Question 1

A small department store in a mall has the opportunity to rent an additional 20,000 square feet of space for five years.It can divide up this space between the above new departments.Each department will require a different amount of space,and each department is expected to make a yearly profit as shown,for each of the next five years.The discount rate is 10%.Based on this information,what departments should be added?

Accepted Answer

11ea7fd1_1f6e_0e6d_99dd_1f12c97fd3f3_TB1622_00

Question 2

When comparing two projects with different lives,why do you compute an annuity with an equivalent present value (PV)to the net present value (NPV)?

Accepted Answer

Computing an annuity with an equivalent present value to the net present value allows for the projects to be compared on their cost or value created per year. This is especially useful when comparing projects with different lives since it allows for a fair comparison of the cash flows over time. Choosing one project over another based solely on their individual NPV can be misleading, as the project with the longer life may have a higher NPV due to the inclusion of cash flows that occur after the shorter-lived project has ended. By computing an annuity with the same PV as the NPV, the projects can be compared on an annual basis, making it easier to determine which project is more cost-effective or creates more value per year. This also helps to reduce the danger that changes in the estimate of the discount rate will lead to choosing the project with a shorter timeframe.

Question 3

When using equivalent annual annuities to compare the costs of projects with different lives,you should not consider any changes in the expected replacement cost of equipment.

Accepted Answer

Changes in the expected replacement cost of equipment should be taken into consideration when using equivalent annual annuities to compare the costs of projects with different lives. This is because equipment replacement cost can significantly impact the overall cost of a project and its annual equivalent cost.

Question 4

A lawn maintenance company compares two ride-on mowers the Excelsior,which has an expected working-life of six years,and the Grassassinator,which has a working life of four years.After examining the equivalent annual annuities of each mower,the company decides to purchase the Excelsior.Which of the following,if true,would be most likely to make them change that decision?

Accepted Answer

If the mower is only needed for three years, then the Grassassinator would be a better choice as it has a shorter working life but may have a lower upfront cost. This would change the company's decision to purchase the Excelsior with a longer working life but potentially a higher upfront cost. The other options provided do not directly affect the decision between the two mowers.

Question 5

An investor has a budget of $10 million.He can invest in the projects shown above.If the cost of capital is 6%,what investment or investments should he make?

Accepted Answer

11ea7fd1_1f6d_4b16_99dd_a53bd0676983_TB1622_00 Select C and D.

Question 6

A company has four projects it wishes to undertake.Which of these investments should be the lowest priority,given a discount rate of 5%?

Accepted Answer

11ea7fd1_1f6e_5c8f_99dd_311ec20bdb11_TB1622_00

Question 7

The profitability index can break down completely when dealing with multiple resource restraints.

Accepted Answer

The profitability index assumes that all resources are unlimited and can be acquired at the same cost. When dealing with multiple resource constraints, the analysis becomes more complex and the profitability index may not accurately reflect the true profitability of a project.

Question 8

An company buys a color printer that will cost $18,000 to buy,and last 5 years.It is assumed that it will require servicing costing $500 each year.What is the equivalent annual annuity of this deal,given a cost of capital of 12%?

Accepted Answer

The answer of An company buys a color printer that...

Question 9

A security company offers to provide CCTV coverage for a parking garage for ten years for an initial payment of $50,000 and additional payments of $20,000 per year.What is the equivalent annual annuity of this deal,given a cost of capital of 6%?

Accepted Answer

To calculate the equivalent annual annuity, we need to find the annual payment that would be equivalent to the initial payment plus the annual payments spread over ten years, taking into account the cost of capital.

Using the formula: Equivalent Annual Annuity = (Present Value of Payments) x (Discount Rate / Present Value Factor)

Where:
- Present Value of Payments = $50,000 (initial payment) + $20,000 x 10 (annual payments for 10 years) = $250,000
- Discount Rate = 6%
- Present Value Factor = 6% / (1 - 1 / (1 + 6%)^10) = 5.2167

Equivalent Annual Annuity = $250,000 x (6% / 5.2167) = $28,393

Therefore, the equivalent annual annuity of the deal is $28,393, which is closest to answer choice D ($26,793).

Question 10

The timeline of an investment is shown above.If the cost of capital is 5%,what is the profitability index of this investment?

Accepted Answer

The answer of 
The timeline of an investment is shown...

Question 11

A company that creates education products is planning to create a suite of books to help customers prepare for high-stakes tests for entry into college and grad school.They have 33 in-house writers to create these books.Due to the expertise needed in creating this content it will not be possible to hire temporary writers within the planned time-frame.Which projects should be undertaken? 
A)Prep for the College Entry Test and Prep for the Law School Entry Test
B)Prep for the College Entry Test and Prep for the Grad School Entry Test
C)Prep for the Dental School Entry Test,Prep for the Grad School Entry Test,and Prep for the Medical School Entry Test
D)Prep for the Grad School Entry Test,Prep for the Law School Entry Test,and Prep for the Medical School Entry Test

Accepted Answer

The answer of  
A company that creates education products...

Question 12

Jenkins Security has learned that a rival has offered to supply a parking garage with security for ten years for $50,000 up front and a further $20,000 per year.If Jenkins Security offers to provide security for eight years for an upfront cost of $70,000 and a separate yearly payment,what is the maximum that this yearly payment can be so that Jenkins' offer matches the equivalent annual annuity of their rival's offer? (Assume a cost of capital of 6%. )

Accepted Answer

The answer of Jenkins Security has learned that a rival...

Question 13

A garage is comparing the cost of buying two different car hoists.Hoist A will cost $20,000,will require servicing of $1000 every two years,and last ten years.Hoist B will cost $15,000,require servicing of $800 per year,and last eight years.If the cost of capital is 7%,which is the better option,given that the firm has an ongoing requirement for a hoist?

Accepted Answer

D) Using a financial calculator,
NPV(A) = -$23,393 equivalent annual annuity (A) = -$3,331
NPV(B) = -$19,777 equivalent annual annuity (B) = -$3,312

Question 14

An investor has a budget of $5 million.He can invest in the projects shown above.If the cost of capital is 6%,what investment or investments should he make?

Accepted Answer

11ea7fd1_1f6d_2404_99dd_71a808b20fbc_TB1622_00 Select B and C.

Question 15

A janitorial services firm is considering two brands of industrial vacuum cleaners to equip their staff.Option A will cost $1500,will require servicing of $200 per year,and last five years.Option B will cost $1000,require servicing of $100 per year,and last three years.If the cost of capital is 8%,which is the better option,given that the firm has an ongoing requirement for vacuum cleaners?

Accepted Answer

The answer of A janitorial services firm is considering two...

Question 16

When different projects put different demands on a limited resource,then net present value (NPV)is always the best way to choose the best project.

Accepted Answer

NPV is one of the methods to evaluate project profitability, but it may not always be the best way to choose the best project when different projects put different demands on a limited resource. Other factors such as project duration, resource availability, risk level, and strategic alignment should also be considered when making project selection decisions.

Question 17

You can evaluate alternative projects with different lives by calculating and comparing their equivalent annual annuity.

Accepted Answer

Calculating and comparing the equivalent annual annuity is a valid method to evaluate alternative projects with different lives.

Question 18

The owner of a number of gas stations is considering installing coffee machines in his gas stations.It will cost $280,000 to install the coffee machines,and they are expected to boost cash flows by $120,000 per year for their five-year working life.What must the cost of capital be if this investment has a profitability index of 1?

Accepted Answer

The answer of The owner of a number of gas...

Question 19

A consultancy calculates that it can supply crude oil assaying services to a small oil producer for $120,000 per year for five years.There are some upfront costs the consultancy will require the oil producer to absorb.What is the maximum that these upfront costs could be,if the equivalent annual annuity to the oil company is to be under $150,000,given that the cost of capital is 10%?

Accepted Answer

Firstly, let us calculate the equivalent annual annuity (EAA) for the oil company based on the given information:

EAA = Annual payment - Annualized upfront costs

We know that the annual payment is $120,000 per year for 5 years, which is a total of $600,000.

Now, we need to find the maximum upfront costs that the oil producer can absorb such that the EAA is under $150,000. To find this, we can use the formula:

Upfront costs = (Annual payment - EAA) / PVIFA(rate, time)

PVIFA is the Present Value Interest Factor for an Annuity, which can be found in tables or calculated using financial calculators or Excel functions. For a rate of 10% and a time of 5 years, PVIFA is 3.791.

Substituting the values:

Upfront costs = (600,000 - 150,000) / 3.791
Upfront costs = $113,724

Therefore, the maximum upfront costs that the oil producer can absorb is $113,724, which is option B.

Question 20

A print shop has contracted to print a number of jobs within 24 hours.Any jobs not completely printed within this time will result in a penalty,as shown in the table above.However too many jobs have been accepted,and not all can be printed.Which jobs should be printed in the next 24 hours?

Accepted Answer

11ea7fd1_1f6d_e75b_99dd_8d7661075695_TB1622_00

Quiz 8: Investment Decision Rules

When comparing two projects with different lives,why do you compute an annuity with an equivalent present value (PV) to the net present value (NPV) ?