Deck 12: Capital Budgeting Decisions

Question 1

The cost of capital is the average cost an organization pays to obtain the resources (i.e., borrowed funds, as well as on funds provided by investors in the company's stock) necessary to make investments.

Answer 1

True

Question 2

The payback period method is frequently used as a screening tool, but it does not take into consideration the profitability of a project.

Answer 2

True

Question 3

The payback period and the accounting rate of return methods are inferior to the net present value method because neither considers cash flows.

Answer 3

False

Question 4

The net present value method and internal rate of return method are both deficient to the extent that neither method considers investment size.

Question 5

To avoid accepting projects that actually should be rejected, a company should ignore all nonquantitative benefits in evaluating net present value.

Question 6

The objective of capital budgeting models is to eliminate risk.

Question 7

The depreciation tax shield is calculated as depreciation divided by tax rate.

Question 8

Taxes have the effect of reducing both cash inflows from taxable revenues and cash outflows for tax deductible expenses.

Question 9

When given a choice between $500 today or $500 tomorrow, a rationale decision maker will choose $500 today only because of risk.

Question 10

An annuity is a series of payments of any size received over equal intervals of time.

Question 11

_______________ involve(s) investment of significant financial resources in projects to develop or introduce new products or services, to expand current production or service capacity, or to change current production or service facilities.

A) Capital budgeting
B) Capital expenditures
C) Long range planning
D) Profitability analysis

Question 12

Which of the following activities falls under the range of responsibility assumed by the capital budgeting committee?

A) Analysis of major capital expenditure proposals
B) Approval of major capital expenditure proposals
C) Review of major capital expenditure proposals
D) All of the above

Question 13

Which of the following processes involve the development of capital budgeting project performance reports that compare planned to actual results?

A) Annual reviews
B) Compliance audits
C) Financials statement audits
D) Post-audit reviews

Question 14

A precondition for effective capital budgeting requires having:

A) A clearly defined mission
B) A well-defined business strategy
C) Long-range goals
D) All of the above

Question 15

Which of the following expenditures would be classified as part of the initial investment phase for equipment?

A) Expenditures to increase working capital
B) Expenditures to maintain equipment
C) Expenditures for production operations
D) All of the above

Question 16

The third phase of a project's cash flows is:

A) Initial project investment
B) Disinvestment
C) Operations
D) Remodeling

Question 17

Firefox Company is considering the following investment proposal:
$$\begin{array}{lr}\text{Initial investment:} \\\text{~~~~Depreciable assets (straight-line)} & \$36,000 \\\text{~~~~Working capital} & 4,000 \\\text{Operations (per year for 4 years):} \\\text{~~~~Cash receipts} & \$25,000 \\\text{~~~~Cash expenditures} & 11,000 \\\text{Disirvestment:} \\\text{~~~~Salvage value of equipment} & \$3,000 \\\text{~~~~Recovery of working capital} & 4,000 \\\text{Discount rate:} & 10 \text{ percent} \\\end{array}$$ Additional information for interest rate of 10 percent and four time periods:
$$\begin{array} { l l } \text { Present value of } \$ 1 & 0.68301 \\\text { Present value of an annuity of } \$ 1 & 3.16987\end{array}$$ What is the net present value for the investment?

A) $ 4,781
B) $18,322
C) $ 9,159
D) $44,378

Question 18

Firefox Company is considering the following investment proposal:
$$\begin{array}{lr}\text{Initial investment:} \\\text{~~~~Depreciable assets (straight-line)} & \$36,000 \\\text{~~~~Working capital} & 4,000 \\\text{Operations (per year for 4 years):} \\\text{~~~~Cash receipts} & \$25,000 \\\text{~~~~Cash expenditures} & 11,000 \\\text{Disirvestment:} \\\text{~~~~Salvage value of equipment} & \$3,000 \\\text{~~~~Recovery of working capital} & 4,000 \\\text{Discount rate:} & 10 \text{ percent} \\\end{array}$$ Using a spreadsheet or financial calculator, determine the net present value for the investment.
The investment's net present value is:

A) $ 8,756
B) $ 9,154
C) $44,378
D) $ 9,159

Question 19

Which of the following is part of a project's operations phase?

A) Collections of accounts receivable from sales
B) Depreciation on working capital
C) Payments of principal and interest on bonds used to finance the project
D) All of the above

Question 20

Which of the following amounts would be classified as part of the disinvestment phase for a project?

A) Depreciation
B) Collections of accounts receivable from sales
C) Expenditure to return plant site to its pre-project condition
D) Retiring bonds issues to finance the project

Question 21

Which of the following capital budgeting techniques provides the decision maker with answers expressed in dollars?

A) Accounting rate of return
B) Internal rate of return
C) Net present value
D) Payback method

Question 22

The internal rate of return:

A) Does not require a predetermined discount rate
B) Is often used to rank investment proposals
C) May be compared to the cost of capital in project evaluation
D) All of the above

Question 23

A project's __________________is computed as the present value of project related cash inflows and outflows.

A) Accounting rate of return
B) Internal rate of return
C) Net present value
D) Present value index

Question 24

Which of the following is needed to compute a project's net present value?

A) A computer
B) Accounting rate of return
C) Discount rate
D) Internal rate of return

Question 25

Pipette Medical Services is considering an investment of $200,000. Data related to the investment and present value factors are as follows:
$$\begin{array} { c c c } \text {\underline{ Year }} & & \underline{ \text { Cash Inflows }} &\underline{ \text { Present Value of } \$ 1.00 @ 18 \%} \\1 & & \$ 100,000 &0.84746 \\2 & & 92,000 &0.71818 \\3 & & 120,000 &0.60863 \\4 & & 160,000 &0.51579 \\5 & & 100,000 &0.43711\end{array}$$ The investment's net present value is:

A) $150,092
B) $114,237
C) $175,820
D) $ 75,830

Question 26

Pipette Medical Services is considering an investment of $200,000. Assume the discount rate is 18%. Data related to the cash inflows are as follows:
$\begin{array}{ccc}\underline{\text { Year }} & & \underline{\text { Cash Inflows }} \\1 & & \$ 100,000 \\2 & & 92,000 \\3 & & 120,000 \\4 & & 160,000 \\5 & & 100,000\end{array}$ Using a spreadsheet or financial calculator, determine the net present value for the investment.
The investment's net present value is:

A) $ 62,920
B) $150,092
C) $114,237
D) $ 75,046

Question 27

Westmont Publishing is considering the purchase of a used printing press costing $75,200. The printing press would generate a net cash inflow of $31,310 a year for 3 years. At the end of 3 years, the press would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation. The present value factors of an annuity of $1.00 for different rates of return are as follows:
The investments internal rate of return (rounded to the nearest percent) is:

A) 10 percent
B) 16 percent
C) 14 percent
D) 12 percent

Question 28

Westmont Publishing is considering the purchase of a used printing press costing $75,200. The printing press would generate a net cash inflow of $31,310 a year for 3 years. At the end of 3 years, the press would have no salvage value. The company's cost of capital is 10 percent.
Using a spreadsheet or financial calculator, determine the internal rate of return for the investment.
The investment's internal rate of return (rounded to the nearest percent) is:

A) 10 percent
B) 16 percent
C) 14 percent
D) 12 percent

Question 29

Westmont Publishing is considering the purchase of a used printing press costing $69,700. The printing press would generate a net cash inflow of $31,000 a year for 3 years. At the end of 3 years, the press would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation. The present value factors of an annuity of $1.00 for different rates of return are as follows:
The investment's net present value is:

A) $ 5,480
B) $23,300
C) $ 7,392
D) $ 8,981

Question 30

Westmont Publishing is considering the purchase of a used printing press costing $69,700. The printing press would generate a net cash inflow of $31,000 a year for 3 years. At the end of 3 years, the press would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation.
Using a spreadsheet or financial calculator, determine the net present value for the investment.
The investment's net present value is:

A) $ 5,480
B) $ 7,392
C) $23,300
D) $ 8,863

Question 31

The internal rate of return is sometimes called the:

A) Adjusted accounting rate or return
B) Cost of capital
C) Discount rate
D) Time-adjusted rate of return

Question 32

The___________________is the discount rate that equates the present value of a project's cash inflows with the present value of the project's outflows.

A) Cost of capital
B) Internal rate of return
C) Present value index
D) Time adjusted accounting rate of return

Question 33

Dutch Donut Shop is considering an investment of $50,000. Data related to the investment and present value factors are as follows:
$$\begin{array} { c c c } \underline{\text { Year }} & & \underline{\text { Cash Inflows }} & \\1 & & \$ 45,000 & 0.87719\\2 & & 44,000 & 0.76947 \\3 & & 32,000 & 0.67497 \\4 & & 60,000 &0.59208 \\5 & & 60,000 &0.51937 \end{array}$$ The net present value of the investment is:

A) $214,352
B) $223,122
C) $111,616
D) $314,352

Question 34

Dutch Donut Shop is considering an investment of $50,000. The cost of capital is 14%. Data related to the investment are as follows:
$\begin{array}{ccc}\underline{\text { Year }} & & \underline{\text { Cash Inflows }} \\1 & & \$ 45,000 \\2 & & 44,000 \\3 & & 32,000 \\4 & & 60,000 \\5 & & 60,000\end{array}$ Using a spreadsheet or financial calculator, determine the net present value for the investment.
The net present value of the investment is:

A) $214,352
B) $223,233
C) $382,000
D) $111,616

Question 35

Copa Corporation is considering the purchase of a new machine costing $150,000. The machine would generate net cash inflows of $43,690 per year for 5 years. At the end of 5 years, the machine would have no salvage value. Copa's cost of capital is 12 percent. Copa uses straight-line depreciation. The present value factors of annuity of $1.00 for different rates of return are as follows:
$\begin{array}{ccccc}\underline{\text { Period }} & \underline{12 \%} & \underline{14 \%} & \underline{16 \%} & \underline{18 \%} \\4 & 3.03735 & 2.91371 & 2.79818 & 2.69006 \\5 & 3.60478 & 3.43308 & 3.27429 & 3.12717 \\6 & 4.11141 & 3.88867 & 3.68474 & 3.49760\end{array}$ The proposal's internal rate of return (rounded to the nearest percent) is:

A) 12 percent
B) 14 percent
C) 16 percent
D) 18 percent

Question 36

Copa Corporation is considering the purchase of a new machine costing $150,000. The machine would generate net cash inflows of $43,690 per year for 5 years. At the end of 5 years, the machine would have no salvage value. Copa's cost of capital is 12 percent. Copa uses straight-line depreciation.
Using a spreadsheet or financial calculator, determine the proposal's internal rate of return for the investment.
The proposal's internal rate of return is:

A) 12.993 percent
B) 14.251 percent
C) 16.012 percent
D) 13.998 percent

Question 37

Copa Corporation is considering the purchase of a new machine costing $169,000. The machine would generate net cash inflows of $43,690 per year for 5 years. At the end of 5 years, the machine would have no salvage value. Copa's cost of capital is 14 percent. Copa uses straight-line depreciation. The present value factors of annuity of $1.00 for different rates of return are as follows:
$\begin{array}{ccccc}\underline{\text { Period }} & \underline{12 \%} & \underline{14 \%} & \underline{16 \%} & \underline{18 \%} \\4 & 3.03735 & 2.91371 & 2.79818 & 2.69006 \\5 & 3.60478 & 3.43308 & 3.27429 & 3.12717 \\6 & 4.11141 & 3.88867 & 3.68474 & 3.49760\end{array}$ The proposal's net present value is:

A) $ (19,009)
B) $ (49,450)
C) $ 1,070
D) $ 18,921

Question 38

Copa Corporation is considering the purchase of a new machine costing $169,000. The machine would generate net cash inflows of $43,690 per year for 5 years. At the end of 5 years, the machine would have no salvage value. Copa's cost of capital is 14 percent. Copa uses straight-line depreciation.
Using a spreadsheet or financial calculator, determine the net present value for the investment.
The proposal's net present value is (rounded to the nearest dollar):

A) $ (19,009)
B) $ (49,450)
C) $ 1,070
D) $ 18,921

Question 39

Kansas Mining is evaluating a proposal to invest in a new piece of equipment costing $50,000 with the following annual cash flows over the equipment's 4-year useful life:
$$\begin{array} { lr } \text { Cash revenues } & \$ 60,000 \\\text { Cash expenses } & (34,000) \\\text { Depreciation expenses (straight-line) } & \underline{(10,000)} \\\text { Income provided from equipment } & \underline{\$ 16,000} \\\text { Cost of capital } & 12 \text { percent }\end{array}$$ $\begin{array}{ccccc}\underline{\text { Period }} & \underline{12 \%} & \underline{14 \%} & \underline{16 \%} & \underline{18 \%} \\4 & 3.03735 & 2.91371 & 2.79818 & 2.69006 \\5 & 3.60478 & 3.43308 & 3.27429 & 3.12717 \\6 & 4.11141 & 3.88867 & 3.68474 & 3.49760\end{array}$ The investment's net present value is:

A) $28,971
B) $63,184
C) $70,072
D) $81,592

Question 40

Kansas Mining is evaluating a proposal to invest in a new piece of equipment costing $50,000 with the following annual cash flows over the equipment's 4-year useful life:
$$\begin{array} { lr } \text { Cash revenues } & \$ 60,000 \\\text { Cash expenses } & (34,000) \\\text { Depreciation expenses (straight-line) } & \underline{(10,000)} \\\text { Income provided from equipment } & \underline{\$ 16,000} \\\text { Cost of capital } & 12 \text { percent }\end{array}$$ Using a spreadsheet or financial calculator, determine the net present value for the investment.
The investment's net present value is:

A) $ 9,346
B) $170,093
C) $ 70,092
D) $ 28,971

Question 41

If a company invests in a project with an internal rate of return higher than the company's cost of capital, the project should:

A) Decrease the market value of the company's stock
B) Have little or no effect on the market value of the company's stock
C) Increase the market value of the company's stock
D) Reduce the weighted average cost of capital

Question 42

A project under consideration has a net present value of $5,000 for a required investment of $30,000. There are no other investment options at this time. However, the assumed discount rate used to calculate the net present value is 10%.
On the basis of this information alone, this project should:

A) Definitely be rejected because $10,000 is only 17% of $60,000
B) Be rejected on the basis that the project loses $50,000
C) Probably be approved since the net present value is greater than zero
D) Be accepted if the cost of capital is greater than or equal to 20 percent

Question 43

Which of the following considerations is most likely to influence the determination of a company's cost of capital?

A) The discount rate used in last year's project approvals
B) The expected return of Standard and Poor's 500 stock index
C) The interest rate on bonds issued
D) The return on the company's stock over the past twelve months

Question 44

Cornell Manufacturing Company is considering the following investment proposal:
$$\begin{array}{lr}\text { Initial investment: } & \\\quad \text { Depreciable assets (straight-line) } & \$ 48,000 \\\quad \text { Working capital } & 4,000 \\\text { Operations (per year for 4 years): } & \\\quad \text { Cash receipts } & \$ 30,000 \\\quad \text { Cash expenditures } & 17,000 \\\text { Disirvestment: } & \\\quad \text { Salvage value of equipment } & \$ 2,000 \\\quad \text { Recovery of working capital } & 4,000\end{array}$$ The investment's payback period in years (rounded to two decimal points) is:

A) 1.50
B) 4.00
C) 3.56
D) 4.67

Question 45

Cornell Manufacturing Company is considering the following investment proposal:
$$\begin{array}{lr}\text { Initial investment: } & \\\quad \text { Depreciable assets (straight-line) } & \$ 48,000 \\\quad \text { Working capital } & 4,000 \\\text { Operations (per year for 4 years): } & \\\quad \text { Cash receipts } & \$ 30,000 \\\quad \text { Cash expenditures } & 17,000 \\\text { Disirvestment: } & \\\quad \text { Salvage value of equipment } & \$ 2,000 \\\quad \text { Recovery of working capital } & 4,000\end{array}$$ The investment's accounting rate of return (rounded to two decimal points) on the original investment is:

A) 5.88 percent
B) 8.33 percent
C) 3.85 percent
D) 10.71 percent

Question 46

Tiger Management Services is considering an investment of $75,000. Data related to the investment are as follows:
$$\begin{array} { c c } \underline{\text { Year }} & \underline{\text { Cash Inflows }} \\1 & \$ 20,000 \\2 & 23,000 \\3 & 17,000 \\4 & 50,000 \\5 & 20,000\end{array}$$ The investment's payback period in years (rounded to two decimal points) is:

A) 3.30
B) 2.23
C) 3.38
D) 3.00

Question 47

Clarinet Publishing is considering the purchase of a used printing press costing $40,000. The printing press would generate a net cash inflow of $10,000 a year for 10 years. At the end of 10 years, the press would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation.
The project's accounting rate of return on the initial investment is:

A) 32 percent
B) 19 percent
C) 15 percent
D) 75 percent

Question 48

Clarinet Publishing is considering the purchase of a used printing press costing $25,600. The printing press would generate a net cash inflow of $10,000 a year for 10 years. At the end of 10 years, the press would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation.
The investment's payback period in years (rounded to two decimal points) is:

A) 2.56
B) 2.13
C) 1.92
D) 3.00

Question 49

Dutch Donut Shop is considering an investment of $72,000. Data related to the investment are as follows:
$$\begin{array} { c c } \underline{\text { Year }} & \underline{\text { Cash Inflows }} \\1 & \$ 20,000 \\2 & 22,000 \\3 & 24,000 \\4 & 30,000 \\5 & 30,000\end{array}$$ The investments payback period (rounded to two decimal points) is:

A) 3.20
B) 2.33
C) 3.13
D) 3.25

Question 50

Copa Cabana Corporation is considering the purchase of a new machine costing $30,000. The machine would generate net cash inflows of $12,000 per year for 5 years. At the end of 5 years, the machine would have no salvage value. Copa Cabana's cost of capital is 12 percent. Copa Cabana uses straight-line depreciation.
The investment's accounting rate of return on initial investment is:

A) 12.28 percent
B) 10.27 percent
C) 20.00 percent
D) 30.55 percent

Question 51

Copa Cabana Corporation is considering the purchase of a new machine costing $30,000. The machine would generate net cash inflows of $12,000 per year for 5 years. At the end of 5 years, the machine would have no salvage value. Copa Cabana's cost of capital is 12 percent. Copa Cabana uses straight-line depreciation.
The investment's payback period in years is:

A) 3.3
B) 3.1
C) 4.0
D) 2.5

Question 52

Tempe Milling is evaluating a proposal to invest in a new piece of equipment costing $50,000 with the following annual cash flows over the equipment's 5-year useful life:
$$\begin{array} { l r } \text { Cash revenues } & \$ 50,000 \\\text { Cash expenses } & ( 30,000 ) \\\text { Depreciation expenses (straight-line) } & \underline{ ( 10,000 ) }\\\text { Income provided from equipment } & \underline{\$ 10,000} \\\text { Cost of capital } & 14 \text { percent }\end{array}$$ The accounting rate of return on initial investment is:

A) 20.00 percent
B) 16.30 percent
C) 25.56 percent
D) 30.00 percent

Question 53

Kansas Mining is evaluating a proposal to invest in a new piece of equipment costing $55,000 with the following annual cash flows over the equipment's 4-year useful life:
$$\begin{array} { l r } \text { Cash revenues } & \$ 95,000 \\\text { Cash expenses } & ( 52,000 ) \\\text { Depreciation expenses (straight-line) } & \underline{( 13,750 )} \\\text { Income provided from equipment } & \underline{\$ 29,250} \\\text { Cost of capital } & 14 \text { percent }\end{array}$$ The investment's payback period is (rounded to two decimal places):

A) 3.91
B) 1.88
C) 2.37
D) 2.56

Question 54

The primary focus of the payback period method is:

A) Increasing shareholder wealth
B) Liquidity
C) Maintaining market value of stock
D) Profitability

Question 55

The following is a disadvantage of the payback period method:

A) It is more complicated to calculate with unequal annual cash flows
B) There is no consideration of cash flows after the payback period
C) There is no consideration of the timing of cash flows
D) Both A and B are disadvantages of this method

Question 56

The payback period method of evaluating investment projects is most appropriate:

A) When a project is expected to lose money
B) When it is used as the sole investment criterion
C) When no information is available concerning the timing of cash inflows
D) When rapid recovery of initial investment is a primary concern

Question 57

Project A has a predicted payback period of 2.5 and Project B has a predicted payback period of 5. Based on this information we can conclude:

A) Project A is preferred to Project B
B) Project B provides twice the return of Project A
C) Project B is preferred to Project A, but it is not necessarily twice as profitable
D) More information should be gathered before deciding on which project, if either, is desirable

Question 58

This capital budgeting model considers the time value of money.

A) Accounting rate of return
B) Payback period
C) Both A and B
D) Neither A nor B

Question 59

This capital budgeting model considers the time value of money.

A) Accounting rate of return
B) Internal rate of return
C) Both A and B
D) Neither A nor B

Question 60

This capital budgeting model does not consider profitability.

A) Accounting rate of return
B) Internal rate of return
C) Payback period
D) All of the above

Question 61

This capital budgeting model gives explicit consideration to investment size.

A) Accounting rate of return
B) Internal rate of return
C) Net present value
D) Payback period

Question 62

This capital budgeting models assumes all net cash inflows are reinvested at the discount rate.

A) Accounting rate of return
B) Internal rate of return
C) Net present value
D) Payback period

Question 63

This is a reason to employ the net present value method in making capital expenditure decisions.

A) The NPV method determines the length of time necessary to recover the entire cost of an investment from the resulting annual net cash flow.
B) The NPV method determines the rate of return on average investment.
C) The NPV method considers the timing of future cash flows.
D) All of the above

Question 64

This capital budgeting model concerns how long it takes to recover the initial investment from a project.

A) Accounting rate of return
B) Internal rate of return
C) Net present value
D) Payback period

Question 65

How is depreciation included in determining a project's NPV?

A) Depreciation is a deduction in determining net operating cash inflows before computing NPV
B) Depreciation is added to net operating cash inflows before computing NPV
C) Depreciation is not a factor in determining a project's NPV
D) Depreciation indirectly influences cash flows through effects on taxes

Question 66

When determining net present value, this is commonly done to consider the risks associated with a proposed investment:

A) Decrease the discount rate used in the analysis
B) Decrease the expected cash flows
C) Increase the discount rate used in the analysis
D) Increase the required payback period

Question 67

The depreciation tax shield is computed as:

A) Depreciation times (one minus the tax rate)
B) Depreciation times the tax rate
C) (Net income minus depreciation) times (one minus the tax rate)
D) The book value of equipment times (one minus the tax rate)

Question 68

Arsenal Company is considering an investment in equipment costing $30,000 with a six-year life and no salvage value. Arsenal uses straight-line depreciation and is subject to a 35 percent tax rate. The expected net cash inflow before depreciation and taxes is projected to be $20,000 per year.
The Year 1 annual after-tax net cash inflow is:

A) $11,880
B) $ 9,000
C) $14,750
D) $29,800

Question 69

Arsenal Company is considering an investment in equipment costing $30,000 with a five-year life and no salvage value. Arsenal uses straight-line depreciation and is subject to a 35 percent tax rate. The expected net cash inflow before depreciation and taxes is projected to be $20,000 per year.
Over the life of the project, the total tax shield created by depreciation is:

A) $10,500
B) $39,600
C) $20,400
D) $10,750

Question 70

Souza Corporation is considering an investment in equipment for $75,000 with a four-year life and no salvage value. Souza uses the straight-line method of depreciation and is subject to a 35 percent tax rate.
Over the life of the project, the total tax shield created by depreciation is:

A) $12,500
B) $26,250
C) $25,000
D) $75,000

Question 71

The management of Leahy Enterprises is currently evaluating the following investment proposal:
$$\begin{array} { l c c c c c } & \text { Time 0 } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } \\\hline \text { Initial investment } & \$ 300,000 & & & & \\\text { Net operating cash flows } & & \$ 100,000 & \$ 100,000 & \$ 100,000 & \$ 100,000\end{array}$$ $$\begin{array} { c c c c c c c } \text { Present Value of an Annuity of } \$ 1 \\\begin{array}{}\hline \text { Period } & 8 \% & 10 \% & 12 \% & 14 \% & 16 \% & 18 \% \\\hline 1 & 0.82593 & 0.90909 & 0.89286 & 0.87719 & 0.86207 & 0.84746 \\2 & 1.78326 & 1.73554 & 1.69005 & 1.64666 & 1.60523 & 1.56564 \\3 & 2.57710 & 2.48685 & 2.40183 & 2.32163 & 2.24589 & 2.17427 \\4 & 3.31213 & 3.16987 & 3.03735 & 2.91371 & 2.79818 & 2.69006\end{array}\end{array}$$ The proposal's payback period and proposal's internal rate of return (IRR) approximate:

A) Payback period 3 years, IRR 12 percent
B) Payback period 3 years, IRR 8 percent
C) Payback period 4 years, IRR 12 percent
D) Payback period 3.5 years, IRR 16 percent

Question 72

The management of Leahy Enterprises is currently evaluating the following investment proposal:
$$\begin{array} { l c c c c c } & \text { Time 0 } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } \\\hline \text { Initial investment } & \$ 300,000 & & & & \\\text { Net operating cash flows } & & \$ 100,000 & \$ 100,000 & \$ 100,000 & \$ 100,000\end{array}$$ $$\begin{array} { c c c c c c c } \text { Present Value of an Annuity of } \$ 1 \\\end{array}\\\begin{array} { c c c c c c c } \hline \text { Period } & 8 \% & 10 \% & 12 \% & 14 \% & 16 \% & 18 \% \\\hline 1 & 0.82593 & 0.90909 & 0.89286 & 0.87719 & 0.86207 & 0.84746 \\2 & 1.78326 & 1.73554 & 1.69005 & 1.64666 & 1.60523 & 1.56564 \\3 & 2.57710 & 2.48685 & 2.40183 & 2.32163 & 2.24589 & 2.17427 \\4 & 3.31213 & 3.16987 & 3.03735 & 2.91371 & 2.79818 & 2.69006\end{array}$$ Given the amount of the initial investment, the minimum annual net cash inflows required to obtain an internal rate of return of 16 percent. (Round the answer to the nearest dollar.)

A) $100,000
B) $107,213
C) $300,000
D) $142,950

Question 73

Randel Company is evaluating a capital expenditure proposal that has the following predicted cash flows:
$$\begin{array} { l r } \text { Initial investment } & \$ 45,110 \\\text { Operation } & \\\quad\text { Year 1 } & 20,640 \\\quad\text { Year 2 } & 30,000 \\\quad\text { Year 3 } & 10,000 \\\text { Salvage value } & 0\end{array}$$ The present value factors of $1 for different rates of return are as follows:
$$\begin{array} { c c c c c } \text { Present Value of } \$ 1 \\\end{array}\\\begin{array} { c c c c c } \hline \text { Period } & 12 \% & 14 \% & 16 \% & 18 \% \\\hline 1 & 0.89286 & 0.87719 & 0.86207 & 0.84746 \\2 & 0.79719 & 0.76947 & 0.74316 & 0.71818 \\3 & 0.71178 & 0.67497 & 0.64066 & 0.60863 \\4 & 0.63552 & 0.59208 & 0.55229 & 0.51579\end{array}$$ Given a discount rate of 14 percent, determine the net present value of the investment proposal.

A) $ 5,618
B) $40,000
C) $45,110
D) $ 2,829

Question 74

Mark decided to purchase a new automobile. Being concerned about environmental issues, he is leaning toward the hybrid rather than the gasoline only model. Nevertheless, as a new business school graduate, he wants to determine if there is an economic justification for purchasing the hybrid, which costs $1,000 more than the regular model. He has determined that city/highway combined gas mileage of the hybrid and regular models are 30 and 24 miles per gallon respectively. Mark anticipates he will travel an average of 10,000 miles per year for the next several years.
The payback period of the incremental investment if gasoline costs $3 per gallon is:

A) 4.80 years
B) 6.00 years
C) 5.80 years
D) 4.00 years

Question 75

Janice decided to purchase a new automobile. Being concerned about environmental issues, she is leaning toward the hybrid rather than the gasoline only model. Nevertheless, as a new business school graduate, she wants to determine if there is an economic justification for purchasing the hybrid, which costs $1,200 more than the regular model. She has determined that city/highway combined gas mileage of the hybrid and regular models are 30 and 24 miles per gallon respectively. Janice anticipates she will travel an average of 10,000 miles per year for the next several years.
$$\begin{array}{l}\text { Present Value of } \$ 1\\\begin{array} { c c } \hline \text { Period } & 4 \% \\\hline 1 & 0.96154 \\2 & 0.92456 \\3 & 0.88900 \\4 & 0.85480\end{array}\end{array}$$ Assuming that Janice plans to keep the car about 5 years and does not believe there will be a trade-in premium associated with the hybrid model, determine the net present value of the incremental investment at 4 percent time value of money.

A) $1,200.00
B) $1,000.00
C) $ 87.04
D) $ (87.04)

Question 76

Rick's Repairs, Inc. is considering renting a new shop. The landlord has offered a number of alternatives for paying the rent. The present value factors at the company's rate of return are as follows:
$$\begin{array} { c c } \underline{\text { Period }} & \underline{\text { Present Value Factor }} \\1 & 0.90909 \\2 & 0.82645 \\3 & 0.75131\end{array}$$ The landlord offered a 2-year lease with $20,000 to be paid for rent at the end of each year. The present value of rent payments over the life of the lease is:

A) $20,000
B) $33,208
C) $34,711
D) $40,000

Question 77

Rick's Repairs, Inc. is considering renting a new shop. The landlord has offered a number of alternatives for paying the rent. The company's desired rate of return is 10%. The landlord offered a 2-year lease with $20,000 to be paid for rent at the end of each year.
Using a spreadsheet or a financial calculator, calculate the present value of the rent payments over the life of the lease.
The present value of rent payments over the life of the lease is:

A) $20,000
B) $33,208
C) $34,711
D) $40,000

Question 78

Rick's Repairs, Inc. is considering renting a new shop. The landlord has offered a number of alternatives for paying the rent. The present value factors at the company's rate of return are as follows:
$$\begin{array} { c c } \underline{\text { Period }} & \underline{\text { Present Value Factor }} \\1 & 0.90909 \\2 & 0.82645 \\3 & 0.75131\end{array}$$ The landlord offered a 3-year lease with the rent payments as follows: $16,000 at the end of the first year, $24,000 at the end of the second year, and $20,000 at the end of the third year.
The present value of the rent payments over the life of the lease is:

A) $45,079
B) $49,200
C) $49,406
D) $60,000

Question 79

Rick's Repairs, Inc. is considering renting a new shop. The landlord has offered a number of alternatives for paying the rent. The company's desired rate of return is 10%. The landlord offered a 3-year lease with the rent payments as follows: $16,000 at the end of the first year, $24,000 at the end of the second year, and $20,000 at the end of the third year.
Using a spreadsheet or a financial calculator, calculate the present value of the rent payments over the life of the lease.
The present value of the rent payments over the life of the lease is:

A) $45,079
B) $49,200
C) $49,406
D) $60,000

Question 80

Black Company will receive $30,000 at the end of each year for the next 8 years. Black has an annual cost of capital equal to 10 percent per year. The present value of $1 and the present value of an annuity of $1 for eight periods at ten percent are 0.46651 and 5.33493, respectively.
What is the present value of these cash receipts?

A) $160,048
B) $240,000
C) $ 13,995
D) $ 30,000