Deck 11: Capital Budgeting

Question 1

The minimum desired rate of return on an investment is sometimes referred to as ________.

A) the discount rate
B) the hurdle rate
C) the required rate of return
D) all of the above

Answer 1

D

Question 2

The most widely used capital budgeting models are ________.

A) payback method
B) accounting rate of return
C) return on investment
D) discounted cash flow methods

Answer 2

D

Question 3

The net present value method computes the present value of all ________ using a minimum desired rate of return.

A) expected future cash inflows only
B) expected future cash outflows only
C) expected future cash inflows and expected future cash outflows
D) past cash inflows

Answer 3

C

Question 4

New Hampshire Company is considering two investments.The relevant data follows:
$\begin{array}{lll}&\text { Project A }&\text { Project B }\\\text { Cost } & \$ 200,000 & \$ 300,000 \\\text { Annual cash savings(end of year) } & \$ 50,692 & \$ 60,995 \\\text { Terminal salvage value } & \$ 50,000 & \$ 70,000 \\\text { Estimated useful life in years } & 5 & 5 \\\text { Minimum desired rate of return } & 10 \% & 10 \%\\\text { Method of depreciation }&\text { Straight-line }&\text { Straight-line }\\\end{array}$
$\begin{array}{lll}&\text { Present Value } & \text { Present Value } \\&\text { Of } \$ 1 & \text { of Ordinary } \\&\text { for } 5 \text { periods } & \text { Annuity of } \$1 \\&& \text { for } 5 \text { periods }\\5 \% & 0.7835 & 4.3295 \\6 \% & 0.7473 & 4.2124 \\7 \% & 0.713 & 4.1002 \\8 \% & 0.6806 & 3.9927 \\10 \% & 0.6209 & 3.7908 \\12 \% & 0.5674 & 3.6048 \\14 \% & 0.5194 & 3.4331\end{array}$
Ignore taxes.Using the net present value method,which project should be accepted?

A) Project A only
B) Project B only
C) both Project A and Project B
D) neither Project A nor Project B

Question 5

Arizona Company is considering two investments.The relevant data follows:
$\begin{array}{lll}&\text { Project A }&\text { Project B }\\\text { Cost } & \$ 205,010 & \$ 259,770 \\\text { Annual cash savings (end of year) } & \$ 50,000 & \$ 60,000 \\\text { Terminal salvage value } & \$ 0 & \$ 0 \\\text { Estimated useful life in years } & 5 & 5 \\\text { Minimum desired rate of return } & 10 \% & 10 \%\\\text { Method of depreciation }&\text { Straight-line }&\text { Straight-line }\\\end{array}$
$\begin{array}{lll}&\text { Present Value } & \text { Present Value } \\&\text { Of } \$ 1 & \text { of Ordinary } \\&\text { for } 5 \text { periods } & \text { Annuity of } \$1 \\&& \text { for } 5 \text { periods }\\5 \% & 0.7835 & 4.3295 \\6 \% & 0.7473 & 4.2124 \\7 \% & 0.713 & 4.1002 \\8 \% & 0.6806 & 3.9927 \\10 \% & 0.6209 & 3.7908 \\12 \% & 0.5674 & 3.6048 \\14 \% & 0.5194 & 3.4331\end{array}$
Ignore taxes.Using the internal rate of return method,which project should be accepted?

A) Project A only
B) Project B only
C) Project A and Project B
D) neither Project A nor Project B

Question 6

The higher the risk of an investment project,the ________ for the project.

A) lower the minimum desired rate of return
B) higher the minimum desired rate of return
C) lower the expected rate of return
D) higher the expected rate of return

Question 7

The internal rate of return method and the ________ method usually result in the same investment decisions.

A) payback period
B) accounting rate of return
C) net present value
D) return on investment

Question 8

When using the Net Present Value model,which of the following assumptions is/are used?

A) We assume the predicted cash inflows and outflows are certain to occur at the times specified.
B) We assume perfect capital markets.
C) The Net Present Value model meets the cost-benefit criterion.
D) A and B

Question 9

Steps used in applying the net present value method to a proposed capital investment do NOT include ________.

A) identify the amount and timing of relevant expected cash inflows and outflows
B) find the present value of each expected future cash inflow and outflow
C) find the sum of the present values of each expected future cash inflow and outflow
D) find the future value of the cash outflow that occurs at the present time.

Question 10

In the capital budgeting process,accountants are NOT involved in ________.

A) follow-up monitoring of investments
B) choosing which investments to make
C) gathering data to aid the investment decision
D) identifying potential investments

Question 11

In net present value analysis,the minimum desired rate of return for an investment project depends on the ________ of a proposed project.

A) expected return
B) desired return
C) risk
D) payback period

Question 12

Pennsylvania Company is considering two investments.The relevant data follows:
$\begin{array}{lll}&\text { Project A }&\text { Project B }\\\text { Cost } & \$ 205,010 & \$ 259,770 \\\text { Annual cash savings (end of year) } & \$ 50,000 & \$ 60,000 \\\text { Terminal salvage value } & \$ 0 & \$ 0 \\\text { Estimated useful life in years } & 5 & 5 \\\text { Minimum desired rate of return } & 10 \% & 10 \%\\\text { Method of depreciation }&\text { Straight-line }&\text { Straight-line }\\\end{array}$
$\begin{array}{lll}&\text { Present Value } & \text { Present Value } \\&\text { Of } \$ 1 & \text { of Ordinary } \\&\text { for } 5 \text { periods } & \text { Annuity of } \$1 \\&& \text { for } 5 \text { periods }\\5 \% & 0.7835 & 4.3295 \\6 \% & 0.7473 & 4.2124 \\7 \% & 0.713 & 4.1002 \\8 \% & 0.6806 & 3.9927 \\10 \% & 0.6209 & 3.7908 \\12 \% & 0.5674 & 3.6048 \\14 \% & 0.5194 & 3.4331\end{array}$
Ignoring taxes,the internal rate of return for Project A is approximately ________.

A) 6%
B) 7%
C) 8%
D) 10%

Question 13

Which of the following statements is FALSE?

A) The higher the minimum desired rate of return, the lower the present value of each future cash flow.
B) Higher required rates of return lead to lower net present values for capital investments.
C) Higher required rates of return lead to higher net present values for capital investments.
D) The net present value for a project can be negative or positive depending on the minimum desired rate of return used.

Question 14

California Company is considering two investments.The relevant data follows:
$\begin{array}{lll}&\text { Project A }&\text { Project B }\\\text { Cost } & \$ 205,010 & \$ 259,770 \\\text { Annual cash savings(end of year) } & \$ 50,000 & \$ 60,000 \\\text { Terminal salvage value } & \$ 0 & \$ 0 \\\text { Estimated useful life in years } & 5 & 5 \\\text { Minimum desired rate of return } & 10 \% & 10 \%\\\text { Method of depreciation }&\text { Straight-line }&\text { Straight-line }\end{array}$
$\begin{array}{lll}&\text { Present Value } & \text { Present Value } \\&\text { Of } \$ 1 & \text { of Ordinary } \\&\text { for } 5 \text { periods } & \text { Annuity of } \$ 1 \\&& \text { for } 5 \text { periods }\\5 \% & 0.7835 & 4.3295 \\6 \% & 0.7473 & 4.2124 \\7 \% & 0.713 & 4.1002 \\8 \% & 0.6806 & 3.9927 \\10 \% & 0.6209 & 3.7908 \\12 \% & 0.5674 & 3.6048 \\14 \% & 0.5194 & 3.4331\end{array}$
Ignoring taxes,the internal rate of return for Project B is approximately ________.

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

Question 15

Dolly Madison Company is considering two investments.The relevant data follows:
$\begin{array}{lll}&\text { Project A }&\text { Project B }\\\text { Cost } & \$ 200,000 & \$ 300,000 \\\text { Annual cash savings(end of year) } & \$ 50,692 & \$ 60,995 \\\text { Terminal salvage value } & \$ 50,000 & \$ 70,000 \\\text { Estimated useful life in years } & 5 & 5 \\\text { Minimum desired rate of return } & 10 \% & 10 \%\\\text { Method of depreciation }&\text { Straight-line }&\text { Straight-line }\\\end{array}$
$\begin{array}{lll}&\text { Present Value } & \text { Present Value } \\&\text { Of } \$ 1 & \text { of Ordinary } \\&\text { for } 5 \text { periods } & \text { Annuity of } \$1 \\&& \text { for } 5 \text { periods }\\5 \% & 0.7835 & 4.3295 \\6 \% & 0.7473 & 4.2124 \\7 \% & 0.713 & 4.1002 \\8 \% & 0.6806 & 3.9927 \\10 \% & 0.6209 & 3.7908 \\12 \% & 0.5674 & 3.6048 \\14 \% & 0.5194 & 3.4331\end{array}$
Ignoring taxes,the internal rate of return for Project A is approximately ________.

A) 8%
B) 10%
C) 12%
D) 14%

Question 16

New Jersey Company is considering two investments.The relevant data follows:
$\begin{array}{lll}&\text { Project A }&\text { Project B }\\\text { Cost } & \$ 200,000 & \$ 300,000 \\\text { Annual cash savings(end of year) } & \$ 50,692 & \$ 60,995 \\\text { Terminal salvage value } & \$ 50,000 & \$ 70,000 \\\text { Estimated useful life in years } & 5 & 5 \\\text { Minimum desired rate of return } & 10 \% & 10 \%\\\text { Method of depreciation }&\text { Straight-line }&\text { Straight-line }\\\end{array}$
$\begin{array}{lll}&\text { Present Value } & \text { Present Value } \\&\text { Of } \$ 1 & \text { of Ordinary } \\&\text { for } 5 \text { periods } & \text { Annuity of } \$1 \\&& \text { for } 5 \text { periods }\\5 \% & 0.7835 & 4.3295 \\6 \% & 0.7473 & 4.2124 \\7 \% & 0.713 & 4.1002 \\8 \% & 0.6806 & 3.9927 \\10 \% & 0.6209 & 3.7908 \\12 \% & 0.5674 & 3.6048 \\14 \% & 0.5194 & 3.4331\end{array}$
Ignoring taxes,the internal rate of return for Project B is approximately ________.

A) 6%
B) 7%
C) 8%
D) 10%

Question 17

A capital investment has a net present value of $1,000.00 at a required rate of return of 10%.At a 12% required rate of return,the net present value of the investment is $100.00.At a 14% required rate of return,the net present value of the investment is $0.The capital investment should be rejected if ________.

A) the required rate of return exceeds 14%
B) the required rate of return exceeds 12%
C) the required rate of return is less than 14%
D) the required rate of return is less than 12%

Question 18

Which of the following statements is FALSE?

A) Discounted cash flow models focus on future cash inflows and outflows.
B) Discounted cash flow models consider the time value of money.
C) Discounted cash flow models focus on net income.
D) Discounted cash flow models compare cash outflows today to the present value of future cash flows.

Question 19

The phases of capital budgeting do NOT include ________.

A) a post-audit of the investment
B) gathering data to aid investment decisions
C) the identification of potential investments
D) sensitivity analysis of investment models

Question 20

Investments of large amounts of cash in plant assets are called ________.

A) cash outflows
B) capital budgeting
C) capital projects
D) capital outlays

Question 21

Using the net present value method,managers sum the present values of all expected future cash flows from the project and ________.

A) add the initial investment
B) subtract the initial investment
C) ignore the initial investment
D) add the depreciation expense

Question 22

When using the net present value method,if the net present value of a project is negative,then the ________.

A) the project should be rejected
B) the project should be accepted
C) the project should be recalculated for missing cash inflows
D) none of the above

Question 23

The internal rate of return and the net present value methods usually result in the same investment decisions.

Question 24

Keisha Company is considering the following investment:
$\begin{array}{ll}\text { Estimated capital investment } & \$ 300,000 \\\text { Estimated useful life } & 3 \text { years } \\\text { Estimated disposal value in } 3 \text { years } & \$ 10,000 \\\text { Estimated annual savings in cash operating costs(end of year) } & \$ 130,000 \\\text { Minimum desired rate of return } & 12 \% \\\text { Present value of ordinary annuity of one, } 3 \text { periods at } 12 \% & 2.4018 \\\text { Present value of one, } 3 \text { periods at } 12 \% & 0.7118\end{array}$
Assume straight-line depreciation is used.Ignore income taxes.The net present value of the investment is ________.

A) $12,234
B) $19,352
C) $22,234
D) $100,000

Question 25

Assume the net present value method is used to evaluate investment opportunities.A manager is faced with several investments,but only has funding for one investment.Which investment should be chosen?

A) the investment with the lowest net present value
B) the investment with a net present value equal to zero
C) the investment with a negative net present value
D) the investment with the largest net present value

Question 26

Hewlett Company is considering the following investment:
$\begin{array}{ll}\text { Estimated capital investment } & \$ 220,000 \\\text { Estimated useful life } & 3 \text { years } \\\text { Estimated disposal value in } 3 \text { years } & \$ 10,000 \\\text { Estimated annual savings in cash operating costs(end of year) } & \$ 120,000 \\\text { Minimum desired rate of return } & 12 \% \\\text { Present value of ordinary annuity of one, } 3 \text { periods at } 12 \% & 2.4018 \\\text { Present value of one, } 3 \text { periods at } 12 \% & 0.7118\end{array}$
Assume straight-line depreciation is used.Ignore income taxes.The net present value of the investment is ________.

A) $68,216
B) $75,334
C) $78,216
D) $150,229

Question 27

Accepting a project with a ________ NPV makes the firm worse off financially because the cost of the investment exceeds the ________.

A) positive; present value of future benefits
B) negative; present value of future cash flows
C) negative; present value of present cash flows
D) positive; present value of present cash flows

Question 28

The net present value of a project is zero.The minimum desired rate of return used to obtain the net present value of zero is 8%.Which of the following statements is TRUE?

A) The project is desirable if the minimum desired rate of return is 10%.
B) The project is desirable if the minimum desired rate of return is 6%.
C) The project is desirable if the minimum desired rate of return is 6% or 10%.
D) The project is undesirable if the minimum desired rate of return is 6%.

Question 29

What is the first step in applying the net-present-value method to investment projects?

A) Identify the amount and timing of relevant future cash inflows.
B) Identify the amount and timing of relevant future cash inflows and outflows.
C) Find the present value of each expected cash flow.
D) Sum the individual present values of the cash flows.

Question 30

If the net present value of an investment project is positive,then the project is ________.If the net present value of an investment project is negative,then the project is ________.

A) ignored; accepted
B) desirable; undesirable
C) unacceptable; acceptable
D) rejected; accepted

Question 31

If the IRR on a project is greater than the required rate of return,then the net present value of the project is ________.

A) equal to zero
B) less than zero
C) greater than zero
D) none of the above

Question 32

Discounted-cash-flow models do not focus on net income.

Question 33

Discounted-cash-flow models focus on a project's cash inflows and cash outflows without regard to the time value of money.

Question 34

Brown Company is considering the following investment:
$\begin{array}{ll}\text { Estimated capital investment } & \$ 220,000 \\\text { Estimated useful life } & 3 \text { years } \\\text { Estimated disposal value in } 3 \text { years } & \$ 5,000 \\\text { Estimated annual savings in cash operating costs(end of year) } & \$ 120,000 \\\text { Minimum desired rate of return } & 12 \% \\\text { Present value of ordinary annuity of one, } 3 \text { periods at } 12 \% & 2.4018 \\\text { Present value of one, } 3 \text { periods at } 12 \% & 0.7118\end{array}$
Assume straight-line depreciation is used.Ignore income taxes.The net present value of the investment is ________.

A) $68,216
B) $71,775
C) $73,216
D) $145,090

Question 35

As the minimum required rate of return increases for an investment project,the net present value of the project ________.

A) increases
B) does not change
C) decreases
D) becomes positive

Question 36

You can receive $10,000 today or $3,000 per year at the end of each year for the next five years.If the required rate of return is 10%,what option should be selected? (The present value of an ordinary annuity of one at 10% for five periods is 3.7908.The present value of one at 10% for five periods is 0.6209.)

A) Receive $10,000 today.
B) Receive $3,000 per year for the next five years.
C) The results are the same for both options.
D) Neither option is desirable.

Question 37

The internal rate of return model determines the ________ at which the net present value of an investment project equals ________.

A) cost of capital; a positive number
B) hurdle rate; a positive number
C) interest rate; zero
D) discount rate; a positive number

Question 38

Capital-budgeting decisions have significant financial effects beyond the current year.

Question 39

If the internal rate of return on a project is ________ the required rate of return,then the project should be accepted.

A) higher than
B) lower than
C) the same as
D) none of the above

Question 40

Zebron Company is considering the following investment:
$\begin{array}{ll}\text { Initial capital investment } & \$ 200,000 \\\text { Estimated useful life } & 3 \text { years } \\\text { Estimated disposal value in } 3 \text { years } & \$ 1,000 \\\text { Estimated annual savings in cash operating costs(end of year) } & \$ 100,000 \\\text { Minimum desired rate of return } & 10 \% \\\text { Present value of ordinary annuity of one, } 3 \text { periods at } 10 \% & 2.4869 \\\text { Present value of one, } 3 \text { periods at } 10 \% & 0.7513\end{array}$
Assume straight-line depreciation is used.Ignore income taxes.The net present value of the investment is ________.

A) $48,690
B) $49,441
C) $49,690
D) $101,000

Question 41

Marvel Company is considering the acquisition of two machines.

Assume straight-line depreciation.Ignore income taxes.The present value of an ordinary annuity of one at 14% and 5 periods is 3.4331.The present value of one at 14% and 5 periods is 0.5194.
Required:

A) Calculate the net present value for both machines.
B) Assume there are enough funds to purchase both machines. Should both machines be purchased?
C) Assume there are funds to purchase only one machine. Which machine should be purchased?

Question 42

Jonathon Company is considering an investment in the project below:
$\begin{array}{ll}&\text { Project } 1\\\text { Cost } & \$ 10,000 \\\text { Annual cash operating savings (end of year) } & \$ 3,000 \\\text { Terminal salvage } & \$ 0 \\\text { Useful life in years } & 5 \\\text { Required rate of return } & 10 \% \\\text { Present value of one for } 5 \text { periods at } 10 \% & 0.6209\end{array}$
Present value of ordinary annuity of one for
$\begin{array} { l } \text {5 periods at 10\% }&3.7908 \\\end{array}$

Ignoring taxes,what is the lowest level of annual cash operating savings that will result in a positive net present value?

A) $2,420
B) $2,638
C) $3,000
D) $3,120

Question 43

Discounted-cash-flow models are not based on the theory of compound interest.

Question 44

When comparing projects using the total project approach,a manager should choose the project with the ________.

A) smallest net present value
B) largest net present value
C) zero net present value
D) largest differential net present value

Question 45

Whitney Company is contemplating three different equipment investments.The relevant data follows:

The present value factor of an ordinary annuity of one for 10 periods at 12% is 5.6502.
The present value factor of one for 10 periods at 12% is 0.322.
Required:

A) Compute the net present value of each investment. Ignore income taxes.
B) If only one investment can be acquired, which investment should be chosen?

Question 46

If a company accepts a project with a negative NPV,the project will increase the value of the firm.

Question 47

In capital budgeting decisions,the riskiness of a project may be shown by ________.

A) the size of the future cash inflows from the project
B) the size of the future cash outflows from the project
C) the timing of the cash flows from the project
D) the project's sensitivity to changes in predictions of cash flows

Question 48

Using the total project approach to investment decisions,the following information is available:
Net present value of Alternative A is $12,000
Net present value of Alternative B is $14,000
If the differential approach is used to evaluate Alternatives A and B,what is the numerical result obtained?

A) $0
B) $2,000 advantage to Alternative B
C) $12,000
D) $14,000

Question 49

When using an NPV model,we assume predicted cash flows are certain to occur at the times specified.

Question 50

The " break-even" cash inflow for an investment project is the point at which ________.

A) the present value of the variable cost of future cash flows equals the present value of the fixed cost of future cash flows
B) the present value of the variable cost of future cash flows equals the present value of the variable cost of past cash flows
C) the net present value of the investment project is zero
D) the total cash revenues equal total cash expenses

Question 51

The IRR model determines the interest rate at which the NPV of an investment equals zero.

Question 52

What will happen to the net present value of a project if my predictions of cash flows change? I think the cash flows may be overestimated.What should be done to address this?

A) net present value analysis
B) internal rate of return
C) sensitivity analysis
D) payback period

Question 53

Spitzer Company is considering two investments.If the differential approach to investment decisions is used,which of the following steps is NOT used?

A) list the differences in cash flows for each investment for each year
B) calculate the net present value of the differential cash flows
C) identify the relevant cash flows
D) calculate the net present value of the cash flows for each investment

Question 54

In the absence of taxes,depreciation expense on a long-term asset is a relevant cash flow for the NPV model.

Question 55

The minimum desired rate of return for an investment under the NPV method is based on the cost of capital.

Question 56

When choosing among several investments,managers should pick the project with the highest net present value.

Question 57

The ________ approach computes the differences in cash flows between two alternatives and then finds the present value of these differences.

A) differential
B) payback
C) total project
D) sensitivity

Question 58

When using the NPV model,it is assumed that we can borrow or lend money at the same interest rate.

Question 59

Valesano Company is considering a project with the following information:
$\begin{array}{ll}&\text { Project } 1\\\text { Cost } & \$ 4,000 \\\text { Annual cash operating savings(end of year) } & \$ 2,000 \\\text { Terminal salvage } & \$ 0 \\\text { Useful life in years } & 3 \\\text { Required rate of return } & 10 \% \\\text { Present value of one for } 3 \text { periods at } 10 \% & 0.7513\end{array}$
Present value of ordinary annuity of one for
$\begin{array} { l } \text {3 periods at 10\% }&2.4869 \\\end{array}$

Ignoring taxes,what is the lowest level of annual cash operating savings that will result in a positive net present value?

A) $1,550
B) $1,600
C) $1,608
D) $2,000

Question 60

Ignoring taxes,the total project approach to investment decisions calculates the difference in the ________.Ignoring income taxes,the differential approach to investment decisions computes the net present value of the difference in ________.

A) depreciation expense; operating cost savings
B) tax savings due to depreciation expense; tax savings due to operating cost savings
C) cash flows between two projects; net present values between two projects
D) net present values between two projects; cash flows between two projects

Question 61

Danworth Company is contemplating whether to use MACRS depreciation or straight-line depreciation for a plant asset.The following information is available:
$\begin{array}{llll}&\text { MACRS } & \text { Straight-line } & \text { Present Value of } \\&\text { Depreciation } & \text { Depreciation } & \text { One At } 12 \%\\\text { Year 1 } & \$ 13,333 & \$ 10,000 & 0.8929 \\\text { Year 2 } & \$ 17,780 & \$ 10,000 & 0.7972 \\\text { Year 3 } & \$ 5,924 & \$ 10,000 & 0.7118 \\\text { Year 4 } & \$ 2,964 & \$ 10,000 & 0,6355\end{array}$
Over the four years examined,how much did Danworth Company gain by using MACRS depreciation instead of straight-line depreciation for the plant asset? The tax rate is 40%.(Find the present value.)

A) $722
B) $1,806
C) $2,976
D) $9,178

Question 62

Generally,the most difficult part of capital budgeting decisions is predicting accurately the relevant cash flows.

Question 63

Which of the following items does NOT affect the present value of the tax deduction for depreciation expense used in the net present value calculation of an investment?

A) recovery period
B) tax rates
C) discount rate
D) gain on disposal of investment

Question 64

Which of the following items is NOT a relevant cash inflow or cash outflow when using the net present value method? (Ignore income taxes.)

A) acquisition cost of new equipment at time zero
B) future disposal value of a long-term plant asset
C) future operating cash inflows from a long-term plant
D) depreciation expense in future periods

Question 65

The differential approach to investments can be used to compare any number of projects.

Question 66

The total project approach to investments can be used to compare any number of projects.

Question 67

Two common methods for comparing alternative investments are the total project approach and the conversion approach.

Question 68

Haworth Company is considering the purchase of a labor saving piece of equipment with the following information:
$\begin{array}{ll}\text { Purchase cost of equipment } & \$ 432,000 \\\text { Annual cost savings, excluding depreciation (end of year) } & \$ 90,000 \\\text { Terminal salvage value } & 0 \\\text { Useful life of equipment } & 12 \text { years } \\\text { Required rate of return } & 10 \% \\\text { Taxrate } & 30 \% \\\text { Depreciation method for taxpurposes } & \text { Straight-line }\end{array}$
Present value of ordinary annuity of one
$\begin{array} { l } \text {at \( 10 \% \) for 12 period }&6.8137 \\ \text {Present value of one at \( 10 \% \) for 12 periods }&0.3186 \\\end{array}$

What is the net present value of the equipment?

A) $(2,737)
B) $(174,442)
C) $70,851
D) $168,968

Question 69

Which of the following approaches should be used to compare four investment alternatives?

A) total project approach
B) sensitivity analysis
C) payback method
D) differential approach

Question 70

A company is considering two investment projects.If they use the total project approach and the differential approach,both approaches produce ________.

A) different answers
B) similar answers
C) the same answer
D) not enough information is given to make an assessment

Question 71

Which of the following is the benefit of depreciation expense on a plant asset when considering investment decisions with taxes?

A) increased future operating income
B) future tax deduction
C) increased cost of plant asset
D) decreased cost of plant asset

Question 72

In the NPV method,errors in forecasting terminal disposal values are usually not crucial because the present value of these cash flows is small.

Question 73

In net present value analysis,a reduction in a future cash outflow is treated as ________.

A) an irrelevant cash flow
B) a cash inflow
C) a disposal value of a long-term asset
D) an expense

Question 74

The book value of an asset that is being replaced is a relevant cash flow in the net present value method.

Question 75

The present value of tax savings from depreciation deductions from an accelerated depreciation method will be ________ those from the straight-line method.

A) the same as
B) greater than
C) less than
D) none of the above

Question 76

Danville Company is contemplating whether to use MACRS depreciation or straight-line depreciation for a plant asset.The following information is available:
$\begin{array}{llll}&\text { MACRS } & \text { Straight-line } & \text { Present Value of } \\&\text { Depreciation } & \text { Depreciation } & \text { One At } 12 \%\\\text { Year 1 } & \$ 13,333 & \$ 10,000 & 0.8929 \\\text { Year 2 } & \$ 17,780 & \$ 10,000 & 0.7972 \\\text { Year 3 } & \$ 5,924 & \$ 10,000 & 0.7118 \\\text { Year 4 } & \$ 2,964 & \$ 10,000 & 0,6355\end{array}$
Assume the tax rate is 40%.Over the four years examined,what is the present value of the difference in tax savings between MACRS depreciation and straight-line depreciation?

A) $722
B) $1,806
C) $2,976
D) $9,178

Question 77

In the net present value method,the only relevant operating cash flows are the ones that differ among alternatives.

Question 78

In the net present value method,the disposal value of a long-term asset at the end of its useful life is considered to be a ________.

A) cash outflow at time zero
B) cash inflow at time zero
C) cash outflow in the year of disposal
D) cash inflow in the year of disposal

Question 79

The first step in using the differential approach to investment analysis is to ________.

A) calculate the present value of the differential cash flows
B) sum the individual present values of each investment
C) estimate the difference in cash flows between two projects for each year
D) estimate the relevant cash inflows and cash outflows for each project

Question 80

A company is considering the acquisition of new equipment to replace old equipment.When using the net present value method,which of the following items is NOT relevant? Ignore taxes.

A) cash outflow for the purchase of new equipment
B) cash installation costs associated with the new equipment
C) disposal value of old equipment replaced with new equipment
D) fixed overhead costs that are the same under both alternatives