been assembled concerning this equipment: $$\begin{array} { | l | l | } \hline \text { Cost of required equipment } & \$ 250,000 \\\hline \text { Working capital required } & \$ 100,000 \\\hline \text { Annual operating cash inflows } & \$ 80,000 \\\hline \text { Cash repair at end of 4 years } & \$ 40,000 \\\hline \text { Salvage value at end of 6 years } & \$ 90,000 \\\hline\end{array}$$ This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be released for use elsewhere. The company's discount rate is 10%.

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

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

Question 61

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine A } & \text { Machine } B \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year 4 } & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.

-What is the amount of the difference in the net present values of the costs of these alternatives closest to?

A)$46,520.
B)$51,190.
C)$64,850.
D)$58,020.

Question 62

Reference: 10-04
The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.

-Information on four investment proposals is given below: $$\begin{array} { | c | l | l | } \hline \text { Proposal } & \text { Investment } & \text { Net Present Value } \\\hline 1 & \$ 50,000 & \$ 30,000 \\\hline 2 & \$ 60,000 & \$ 24,000 \\\hline 3 & \$ 30,000 & \$ 15,000 \\\hline 4 & \$ 45,000 & \$ 9,000 \\\hline\end{array}$$ In what order do the proposals in terms of preference according to the profitability index?

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

Question 63

Reference: 10-09
Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects: $$\begin{array} { | l | l | l | } \hline & \text { Project A } & \text { Project } B \\\hline \text { Cost of equipment needed now } & \$ 120,000 & \$ 70,000 \\\hline \text { Working capital investment needed now } & - & \$ 50,000 \\\hline \text { Annual net operating cash inflows } & \$ 50,000 & \$ 45,000 \\\hline \text { Salvage value of equipment in 6 years } & \$ 15,000 & - \\\hline\end{array}$$ Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%.

-The following data pertain to an investment proposal: $$\begin{array} { | l | l | } \hline \text { Cost of the investment } & \$ 20,000 \\\hline \text { Annual cost savings } & \$ 5,000 \\\hline \text { Estimated salvage value } & \$ 1,000 \\\hline \text { Life of the project } & 8 \text { years } \\\hline \text { Discount rate } & 16 \% \\\hline\end{array}$$ The net present value of the proposed investment is:

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

Question 64

Reference: 10-04
The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
The present value of a cash flow decreases as it moves further into the future.

Question 65

Reference: 10-04
The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
Which of the statements below is correct about an increase in the discount rate

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

Question 66

Reference: 10-04
The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
The immediate cash outflow required for this project would be:

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

Question 67

Reference: 10-04
The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
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 68

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine } A & \text { Machine } B \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year } 4 & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.

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

Question 69

Reference: 10-04
The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
Screening decisions in capital budgeting involve determining whether a project meets some minimal pre-set standard of acceptance.

Question 70

Reference: 10-09
Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects: $$\begin{array} { | l | l | l | } \hline & \text { Project A } & \text { Project } B \\\hline \text { Cost of equipment needed now } & \$ 120,000 & \$ 70,000 \\\hline \text { Working capital investment needed now } & - & \$ 50,000 \\\hline \text { Annual net operating cash inflows } & \$ 50,000 & \$ 45,000 \\\hline \text { Salvage value of equipment in 6 years } & \$ 15,000 & - \\\hline\end{array}$$ Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%.

-The net present value of Project B is closest to?

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

Question 71

Reference: 10-09
Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects: $$\begin{array} { | l | l | l | } \hline & \text { Project A } & \text { Project } B \\\hline \text { Cost of equipment needed now } & \$ 120,000 & \$ 70,000 \\\hline \text { Working capital investment needed now } & - & \$ 50,000 \\\hline \text { Annual net operating cash inflows } & \$ 50,000 & \$ 45,000 \\\hline \text { Salvage value of equipment in 6 years } & \$ 15,000 & - \\\hline\end{array}$$ Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%.

-Perkins Company is considering several investment proposals, as shown below: $$\begin{array} { | l | l | l | l | l | } \hline& { \text { Investment Proposal } } \\\hline & A & B & C & D \\\hline \text { Investment required } & \$ 80,000 & \$ 100,000 & \$ 60,000 & \$ 75,000 \\\hline \text { Present value of future net cash flows } & \$ 96,000 & \$ 150,000 & \$ 84,000 & \$ 120,000 \\\hline\end{array}$$ In what order do the proposals rank in terms of preference using the profitability index?

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

Question 72

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine } A & \text { Machine } B \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year } 4 & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.

- $$\begin{array} { | l | l | l | } \hline & \text { Depreciation expense } & \text { Salvage value } \\\hline \text { A) } & \text { Include } & \text { Include } \\\hline \text { B) } & \text { Include } & \text { Exclude } \\\hline \text { C) } & \text { Exclude } & \text { Include } \\\hline \text { D) } & \text { Exclude } & \text { Exclude } \\\hline\end{array}$$

A)Choice A.
B)Choice B.
C)Choice C.
D)Choice D.

Question 73

Reference: 10-04
The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
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)49.2%.
C)20%.
D)40%.

Question 74

Reference: 10-04
The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
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)$36,050.
B)$2,774.
C)$17,637.
D)$5,670.

Question 75

Reference: 10-04
The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
If pre-tax cash flow is $100,000 and the tax rate is 20%, after-tax cash flow is:

A)$100,000.
B)$60,000.
C)$120,000.
D)$80,000.

Question 76

Reference: 10-04
The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
The cost of capital is the average rate of return a company must pay on its short-term bank borrowings.

Question 77

Reference: 10-04
The Finney Company is reviewing the possibility of remodelling one of its showrooms and buying some new equipment to improve sales operations. The remodelling would cost $120,000 now and the useful life of the project is 10 years. Additional working capital needed immediately for this project would be $30,000; the working capital would be released for use elsewhere at the end of the 10-year period. The equipment and other materials used in the project would have a salvage value of $10,000 in 10 years. Finney's discount rate is 16%.
Equipment purchased on the last day of a company's fiscal year for a total cost of $10,000 is in a capital asset class that has a 10% per annual depreciation rate allowed for tax purposes. In the year of acquisition of this asset, the allowable tax deduction will be:

A)$10,000.
B)$1,000.
C)$0.
D)$500.

Question 78

Reference: 10-09
Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects: $$\begin{array} { | l | l | l | } \hline & \text { Project A } & \text { Project } B \\\hline \text { Cost of equipment needed now } & \$ 120,000 & \$ 70,000 \\\hline \text { Working capital investment needed now } & - & \$ 50,000 \\\hline \text { Annual net operating cash inflows } & \$ 50,000 & \$ 45,000 \\\hline \text { Salvage value of equipment in 6 years } & \$ 15,000 & - \\\hline\end{array}$$ Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%.

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

Question 79

Reference: 10-12
Hanley Company purchased a machine for $125,000 that will be depreciated on the straight-line basis over a five-year period with no salvage value. The related cash flow from operations is expected to be $45,000 a year. These cash flows from operations occur uniformly throughout the year.
What is the payback period closest to?

A)2.8 years.
B)4.2 years.
C)2.1 years.
D)2.3 years.

Question 80

Reference: 10-13
Jimbob Co. is considering two alternatives to replace some existing manufacturing equipment. The following data have been gathered concerning these two alternatives: $$\begin{array} { | l | l | l | } \hline & \text { Machine } A & \text { Machine } B \\\hline \text { Purchase cost new } & \$ 300,000 & \$ 300,000 \\\hline \text { Overhaul costs needed year } 4 & \$ 10,000 & 20,000 \\\hline \text { Annual cash operating costs } & \$ 130,000 & \$ 120,000 \\\hline \text { Salvage value at the end of 8 years } & \$ 20,000 & \$ 30,000 \\\hline\end{array}$$ Jimbob Co. uses a 10% discount rate and the incremental cost approach to capital budgeting analysis. Both alternatives are expected to have a useful life of eight years.

-Assuming that a business has a project with anticipated positive net annual operating cash flows, assuming all other factors remain the same, the inclusion of income taxes in the capital budgeting analysis will:

A)increase the net present value.
B)decrease the net present value.
C)have no impact on the net present value.
D)not be determinable.