Deck 14: Investment Decision Making

Question 1

The Serene Hotel is considering investment in some new low maintenance kitchen equipment that will increase the range of meals that its restaurant can offer. Based on the following information, calculate the payback period.
Initial investment = $90,000
Investment life = 6 years
Increased revenues resulting from investment = $16,000 per year
Decreased costs resulting from investment = $4,000 per year
Salvage value associated with investment = $10,000 in year 6
Investment's required rate of return = 13%

A) 4.25 years
B) 3.75 years
C) 3.5 years
D) 4.0 years
E) 4.5 years

Answer 1

E

Question 2

The SoothingSpa Resort is appraising a January 1st 20X0 investment of $32,000 that will increase cash inflows by $8,000 in 20X0, $9,000 in 20X1, $9,000 in 20X2, $12,000 in 20X3 and $8,000 in 20X4. At the end of 20X4, it is estimated the investment can be salvaged for $6,000. What is the payback period for the investment?

A) 3 years.
B) 3 years and 6 months.
C) 3 years and 9 months.
D) 4 years.
E) 4 years and 6 months.

Answer 2

B

Question 3

The City Lodge Hotel is appraising a January 1st 20X0 investment of $20,000 in maintenance equipment that will increase accounting profits by $4,000 in 20X0, $6,000 in 20X1 and $8,000 in 20X2. At the end of 20X2, it is estimated the maintenance equipment will be sold for $4,000. What is the projected accounting rate of return for the investment?

A) 30%.
B) 40%.
C) 50%.
D) 60%.
E) None of the above.

Answer 3

C

Question 4

Imagine Cairns' BarrierReef Lodge is appraising a January 1st 20X0 investment of $8,000 in a drinks vending machine that will increase accounting profits by $1,000 in 20X0, $2,000 in 20X1 and $3,000 in 20X2. At the end of 20X2, it is estimated the vending machine will be sold for $2,000. What is the projected accounting rate of return for the investment?

A) 12.5%.
B) 25%.
C) 40%.
D) 50%.
E) None of the above.

Question 5

Use discounting tables to determine the value today of an opportunity to receive $5,000 at the end of each of the next four years. Assume an interest rate of 8%.

A) $2,940
B) $13,750
C) $16,560
D) $19,965
E) $20,000

Question 6

Use discounting tables to determine today's value of an investment that will provide a dividend of $1,000 at the end of each of the next five years and will be sold for $10,000 in five years time. Assume the required rate of return is 8%.

A) $10,003
B) $10,203
C) $10,403
D) $10,603
E) $10,803

Question 7

The ParkRidge Resort accountant has developed the following estimates relating to a proposed investment in its laundry department.
$$\begin{array} { l r } \text { Cost of new laundry equipment } & \$ 40,000 \\\text { Annual cash savings from new equipment } & \$ 8,200 \\\text { Life of the new equipment } & 7 \text { years } \\\text { Equipment salvage value } & \$ 6,000 \\\text { ParkRidge Resort cost of capital } & 7 \%\end{array}$$ What is the net present value of the proposed investment?

A) $6,427.8
B) $6,927.8
C) $7,427.8
D) $7,927.8
E) $8,427.8

Question 8

Use the following information to answer the next two questions. The Debonair Hotel is considering a kitchen investment with a ten year life. The investment will require an initial outlay of $120,780 and provide increased cash inflows of $24,000 per annum and generate increased running cost cash outflows of $6,000 per annum. There will be no salvage value at the end of the life of the investment.
-What is the internal rate of return for the Debonair Hotel's kitchen investment?

A) 5%
B) 6%
C) 7%
D) 8%
E) 9%

Question 9

Use the following information to answer the next two questions. The Debonair Hotel is considering a kitchen investment with a ten year life. The investment will require an initial outlay of $120,780 and provide increased cash inflows of $24,000 per annum and generate increased running cost cash outflows of $6,000 per annum. There will be no salvage value at the end of the life of the investment.
-Assuming a 6% cost of capital, what is the net present value of the Debonair Hotel's kitchen investment?
A: $9,700
B: $11,700
C: $13,700
D: $15,700
E: $17,700

Question 10

Which of the following statements is true?

A) If three investment projects are under consideration, the one with the highest IRR is preferable.
B) If a project has an IRR greater than 0, the NPV of the project will be positive.
C) If a payback analysis and an accounting rate of return analysis both indicate that the larger of two possible investments should be made, but the internal rate of return indicates that the smaller project investment should be made, the smaller project should be chosen.
D) If the cost of capital is less than the IRR, the NPV will always be positive.
E) NPV and IRR approaches always provide the same answer when ranking two or more investment opportunities.

Question 11

The Gorgeous Grand Hotel is considering overhauling and redesigning its main restaurant. Based on the following information, calculate the payback period.
Initial investment = $127,500
Investment life = 7 years
Increased revenues resulting from investment = $22,000 per year
Decreased costs resulting from investment = $8,000 per year
Salvage value associated with investment = $12,000 in year 7
Investment's required rate of return = 8%
A: 9.11 years
B: 7.75 years
C: 6.25 years
D: 5.15 years
E: 4.25 years

Question 12

Use the following information to answer the next two questions. The Slick Hotel is appraising the merit of a proposed investment in a vending machine with an eight year life. The investment will require an initial outlay of $22,988 and provide increased cash inflows of $24,000 per annum and generate increased cash outflows of $20,000 per annum. There will be no salvage value at the end of the life of the investment.
-What is the internal rate of return for the vending machine investment?
A: 5%
B: 6%
C: 7%
D: 8%
E: 9%

Question 13

Use the following information to answer the next two questions. The Slick Hotel is appraising the merit of a proposed investment in a vending machine with an eight year life. The investment will require an initial outlay of $22,988 and provide increased cash inflows of $24,000 per annum and generate increased cash outflows of $20,000 per annum. There will be no salvage value at the end of the life of the investment.
-Assuming a 6% cost of capital, what is the net present value of the Slick Hotel vending machine investment?
A: $1,252
B: $1,552
C: $1,852
D: $2,152
E: $2,452

Question 14

The WhiteCliffs Resort accountant has developed the following estimates relating to a proposed replacement of a boiler.
$$\begin{array} { l r } \text { Cost of new boiler } & \$ 60,000 \\\text { Annual cash savings from new equipment } & \$ 13,000 \\\text { Life of the new equipment } & 6 \text { years } \\\text { Equipment salvage value } & \$ 4,000 \\\text { WhiteCliffs Resort cost of capital } & 7 \%\end{array}$$ What is the net present value of the proposed investment?

A) $3,945
B) $4,635
C) $5,235
D) $6,144
E) $7,011

Question 15

Which of the following statements is true?

A) If three investment projects are under consideration, the one with the highest IRR is preferable.
B) If a project has an IRR greater than one, the project's NPV will be positive.
C) A higher payback period is consistent with a higher NPV.
D) If a project's required rate of return is above the IRR, the project's NPV will be negative.
E) If ranking investment opportunities, the NPV and IRR investment appraisal approaches will provide the same rankings.

Question 16

The Moons AFL club has raised $80,000 of long term debt and $120,000 in owners equity capital. The after tax cost of the long term debt is 5% and the club's shareholders expect a 10% return on their investment. What is the club's weighted average cost of capital?
A: 6%
B: 6.5%
C: 7%
D: 7.5%
E: 8%

Question 17

Use the following information to answer the next two questions. The Slick Hotel is appraising the merit of a proposed investment in a vending machine with an eight year life. The investment will require an initial outlay of $22,000 and provide increased cash inflows of $24,000 per annum and generate increased cash outflows of $20,000 per annum. The vending machine will be sold off for $3,000 in eight year's time.
-What is the payback period for the vending machine investment?
A: 4 years and 9 months
B: 5 years
C: 5 years and 3 months
D: 5 years and 6 months
E: 5 years and 9 months

Question 18

Use the following information to answer the next two questions. The Slick Hotel is appraising the merit of a proposed investment in a vending machine with an eight year life. The investment will require an initial outlay of $22,000 and provide increased cash inflows of $24,000 per annum and generate increased cash outflows of $20,000 per annum. The vending machine will be sold off for $3,000 in eight year's time.
-Assuming a 6% cost of capital, what is the net present value of the Slick Hotel vending machine investment?
A: $3,931
B: $4,322
C: $4,721
D: $5,152
E: $5,423

Question 19

A positive net present value means that the:

A) project's rate of return is less than the company's cost of capital.
B) project's rate of return exceeds the required rate of return.
C) project's rate of return is the same as the company's cost of capital.
D) present value of cash inflows associated with the project are the same as the present value of cash outflows associated with the project.
E) project's IRR is more than 1.

Question 20

The theoretically preferred quantitative approach to take in capital budget decision making is:

A) Return on Investment
B) Internal Rate of Return
C) Payback
D) Net Present Value
E) Accounting rate of return

Question 21

A travel company has raised $60,000 of long term debt and $40,000 in owners equity capital. The after tax cost of the long term debt is 6% and the club's shareholders expect a 12% return on their investment. What is the club's weighted average cost of capital?
A: 6.8%
B: 7.6%
C: 8.4%
D: 9.2%
E: 9.8%

Question 22

Use the following information to answer the next two questions. The Premier Hotel is appraising the merit of a proposed investment in a vending machine with an eight year life. The investment will require an initial outlay of $16,000 and provide increased cash inflows of $17,000 per annum and generate increased cash outflows of $14,000 per annum. The vending machine will be sold off for $2,000 in eight year's time.
-What is the payback period for the vending machine investment?
A: 5 years
B: 5 years and 3 months
C: 5 years and 4 months
D: 5 years and 6 months
E: 5 years and 9 months

Question 23

Use the following information to answer the next two questions. The Premier Hotel is appraising the merit of a proposed investment in a vending machine with an eight year life. The investment will require an initial outlay of $16,000 and provide increased cash inflows of $17,000 per annum and generate increased cash outflows of $14,000 per annum. The vending machine will be sold off for $2,000 in eight year's time.
-Assuming a 6% cost of capital, what is the net present value of the Premier Hotel's vending machine investment?
A: $931
B: $1,655
C: $2,630
D: $3,884
E: $4,534

Question 24

The Marvellous Resort accountant has developed the following estimates relating to a proposed investment in its laundry department.
$$\begin{array} { l r } \text { Cost of new laundry equipment } & \$ 38,000 \\\text { Annual cash savings from new equipment } & \$ 8,000 \\\text { Life of the new equipment } & 7 \text { years } \\\text { Equipment salvage value } & \$ 5,000 \\\text { Marvellous Resort cost of capital } & 8 \%\end{array}$$ What is the net present value of the proposed investment?

A) $6,063
B) $6,163
C) $6,563
D) $6,763
E) $6,963

Question 25

Use discounting tables to determine the value today of an opportunity to receive $3,000 at the end of each of the next five years. Assume an interest rate of 6%.

A) $10,636
B) $11,136
C) $11,636
D) $12,136
E) $12,636

Question 26

The Adele Tower Resort's accountant has developed the following estimates relating to a proposed investment in its laundry department.
Cost of new laundry equipment
Annual cash savings from new equipment
Life of the new equipment
Equipment salvage value
Adele Tower Resort's cost of capital
$\$ 40,000$
$\$ 9,000$
7 years
$\$ 4,000$
$8 \%$ What is the net present value of the proposed investment?

A) $7,822
B) $8,131
C) $8,648
D) $9,186
E) $9,823

Question 27

Use discounting tables to determine the value today of an opportunity to receive $4,500 at the end of each of the next six years. Assume an interest rate of 7%.

A) $19,221.44
B) $20,343.60
C) $21,451.50
D) $22,139.88
E) $23,156.98