Deck 14: Capital Investment Decisions

Question 1

Kendra Van Cleve has just invested $200,000 in a coffee shop.She expects to receive cash income of $50,000 a year.What is the payback period?

A)2.5 years
B)3 years
C)3.5 years
D)4 years

Answer 1

D

Question 2

Which of the following is a drawback of the payback period?

A)It ignores a project's total profitability.
B)It uses a set discount rate.
C)It considers total profitability, requiring the forecasting of all future cash flows.
D)It uses before-tax cash flows rather than after-tax cash flows.

Answer 2

A

Question 3

Suppose the cash flows of a project are received evenly over the life of the project.What formula is used to calculate the payback period?

A)original investment/annual cash flow
B)original investment × annual cash flow
C)original investment + annual cash flow
D)original investment − annual cash flow

Answer 3

A

Question 4

A division manager is considering a project that requires a significant initial investment.If accepted,the project could have a negative impact on certain financial ratios that the firm is required to maintain to satisfy bond contracts.The manager wants to ensure that the ratios will NOT be adversely affected by the investment.Which capital investment model should the manager use?

A)the payback period
B)the accounting rate of return
C)the net present value
D)the internal rate of return

Question 5

In what way does the payback period provide information to help managers?

A)controls the risks associated with the uncertainty of past cash flows
B)maximizes the impact of an investment on a firm's liquidity problems
C)includes the present value of future cash flows
D)controls the effect of the investment on performance measures

Question 6

Sarah Lindsay invested $300,000 in a project that pays her an even amount per year for 10 years.The payback period is 8 years.What are Sarah's yearly cash inflows from the project?

A)$15,000
B)$25,000
C)$90,000
D)$150,000

Question 7

Which of the following factors must a manager estimate when making a capital investment decision?

A)the previous spending
B)the timing of cash flows
C)the company's spending on other projects
D)the company's financial history

Question 8

In general terms,how much will a sound capital investment earn?

A)It will earn back its original capital outlay.
B)It will earn a return greater than existing capital investments.
C)It will earn back its original capital outlay and provide a reasonable return on the original investment.
D)It will earn back its original capital outlay by the midpoint of its useful life.

Question 9

Which statement about payback method and the accounting rate of return method are correct? $\begin{array}{lll}&\text { Profitability }&\text { Time Value of Money }\\i&\text { Ignored by both methods }&\text { Ignored by both methods }\\ii&\text { Ignored by both methods }&\text { Used in accounting rate of return; ignored } \\&& \text { by payback method }\\iii&\text { Considered by accounting method, not by }&\text { Ignored by both methods }\\&\text { payback }\\iv&\text { Considered by accounting method, not by }&\text { Considered by both methods }\\&\text { payback }\\\end{array}$

A)i
B)ii
C)iii
D)iv

Question 10

Which of the following measure results in the time required for a firm to recover its original investment?

A)the internal rate of return
B)the net present value
C)the life of the project
D)the payback period

Question 11

What is the term for the earning of interest on interest?

A)the present value of interest
B)the future value of interest
C)the discount rate of interest
D)the compounding of interest

Question 12

Why is a discount factor in year 3 less than a discount factor in year 2?

A)because a dollar received in three years is worth less than a dollar received in two years
B)because compounding does not occur
C)because cash flows are even
D)because present value is positive

Question 13

Which is the most widely used non-discounting model for capital investment decision making?

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

Question 14

What is the term for a series of equal future cash flows?

A)a future amount
B)future earnings
C)an annuity
D)earnings to be discounted

Question 15

Joseph Giovine invested in a project with a payback period of six years.The project brings $40,000 per year for a period of twelve years.What was the initial investment?

A)$7,500
B)$75,000
C)$120,000
D)$240,000

Question 16

Evan Cram is considering an investment in a solar-powered irrigation system manufacturer.The initial investment is $200,000.He expects to receive cash income of $100,000 a year.What is the payback period?

A)1 year
B)1.5 years
C)2 years
D)2.5 years

Question 17

Which of the following is NOT an advantage of the payback period?

A)It is sometimes used as a crude measure of risk.
B)It encourages managers to choose projects with quick payback to maximize short-term criteria.
C)It cannot be used for investments with unequal cash inflows.
D)It cannot be used if the entire cost of the investment does not occur immediately.

Question 18

Which payback period will managers want when the risk of obsolescence is high?

A)a shorter payback period
B)a longer payback period
C)a payback period equal to the life of the investment
D)an extended payback period

Question 19

Which of the following statements is characteristic of capital investment decision making?

A)It is used only for independent projects.
B)It is used only for mutually exclusive projects.
C)It requires that funding for a project must come from sources with the same opportunity cost of funds.
D)It places large amounts of resources at risk for long periods of time.

Question 20

The Canadian Division manager is choosing between two mutually exclusive projects. The company requires any project to earn at least 13%.The manager believes that cash inflows from the project can be reinvested at the rate of 13%.Which project will the manager likely choose?
$\begin{array}{lrr}&\text { Project } 123&\text { Project } 456\\\text { Net present value } & \$ 235,000 & \$ 210,000 \\\text { Internal rate of return } & 14 \% & 16 \%\end{array}$

A)Project 456
B)Project 123
C)both Projects 123 and 456
D)neither Project 123 nor 456

Question 21

The following information pertains to an investment: What is the present value of the annual cash flow (rounded to the nearest whole number)?
$$\begin{array} { l r } \text { Investment } & \$ 140,000 \\\text { Annual revenues } & \$ 96,000 \\\text { Annual variable costs } & \$ 32,000 \\\text { Annual fixed out-of-pocket costs } & \$ 20,000 \\\text { Discount rate } & 12 \% \\\text { Expected life of project } & 8 \text { years }\end{array}$$

A)$136,822
B)$152,538
C)$204,884
D)$218,592

Question 22

Jerry Costansa has just invested $280,000 in a day spa.He expects to receive income of $70,000 a year and to have the investment for 10 years.What is the accounting rate of return?

A)2.2%
B)4.0%
C)25.0%
D)28.0%

Question 23

Buckhead Shop is considering the purchase of a used printing press costing $19,200.The printing press would generate a net cash inflow of $8,000 per year for five years.At the end of three years,the press would have no salvage value.The company's cost of capital is 10%.The company uses straight-line depreciation with no mid-year convention. Assume no taxes are paid.What would be the accounting rate of return on the original investment in the press to the nearest percent?

A)8.33%
B)10.00%
C)21.67%
D)75.00%

Question 24

Suppose the net present value is negative.Which of the following would best describe the return on the investment?

A)less than the discount rate
B)more than the discount rate
C)equal to the discount rate
D)acceptable

Question 25

A firm is evaluating a project that has a net present value of $0 when a discount rate of 10% is used.What will be the result of a discount rate of 8%?

A)a negative net present value
B)a positive net present value
C)a net present value of $0
D)a positive present value

Question 26

A firm is considering a project with an annual cash flow of $160,000.The project would have a 10-year life,and the company uses a discount rate of 8%.What is the maximum amount the company could invest in the project and have the project still be acceptable (rounded to the nearest whole number)?

A)$406,420
B)$671,000
C)$727,208
D)$800,000

Question 27

What term refers to the interest rate that sets the present value of a project's cash inflows equal to the present value of the project's cost?

A)the present value
B)the discount rate
C)the internal rate of return
D)the payback period

Question 28

Which of the following is a reason managers use the accounting rate of return to evaluate potential investment projects?

A)because debt contracts require that a firm maintain certain ratios that are not affected by income and long-term asset levels
B)because it serves as a screening measure to ensure that new investments do affect key financial ratios
C)because bonuses to managers may be based on accounting income and/or return on assets
D)because it does not consider the time value of money

Question 29

Charlotte Company invests in a new piece of equipment costing $80,000.The equipment is expected to yield the following amounts per year for the equipment's four-year useful life: What is the net present value of this investment in equipment?
$\begin{array} { l r } \text { Cash revenues } & \$ 120,000 \\ \text { Cash expenses } & ( 64,000 ) \\ \text { Depreciation expenses (straight-line) } & ( 20,000 ) \\ \text { Income provided from equipment } & \$ 36,000\\\text { Cost of capital }&14\% \end{array}$

A)($4,480)
B)$41,592
C)$52,452
D)$83,184

Question 30

Randy Ritchie is considering investing $20,000 in a project with the following annual cash revenues and expenses: Depreciation will be $4,000 per year.
What is the accounting rate of return on the investment?
$$\begin{array} { l r r } & \begin{array} { r } \text { Cash } \\\text { Revenues }\end{array} & \begin{array} { r } \text { Cash } \\\text { Expenses }\end{array} \\\text { Year 1 } & \$ 8,000 & \$ 8,000 \\\text { Year 2 } & \$ 12,000 & \$ 8,000 \\\text { Year 3 } & \$ 15,000 & \$ 9,000 \\\text { Year 4 } & \$ 20,000 & \$ 10,000 \\\text { Year 5 } & \$ 20,000 & \$ 10,000\end{array}$$

A)10%
B)15%
C)35%
D)75%

Question 31

What is the formula for the accounting rate of return?

A)average income/initial investment
B)initial investment/annual cash flow
C)annual cash flow/initial investment
D)initial investment/average income

Question 32

A division manager is considering a project that requires a significant initial investment.The company's top management will NOT approve any project that does not return at least 12%.Which capital investment model will the manager most likely use?

A)the payback period
B)the accounting rate of return
C)the net present value
D)the internal rate of return

Question 33

What is another term for the required rate of return when using the net present value model?

A)the huddle rate
B)the maximum acceptable rate of return
C)the payback rate
D)the discount rate

Question 34

An investment of $4,000 provides an average net cash flow of $960 with zero salvage value.Depreciation is $80 per year.What is the accounting rate of return using the original investment?

A)20%
B)22%
C)24%
D)40%

Question 35

A firm is considering a project with an annual cash flow of $400,000.The project would have a seven-year life,and the company uses a discount rate of 10%.What is the maximum amount the company could invest in the project and have the project still be acceptable?

A)$200,000
B)$718,200
C)$1,400,000
D)$1,947,200

Question 36

Rose Henderson invested in a project that required an initial amount of $1,560 and returned one cash inflow of $12,000 at the end of the 18th year.A partial table of the present value of an annuity of $1 in arrears is as follows: What is the internal rate of return for this investment?
$\begin{array}{|c|r|r|r|r|r|r|r|r|}\hline \text { Year } & 2 \% & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% & 16 \% \\\hline 18 & 0.700 & 0.494 & 0.350 & 0.250 & 0.180 & 0.130 & 0.095 & 0.069 \\\hline\end{array}$

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

Question 37

What capital investment decision-making model assumes that each cash inflow is reinvested at the required rate of return?

A)the net present value
B)the internal rate of return
C)the payback period
D)the accounting rate of return

Question 38

Henkle Company is considering a project with an initial investment of $626,500 in new equipment that will yield annual net cash flows of $90,000 and will be depreciated at $55,000 per year over its nine-year life.What is the accounting rate of return?

A)5.59%
B)18.74%
C)31.27%
D)50.0%

Question 39

What is the preferred model for choosing the best of several competing projects?

A)the net present value
B)the internal rate of return
C)the payback period
D)the accounting rate of return

Question 40

Which of the following provides an absolute dollar measure?

A)the internal rate of return
B)the net present value
C)the payback period
D)the accounting rate of return

Question 41

What is the difference between NPV and IRR?

A)NPV measures profitability in absolute terms, whereas the IRR method measures profitability in relative terms.
B)NPV is used on one project only and IRR is used when choosing among competing, mutually exclusive projects.
C)NPV considers the time value of money, and IRR does not.
D)Both NPV and IRR will generate the same decisions.

Question 42

A company is considering two projects.
$\begin{array}{lrr} & \text { Froject I } & \text { Froject II } \\\text { Initial investment } & \$ 60,000 & \$ 60,000 \\\text { Cash inflow Year 1 } & \$ 30,000 & \$ 15,000 \\\text { Cash inflow Year 2 } & \$ 30,000 & \$ 15,000 \\\text { Cash inflow Year 3 } & \$ 30,000 & \$ 30,000 \\\text { Cash inflow Year 4 } & \$ 30,000 & \$ 70,000 \\\text { Cash inflow Year 5 } & \$ 30,000 & \$ 70,000\end{array}$

-Refer to the Figure.What is the payback period for Project I?

A)1 year
B)2 years
C)2.5 years
D)3 years

Question 43

Shore Builders is considering a project with an internal rate of return of 16.5%.Shore Builders requires a minimum rate of return of 14%.What is the net present value of the project?

A)negative
B)infinite
C)equal to zero
D)positive

Question 44

When investing in automated systems,which of the following intangible or indirect benefit is important to consider?

A)decreased customer satisfaction
B)decreased market share
C)increased support labour cost
D)reduced lead time

Question 45

Cantar,Inc.has the opportunity to invest in new equipment that will cost $113,000.The net cash inflows for 10 years equal $20,000 per year.What is the internal rate of return for the investment? A partial table of the present value of an annuity of $1 in arrears is as follows: $\begin{array}{|c|r|r|r|r|r|r|r|r|}\hline \text { Year } & 2 \% & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% & 16 \% \\\hline 10 & 7.983 & 8.111 & 7.360 & 6.710 & 6.145 & 5.650 & 5.216 & 4.833 \\\hline\end{array}$

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

Question 46

Marco Marousis invested in a project that required an initial amount of $52,160 and returned cash inflows of $10,000 per year for 10 years.A partial table of the present value of an annuity of $1 in arrears is as follows: What is the internal rate of return for this investment?
$\begin{array}{|c|r|r|r|r|r|r|r|r|}\hline \text { Year } & 2 \% & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% & 16 \% \\\hline 10 & 7.983 & 8.111 & 7.360 & 6.710 & 6.145 & 5.650 & 5.216 & 4.833 \\\hline\end{array}$

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

Question 47

Who should usually perform a postaudit of a firm's capital investment?

A)the manager of that investment
B)the CEO
C)the board of directors
D)the internal audit staff

Question 48

Which of the following is NOT an advantage of postaudits?

A)They evaluate profitability rather than cash flows.
B)They may point to the need for additional funding for the project.
C)They tend to hold managers accountable for capital investment decision making.
D)The assumptions driving the original analysis may be invalidated by changes in the actual operating environment.

Question 49

The Columbus Company has four mutually exclusive projects with the following information: Which project is preferred?
$\begin{array}{lrrrr}&\text { Project } 1&\text { Project } 2&\text { Project } 3&\text { Project } 4\\\text { NPV } & \$(12,000) & \$ 80,000 & \$ 60,000 & \$ 20,000 \\\text { IRR } & 7 \% & 10 \% & 12 \% & 9 \%\end{array}$

A)Project 1
B)Project 2
C)Project 3
D)Project 4

Question 50

Which of the following is NOT characteristic of the internal rate of return for a project?

A)If the internal rate of return is less than the required rate of return, the project will be rejected.
B)If the internal rate of return is equal to the required rate of return, the net present value of the project is positive.
C)If the internal rate of return is more than the required rate of return, the project will be accepted.
D)If the internal rate of return is equal to the required rate of return, the net present value of the project is negative.

Question 51

A firm is considering a project requiring an investment of $54,000.The project would generate an annual cash flow of $12,592 for the next seven years.The company uses the straight-line method of depreciation.What is the approximate internal rate of return for the project?

A)6%
B)8%
C)12%
D)14%

Question 52

Which of the following compares the actual benefits from an investment with the estimated benefits,and the actual operating costs of the investment with estimated operating costs?

A)the internal rate of return
B)the discounted returns
C)the postaudit
D)the opportunity cost

Question 53

A company is considering two projects.
$\begin{array}{lrr} & \text { Froject I } & \text { Froject II } \\\text { Initial investment } & \$ 60,000 & \$ 60,000 \\\text { Cash inflow Year 1 } & \$ 30,000 & \$ 15,000 \\\text { Cash inflow Year 2 } & \$ 30,000 & \$ 15,000 \\\text { Cash inflow Year 3 } & \$ 30,000 & \$ 30,000 \\\text { Cash inflow Year 4 } & \$ 30,000 & \$ 70,000 \\\text { Cash inflow Year 5 } & \$ 30,000 & \$ 70,000\end{array}$

-Refer to the Figure.What is the payback period for Project II?

A)1 year
B)2 years
C)2.5 years
D)3 years

Question 54

Which of the following is characteristic of the measurement and use of indirect and intangible benefits in capital investment decision making?

A)ABC has made identifying indirect benefits easier.
B)Intangible benefits cannot be measured.
C)Indirect and intangible benefits should not be considered; only direct costs and benefits are considered.
D)Actions by competitors are not considered.

Question 55

What capital investment decision-making model assumes that each cash inflow is reinvested at the project's own rate of return?

A)the net present value
B)the accounting rate of return
C)the payback period
D)the internal rate of return

Question 56

The Picture Company is considering the purchase of a new machine for $68,754.The machine would generate an annual cash flow of $21,000 for five years.At the end of five years,the machine would have no salvage value.The company's cost of capital is 12%.The company uses straight-line depreciation. What is the internal rate of return for the machine (rounded to the nearest percent)?

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

Question 57

Which of the following is a follow-up analysis of a capital investment after it is implemented?

A)a capital investment review
B)a profitability analysis
C)a postaudit
D)a peer review

Question 58

What is the definition of the internal rate of return?

A)a blend of the costs of capital from all sources
B)the minimal acceptable interest rate on investments
C)the difference between the present value of the cash inflows and outflows associated with a project
D)the interest rate that sets the present value of a project's cash inflows equal to the present value of a project's cost

Question 59

Cooper Industries is considering a project that would require an initial investment of $101,000.The project would result in cost savings of $62,000 in year 1 and $70,000 in year 2.What is the internal rate of return for the project?

A)less than 15%
B)between 16% and 17%
C)between 18% and 20%
D)greater than 22%

Question 60

Which of the following is NOT a benefit of postaudits of capital investments?

A)They consider changes in the actual operating environment.
B)They guide managers to make capital investment in the best interests of the firm.
C)They ensure that resources are used wisely by evaluating profitability.
D)They supply feedback to managers that should help improve decision making.

Question 61

Cary Swenson is considering investing $30,000 in a project with the following cash revenues and expenses:
$\begin{array}{lll}&&\text { Cash Expenses \& }\\&\text { Revenues }&\text { Depreciation }\\\text { Year 1 } & \$ 10,000 & \$ 12,000 \\\text { Year 2 } & \$ 12,000 & \$ 11,000 \\\text { Year 3 } & \$ 15,000 & \$ 12,000 \\\text { Year 4 } & \$ 20,000 & \$ 12,000 \\\text { Year 5 } & \$ 22,000 & \$ 12,000 \\\text { Year 6 } & \$ 25,000 & \$ 15,000 \\\text { Year 7 } & \$ 25,000 & \$ 15,000 \\\text { Year 8 } & \$ 25,000 & \$ 15,000\end{array}$

-Refer to the Figure.What is the average income for the project?

A)$6,250
B)$13,000
C)$19,250
D)$30,000

Question 62

Darth Company is considering the purchase of new heavy construction equipment that will cost $2,000,000 and have a life of eight years with no expected salvage value. The expected cash flows associated with the project are as follows:
$\begin{array}{lll}&\text { Cash } & \text { Cash Expenses \& } \\\text { Year } &\text { Revenues }&\text { Depreciation }\\1 & \$ 2,400,000 & \$ 1,900,000 \\2 & \$ 2,400,000 & \$ 1,900,000 \\3 & \$ 2,400,000 & \$ 1,900,000 \\5 & \$ 2,400,000 & \$ 1,900,000 \\6 & \$ 2,400,000 & \$ 1,900,000 \\7 & \$ 2,400,000 & \$ 1,900,000 \\8 & \$ 2,400,000 & \$ 1,900,000 \\& \$ 2,400,000 & \$ 1,900,000\end{array}$

-Refer to the Figure.What is the accounting rate of return for the project?

A)3.125%
B)25.000%
C)83.330%
D)120.000%

Question 63

Martin Brother is considering investing $20,000 in a project with the following cash revenues and expenses:
$\begin{array}{lll}&&\text { Cash Expenses \& }\\&\text { Revenues }&\text { Depreciation }\\\text { Year 1 } & \$ 8,000 & \$ 8,000 \\\text { Year 2 } & \$ 12,000 & \$ 8,000 \\\text { Year 3 } & \$ 15,000 & \$ 9,000 \\\text { Year 4 } & \$ 20,000 & \$ 10,000 \\\text { Year 5 } & \$ 20,000 & \$ 10,000\end{array}$

-Refer to the Figure.What is the accounting rate of return for the project?

A)30%
B)45%
C)75%
D)150%

Question 64

Present value of $1
Present value of an annuity of $1
$\begin{array}{|c|l|l|l|l|l|l|}\hline \text { Periods } & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% \\\hline 1 & 0.962 & 0.943 & 0.926 & 0.909 & 0.893 & 0.877 \\\hline 2 & 0.925 & 0.890 & 0.857 & 0.826 & 0.797 & 0.769 \\\hline 3 & 0.889 & 0.840 & 0.794 & 0.751 & 0.712 & 0.675 \\\hline 4 & 0.855 & 0.792 & 0.735 & 0.683 & 0.636 & 0.592 \\\hline 5 & 0.822 & 0.747 & 0.681 & 0.621 & 0.567 & 0.519 \\\hline 6 & 0.790 & 0.705 & 0.630 & 0.564 & 0.507 & 0.456 \\\hline 7 & 0.760 & 0.665 & 0.583 & 0.513 & 0.452 & 0.400 \\\hline 8 & 0.731 & 0.627 & 0.540 & 0.467 & 0.404 & 0.351 \\\hline 9 & 0.703 & 0.592 & 0.500 & 0.424 & 0.361 & 0.308 \\\hline 10 & 0.676 & 0.558 & 0.463 & 0.386 & 0.322 & 0.270 \\\hline\end{array}$ $\begin{array}{|c|l|l|l|l|l|l|}\hline \text { Periods } & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% \\\hline 1 & 0.962 & 0.943 & 0.926 & 0.909 & 0.893 & 0.877 \\\hline 2 & 1.886 & 1.833 & 1.783 & 1.736 & 1.690 & 1.647 \\\hline 3 & 2.775 & 2.673 & 2.577 & 2.487 & 2.402 & 2.322 \\\hline 4 & 3.630 & 3.465 & 3.312 & 3.170 & 3.037 & 2.914 \\\hline 5 & 4.452 & 4.212 & 3.993 & 3.791 & 3.605 & 3.433 \\\hline 6 & 5.242 & 4.917 & 4.623 & 4.355 & 4.111 & 3.889 \\\hline 7 & 6.002 & 5.582 & 5.206 & 4.868 & 4.564 & 4.288 \\\hline 8 & 6.733 & 6.210 & 5.747 & 5.335 & 4.968 & 4.639 \\\hline 9 & 7.435 & 6.802 & 6.247 & 5.759 & 5.328 & 4.946 \\\hline 10 & 8.111 & 7.360 & 6.710 & 6.145 & 5.650 & 5.216 \\\hline\end{array}$

-Refer to the Figure.Jan Rigby is considering an investment that will cost $20,000 initially and return annual cash flows of $10,000 in each of three years.Jan requires a minimum rate of return of 8%.What is the present value of the cash inflows? (Note: there may be a rounding error depending on the table you use to compute your answer.Choose the answer closest to the result you calculate.)

A)$5,770
B)$10,000
C)$20,000
D)$25,770

Question 65

Cary Swenson is considering investing $30,000 in a project with the following cash revenues and expenses:
$\begin{array}{lll}&&\text { Cash Expenses \& }\\&\text { Revenues }&\text { Depreciation }\\\text { Year 1 } & \$ 10,000 & \$ 12,000 \\\text { Year 2 } & \$ 12,000 & \$ 11,000 \\\text { Year 3 } & \$ 15,000 & \$ 12,000 \\\text { Year 4 } & \$ 20,000 & \$ 12,000 \\\text { Year 5 } & \$ 22,000 & \$ 12,000 \\\text { Year 6 } & \$ 25,000 & \$ 15,000 \\\text { Year 7 } & \$ 25,000 & \$ 15,000 \\\text { Year 8 } & \$ 25,000 & \$ 15,000\end{array}$

-Refer to the Figure.What is the accounting rate of return for the project?

A)20.00%
B)20.83%
C)64.17%
D)166.70%

Question 66

A company is considering two projects.
$$\begin{array} { l l l } & \text { Project A } & \text { Project B } \\\text { Initial investment } & \$ 150,000 & \$ 150,000 \\\text { Cash inflow Year 1 } & \$ 50,000 & \$ 40,000 \\\text { Cash inflow Year 2 } & \$ 50,000 & \$ 40,000 \\\text { Cash inflow Year 3 } & \$ 50,000 & \$ 40,000 \\\text { Cash inflow Year 4 } & \$ 50,000 & \$ 60,000 \\\text { Cash inflow Year 5 } & \$ 50,000 & \$ 80,000\end{array}$$

-Refer to the Figure.What is the payback period for Project A?

A)2 years
B)2.5 years
C)3 years
D)3.5 years

Question 67

Cary Swenson is considering investing $30,000 in a project with the following cash revenues and expenses:
$\begin{array}{lll}&&\text { Cash Expenses \& }\\&\text { Revenues }&\text { Depreciation }\\\text { Year 1 } & \$ 10,000 & \$ 12,000 \\\text { Year 2 } & \$ 12,000 & \$ 11,000 \\\text { Year 3 } & \$ 15,000 & \$ 12,000 \\\text { Year 4 } & \$ 20,000 & \$ 12,000 \\\text { Year 5 } & \$ 22,000 & \$ 12,000 \\\text { Year 6 } & \$ 25,000 & \$ 15,000 \\\text { Year 7 } & \$ 25,000 & \$ 15,000 \\\text { Year 8 } & \$ 25,000 & \$ 15,000\end{array}$

-Refer to the Figure.Assume a straight-line depreciation over eight years.What would be the payback period for the project?

A)between 1 and 2 years
B)between 3 and 4 years
C)between 4 and 5 years
D)between 6 and 7 years

Question 68

Present value of an annuity of $1 in arrears
$\begin{array}{|c|l|l|l|l|l|l|}\hline \text { Periods } & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% \\\hline 1 & 0.962 & 0.943 & 0.926 & 0.909 & 0.893 & 0.877 \\\hline 2 & 1.886 & 1.833 & 1.783 & 1.736 & 1.690 & 1.647 \\\hline 3 & 2.775 & 2.673 & 2.577 & 2.487 & 2.402 & 2.322 \\\hline 4 & 3.630 & 3.465 & 3.312 & 3.170 & 3.037 & 2.914 \\\hline 5 & 4.452 & 4.212 & 3.993 & 3.791 & 3.605 & 4.433 \\\hline 6 & 5.242 & 4.917 & 4.623 & 4.355 & 4.111 & 3.889 \\\hline 7 & 6.002 & 5.582 & 5.206 & 4.868 & 4.564 & 4.288 \\\hline 8 & 6.733 & 6.210 & 5.747 & 5.335 & 4.968 & 4.639 \\\hline 9 & 7.435 & 6.802 & 6.247 & 5.759 & 5.328 & 4.946 \\\hline 10 & 8.111 & 7.360 & 6.710 & 6.145 & 5.650 & 5.216 \\\hline\end{array}$

-Refer to the Figure.Coriander Company is considering a project with an initial investment of $426,800 in new equipment that will yield annual net cash flows of $80,000 and will be depreciated at $53,350 per year over its eight-year life.What is the internal rate of return?

A)6%
B)8%
C)10%
D)12%

Question 69

Present value of $1
Present value of an annuity of $1
$\begin{array}{|c|l|l|l|l|l|l|}\hline \text { Periods } & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% \\\hline 1 & 0.962 & 0.943 & 0.926 & 0.909 & 0.893 & 0.877 \\\hline 2 & 0.925 & 0.890 & 0.857 & 0.826 & 0.797 & 0.769 \\\hline 3 & 0.889 & 0.840 & 0.794 & 0.751 & 0.712 & 0.675 \\\hline 4 & 0.855 & 0.792 & 0.735 & 0.683 & 0.636 & 0.592 \\\hline 5 & 0.822 & 0.747 & 0.681 & 0.621 & 0.567 & 0.519 \\\hline 6 & 0.790 & 0.705 & 0.630 & 0.564 & 0.507 & 0.456 \\\hline 7 & 0.760 & 0.665 & 0.583 & 0.513 & 0.452 & 0.400 \\\hline 8 & 0.731 & 0.627 & 0.540 & 0.467 & 0.404 & 0.351 \\\hline 9 & 0.703 & 0.592 & 0.500 & 0.424 & 0.361 & 0.308 \\\hline 10 & 0.676 & 0.558 & 0.463 & 0.386 & 0.322 & 0.270 \\\hline\end{array}$ $\begin{array}{|c|l|l|l|l|l|l|}\hline \text { Periods } & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% \\\hline 1 & 0.962 & 0.943 & 0.926 & 0.909 & 0.893 & 0.877 \\\hline 2 & 1.886 & 1.833 & 1.783 & 1.736 & 1.690 & 1.647 \\\hline 3 & 2.775 & 2.673 & 2.577 & 2.487 & 2.402 & 2.322 \\\hline 4 & 3.630 & 3.465 & 3.312 & 3.170 & 3.037 & 2.914 \\\hline 5 & 4.452 & 4.212 & 3.993 & 3.791 & 3.605 & 3.433 \\\hline 6 & 5.242 & 4.917 & 4.623 & 4.355 & 4.111 & 3.889 \\\hline 7 & 6.002 & 5.582 & 5.206 & 4.868 & 4.564 & 4.288 \\\hline 8 & 6.733 & 6.210 & 5.747 & 5.335 & 4.968 & 4.639 \\\hline 9 & 7.435 & 6.802 & 6.247 & 5.759 & 5.328 & 4.946 \\\hline 10 & 8.111 & 7.360 & 6.710 & 6.145 & 5.650 & 5.216 \\\hline\end{array}$

-Refer to the Figure.Gibb Clinical Practice is considering an investment in new imaging equipment that will cost $400,000.The equipment is expected to yield cash inflows of $80,000 per year for a six-year period.Gibb set a required rate of return at 10%.What is the net present value of the investment?

A)($348,600)
B)($51,600)
C)$51,600
D)$348,400

Question 70

Martin Brother is considering investing $20,000 in a project with the following cash revenues and expenses:
$\begin{array}{lll}&&\text { Cash Expenses \& }\\&\text { Revenues }&\text { Depreciation }\\\text { Year 1 } & \$ 8,000 & \$ 8,000 \\\text { Year 2 } & \$ 12,000 & \$ 8,000 \\\text { Year 3 } & \$ 15,000 & \$ 9,000 \\\text { Year 4 } & \$ 20,000 & \$ 10,000 \\\text { Year 5 } & \$ 20,000 & \$ 10,000\end{array}$

-Refer to the Figure.Assume straight-line depreciation over five years.What would be the payback period for this investment?

A)between 1 and 2 years
B)between 2 and 3 years
C)between 3 and 4 years
D)between 4 and 5 years

Question 71

Boleyn Company is considering two projects.
Present value of an annuity of $1 in arrears
$\begin{array}{lrr}&\text { Project } \mathrm{A}&\text { Project } \mathrm{B}\\\text { Initial investment } & \$ 100,000 & \$ 25,000 \\\text { Annual cash flows } & \$ 18,750 & \$ 8,580 \\\text { Life of the project } & 8 \text { years } & 4 \text { years } \\\text { Depreciation per year } & \$ 25,000 & \$ 6,250\end{array}$ $\begin{array}{|c|l|l|l|l|}\hline \text { Periods } & 8 \% & 10 \% & 12 \% & 14 \% \\\hline 1 & 0.926 & 0.909 & 0.893 & 0.877 \\\hline 2 & 1.783 & 1.736 & 1.690 & 1.647 \\\hline 3 & 2.577 & 2.487 & 2.402 & 2.322 \\\hline 4 & 3.312 & 3.170 & 3.037 & 2.914 \\\hline 5 & 3.993 & 3.791 & 3.605 & 4.433 \\\hline 6 & 4.623 & 4.355 & 4.111 & 3.889 \\\hline 7 & 5.206 & 4.868 & 4.564 & 4.288 \\\hline 8 & 5.747 & 5.335 & 4.968 & 4.639 \\\hline 9 & 6.247 & 5.759 & 5.328 & 4.946 \\\hline 10 & 6.710 & 6.145 & 5.650 & 5.216 \\\hline\end{array}$

-Refer to the Figure.Suppose that Boleyn Company requires a minimum rate of return of 8%.Which project is higher in terms of net present value?

A)Project A with an NPV of $3,415
B)Project B with an NPV of $3,415
C)Project A with an NPV of $7,756
D)Project B with an NPV of $7,756

Question 72

Ostead Company is considering an investment with the following data:
Depreciation will be taken on a straight-line basis over the expected life of the investment.
$$\begin{array} { l r } \text { Initial cost } & \$ 200,000 \\\text { Annual net cash inflows } & \$ 25,000 \\\text { Expected life } & 10 \text { years } \\\text { Salvage value } & \text { none }\end{array}$$

-Refer to the Figure.The company requires a minimum rate of return of 4%.The present value of an annuity of $1 in arrears for 4% for 10 years is as follows: What is the net present value of the investment?
$\begin{array}{|c|c|c|c|c|c|c|c|c|c|c|}\hline \text { Period } & 1 & 2 & 3 & 4 & 5 & 6 & 7 & 8 & 9 & 10 \\\hline 4 \% & 0.962 & 1.886 & 2.775 & 3.630 & 4.452 & 5.242 & 6.002 & 6.773 & 7.435 & 8.111 \\\hline\end{array}$

A)($81,830)
B)$2,775
C)$118,170
D)$202,775

Question 73

Darth Company is considering the purchase of new heavy construction equipment that will cost $2,000,000 and have a life of eight years with no expected salvage value. The expected cash flows associated with the project are as follows:
$\begin{array}{lll}&\text { Cash } & \text { Cash Expenses \& } \\\text { Year } &\text { Revenues }&\text { Depreciation }\\1 & \$ 2,400,000 & \$ 1,900,000 \\2 & \$ 2,400,000 & \$ 1,900,000 \\3 & \$ 2,400,000 & \$ 1,900,000 \\5 & \$ 2,400,000 & \$ 1,900,000 \\6 & \$ 2,400,000 & \$ 1,900,000 \\7 & \$ 2,400,000 & \$ 1,900,000 \\8 & \$ 2,400,000 & \$ 1,900,000 \\& \$ 2,400,000 & \$ 1,900,000\end{array}$

-Refer to the Figure.What is the average annual income for this project?

A)$62,500
B)$300,000
C)$500,000
D)$1,900,000

Question 74

Present value of an annuity of $1 in arrears
$\begin{array}{|c|l|l|l|l|l|l|}\hline \text { Periods } & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% \\\hline 1 & 0.962 & 0.943 & 0.926 & 0.909 & 0.893 & 0.877 \\\hline 2 & 1.886 & 1.833 & 1.783 & 1.736 & 1.690 & 1.647 \\\hline 3 & 2.775 & 2.673 & 2.577 & 2.487 & 2.402 & 2.322 \\\hline 4 & 3.630 & 3.465 & 3.312 & 3.170 & 3.037 & 2.914 \\\hline 5 & 4.452 & 4.212 & 3.993 & 3.791 & 3.605 & 4.433 \\\hline 6 & 5.242 & 4.917 & 4.623 & 4.355 & 4.111 & 3.889 \\\hline 7 & 6.002 & 5.582 & 5.206 & 4.868 & 4.564 & 4.288 \\\hline 8 & 6.733 & 6.210 & 5.747 & 5.335 & 4.968 & 4.639 \\\hline 9 & 7.435 & 6.802 & 6.247 & 5.759 & 5.328 & 4.946 \\\hline 10 & 8.111 & 7.360 & 6.710 & 6.145 & 5.650 & 5.216 \\\hline\end{array}$

-Refer to the Figure.Galway Company is considering a project with an initial investment of $124,450 that will yield annual net cash flows of $32,000 and will be depreciated at $20,742 per year over its six-year life.What is the internal rate of return?

A)6%
B)8%
C)10%
D)14%

Question 75

Ostead Company is considering an investment with the following data:
Depreciation will be taken on a straight-line basis over the expected life of the investment.
$$\begin{array} { l r } \text { Initial cost } & \$ 200,000 \\\text { Annual net cash inflows } & \$ 25,000 \\\text { Expected life } & 10 \text { years } \\\text { Salvage value } & \text { none }\end{array}$$

-Refer to the Figure.What is the accounting rate of return for the investment?

A)2.5%
B)10.0%
C)12.5%
D)20.0%

Question 76

Present value of $1
Present value of an annuity of $1
$\begin{array}{|c|l|l|l|l|l|l|}\hline \text { Periods } & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% \\\hline 1 & 0.962 & 0.943 & 0.926 & 0.909 & 0.893 & 0.877 \\\hline 2 & 0.925 & 0.890 & 0.857 & 0.826 & 0.797 & 0.769 \\\hline 3 & 0.889 & 0.840 & 0.794 & 0.751 & 0.712 & 0.675 \\\hline 4 & 0.855 & 0.792 & 0.735 & 0.683 & 0.636 & 0.592 \\\hline 5 & 0.822 & 0.747 & 0.681 & 0.621 & 0.567 & 0.519 \\\hline 6 & 0.790 & 0.705 & 0.630 & 0.564 & 0.507 & 0.456 \\\hline 7 & 0.760 & 0.665 & 0.583 & 0.513 & 0.452 & 0.400 \\\hline 8 & 0.731 & 0.627 & 0.540 & 0.467 & 0.404 & 0.351 \\\hline 9 & 0.703 & 0.592 & 0.500 & 0.424 & 0.361 & 0.308 \\\hline 10 & 0.676 & 0.558 & 0.463 & 0.386 & 0.322 & 0.270 \\\hline\end{array}$ $\begin{array}{|c|l|l|l|l|l|l|}\hline \text { Periods } & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% \\\hline 1 & 0.962 & 0.943 & 0.926 & 0.909 & 0.893 & 0.877 \\\hline 2 & 1.886 & 1.833 & 1.783 & 1.736 & 1.690 & 1.647 \\\hline 3 & 2.775 & 2.673 & 2.577 & 2.487 & 2.402 & 2.322 \\\hline 4 & 3.630 & 3.465 & 3.312 & 3.170 & 3.037 & 2.914 \\\hline 5 & 4.452 & 4.212 & 3.993 & 3.791 & 3.605 & 3.433 \\\hline 6 & 5.242 & 4.917 & 4.623 & 4.355 & 4.111 & 3.889 \\\hline 7 & 6.002 & 5.582 & 5.206 & 4.868 & 4.564 & 4.288 \\\hline 8 & 6.733 & 6.210 & 5.747 & 5.335 & 4.968 & 4.639 \\\hline 9 & 7.435 & 6.802 & 6.247 & 5.759 & 5.328 & 4.946 \\\hline 10 & 8.111 & 7.360 & 6.710 & 6.145 & 5.650 & 5.216 \\\hline\end{array}$

-Refer to the Figure.Ramona Kruss is considering two investments.Each will cost $20,000 initially.Project 1 will return annual cash flows of $10,000 in each of three years.Project 2 will return $5,000 in year 1,$10,000 in year 2,and $15,000 in year 3.Ramona Kruss requires a minimum rate of return of 10%.What is the net present value of Project 1? (Note: there may be a rounding error depending on the table you use to compute your answer.Choose the answer closest to the result you calculate.)

A)$2,530
B)$4,860
C)$20,000
D)$22,530

Question 77

Present value of $1
Present value of an annuity of $1
$\begin{array}{|c|l|l|l|l|l|l|}\hline \text { Periods } & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% \\\hline 1 & 0.962 & 0.943 & 0.926 & 0.909 & 0.893 & 0.877 \\\hline 2 & 0.925 & 0.890 & 0.857 & 0.826 & 0.797 & 0.769 \\\hline 3 & 0.889 & 0.840 & 0.794 & 0.751 & 0.712 & 0.675 \\\hline 4 & 0.855 & 0.792 & 0.735 & 0.683 & 0.636 & 0.592 \\\hline 5 & 0.822 & 0.747 & 0.681 & 0.621 & 0.567 & 0.519 \\\hline 6 & 0.790 & 0.705 & 0.630 & 0.564 & 0.507 & 0.456 \\\hline 7 & 0.760 & 0.665 & 0.583 & 0.513 & 0.452 & 0.400 \\\hline 8 & 0.731 & 0.627 & 0.540 & 0.467 & 0.404 & 0.351 \\\hline 9 & 0.703 & 0.592 & 0.500 & 0.424 & 0.361 & 0.308 \\\hline 10 & 0.676 & 0.558 & 0.463 & 0.386 & 0.322 & 0.270 \\\hline\end{array}$ $\begin{array}{|c|l|l|l|l|l|l|}\hline \text { Periods } & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% \\\hline 1 & 0.962 & 0.943 & 0.926 & 0.909 & 0.893 & 0.877 \\\hline 2 & 1.886 & 1.833 & 1.783 & 1.736 & 1.690 & 1.647 \\\hline 3 & 2.775 & 2.673 & 2.577 & 2.487 & 2.402 & 2.322 \\\hline 4 & 3.630 & 3.465 & 3.312 & 3.170 & 3.037 & 2.914 \\\hline 5 & 4.452 & 4.212 & 3.993 & 3.791 & 3.605 & 3.433 \\\hline 6 & 5.242 & 4.917 & 4.623 & 4.355 & 4.111 & 3.889 \\\hline 7 & 6.002 & 5.582 & 5.206 & 4.868 & 4.564 & 4.288 \\\hline 8 & 6.733 & 6.210 & 5.747 & 5.335 & 4.968 & 4.639 \\\hline 9 & 7.435 & 6.802 & 6.247 & 5.759 & 5.328 & 4.946 \\\hline 10 & 8.111 & 7.360 & 6.710 & 6.145 & 5.650 & 5.216 \\\hline\end{array}$

-Refer to the Figure.Gibb Clinical Practice is considering an investment in new imaging equipment that will cost $400,000.The equipment is expected to yield cash inflows of $80,000 per year for a six-year period.At the end of the sixth year,the firm expects to recover $150,000 from the sale of the equipment.Gibb set a required rate of return at 10%.What is the net present value of the investment? (Note: there may be a rounding error depending on the table you use to compute your answer.Choose the answer closest to the result you calculate.)

A)($177,280)
B)($33,000)
C)$33,000
D)$45,200

Question 78

Present value of $1
Present value of an annuity of $1
$\begin{array}{|c|l|l|l|l|l|l|}\hline \text { Periods } & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% \\\hline 1 & 0.962 & 0.943 & 0.926 & 0.909 & 0.893 & 0.877 \\\hline 2 & 0.925 & 0.890 & 0.857 & 0.826 & 0.797 & 0.769 \\\hline 3 & 0.889 & 0.840 & 0.794 & 0.751 & 0.712 & 0.675 \\\hline 4 & 0.855 & 0.792 & 0.735 & 0.683 & 0.636 & 0.592 \\\hline 5 & 0.822 & 0.747 & 0.681 & 0.621 & 0.567 & 0.519 \\\hline 6 & 0.790 & 0.705 & 0.630 & 0.564 & 0.507 & 0.456 \\\hline 7 & 0.760 & 0.665 & 0.583 & 0.513 & 0.452 & 0.400 \\\hline 8 & 0.731 & 0.627 & 0.540 & 0.467 & 0.404 & 0.351 \\\hline 9 & 0.703 & 0.592 & 0.500 & 0.424 & 0.361 & 0.308 \\\hline 10 & 0.676 & 0.558 & 0.463 & 0.386 & 0.322 & 0.270 \\\hline\end{array}$ $\begin{array}{|c|l|l|l|l|l|l|}\hline \text { Periods } & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% \\\hline 1 & 0.962 & 0.943 & 0.926 & 0.909 & 0.893 & 0.877 \\\hline 2 & 1.886 & 1.833 & 1.783 & 1.736 & 1.690 & 1.647 \\\hline 3 & 2.775 & 2.673 & 2.577 & 2.487 & 2.402 & 2.322 \\\hline 4 & 3.630 & 3.465 & 3.312 & 3.170 & 3.037 & 2.914 \\\hline 5 & 4.452 & 4.212 & 3.993 & 3.791 & 3.605 & 3.433 \\\hline 6 & 5.242 & 4.917 & 4.623 & 4.355 & 4.111 & 3.889 \\\hline 7 & 6.002 & 5.582 & 5.206 & 4.868 & 4.564 & 4.288 \\\hline 8 & 6.733 & 6.210 & 5.747 & 5.335 & 4.968 & 4.639 \\\hline 9 & 7.435 & 6.802 & 6.247 & 5.759 & 5.328 & 4.946 \\\hline 10 & 8.111 & 7.360 & 6.710 & 6.145 & 5.650 & 5.216 \\\hline\end{array}$

-Refer to the Figure.Ramona Kruss is considering two investments.Each will cost $20,000 initially.Project 1 will return annual cash flows of $10,000 in each of three years.Project 2 will return $5,000 in year 1,$10,000 in year 2,and $15,000 in year 3.Ramona Kruss requires a minimum rate of return of 10%.What is the net present value of Project 2?

A)$2,530
B)$4,070
C)$5,670
D)$20,000

Question 79

A company is considering two projects.
$$\begin{array} { l l l } & \text { Project A } & \text { Project B } \\\text { Initial investment } & \$ 150,000 & \$ 150,000 \\\text { Cash inflow Year 1 } & \$ 50,000 & \$ 40,000 \\\text { Cash inflow Year 2 } & \$ 50,000 & \$ 40,000 \\\text { Cash inflow Year 3 } & \$ 50,000 & \$ 40,000 \\\text { Cash inflow Year 4 } & \$ 50,000 & \$ 60,000 \\\text { Cash inflow Year 5 } & \$ 50,000 & \$ 80,000\end{array}$$

-Refer to the Figure.What is the payback period for Project B?

A)2 years
B)2.5 years
C)3 years
D)3.5 years

Question 80

Boleyn Company is considering two projects.
Present value of an annuity of $1 in arrears
$\begin{array}{lrr}&\text { Project } \mathrm{A}&\text { Project } \mathrm{B}\\\text { Initial investment } & \$ 100,000 & \$ 25,000 \\\text { Annual cash flows } & \$ 18,750 & \$ 8,580 \\\text { Life of the project } & 8 \text { years } & 4 \text { years } \\\text { Depreciation per year } & \$ 25,000 & \$ 6,250\end{array}$ $\begin{array}{|c|l|l|l|l|}\hline \text { Periods } & 8 \% & 10 \% & 12 \% & 14 \% \\\hline 1 & 0.926 & 0.909 & 0.893 & 0.877 \\\hline 2 & 1.783 & 1.736 & 1.690 & 1.647 \\\hline 3 & 2.577 & 2.487 & 2.402 & 2.322 \\\hline 4 & 3.312 & 3.170 & 3.037 & 2.914 \\\hline 5 & 3.993 & 3.791 & 3.605 & 4.433 \\\hline 6 & 4.623 & 4.355 & 4.111 & 3.889 \\\hline 7 & 5.206 & 4.868 & 4.564 & 4.288 \\\hline 8 & 5.747 & 5.335 & 4.968 & 4.639 \\\hline 9 & 6.247 & 5.759 & 5.328 & 4.946 \\\hline 10 & 6.710 & 6.145 & 5.650 & 5.216 \\\hline\end{array}$

-Refer to the Figure.Which of the two projects,A or B,has a higher internal rate of return?

A)Project A with an IRR of 10%
B)Project B with an IRR of 10%
C)Project A with an IRR of 14%
D)Project B with an IRR of 14%