Question 1

Assume you receive $4,800 in two years and the annual interest rate is four percent.Using the present value formula,how much is that amount worth in today's dollars (rounded to the nearest dollar)?

Accepted Answer

Using the present value formula, we have:

PV = FV / (1 + r)^n

where PV is the present value, FV is the future value, r is the annual interest rate, and n is the number of years. Plugging in the given values:

PV = 4,800 / (1 + 0.04)^2
PV = 4,437.78 ≈ $4,438

Therefore, the answer is B, $4,438 rounded to the nearest dollar.

Question 2

If a project's net present value is zero,the internal rate of return is:

Accepted Answer

If the net present value is zero, it means the project's cash inflows are equal to the initial investment. Therefore, the internal rate of return would be the discount rate that was used to calculate the present value of the cash inflows. Thus, the correct choice is B, where the internal rate of return is equal to the discount rate.

Question 3

Thomas Inc.has two independent investment opportunities,each requiring an initial investment of $15,000.The company's hurdle rate is 14 percent.The cash inflows for each investment are provided below.

Without making any calculations,which investment will have the higher net present value?

Accepted Answer

The answer of Thomas Inc.has two independent investment opportunities,each requiring...

Question 4

Assume you receive $63,000 in three years and the annual interest rate is five percent.Using the present value formula,how much is that amount worth in today's dollars (rounded to the nearest dollar)?

Accepted Answer

To calculate the present value, we need to discount the $63,000 back to the present day using the formula PV = FV/(1+r)^n, where PV is the present value, FV is the future value, r is the annual interest rate, and n is the number of years. Plugging in the numbers, we get PV = $63,000/(1+0.05)^3 = $54,421.81 ≈ $54,422 rounded to the nearest dollar. Therefore, the correct choice is A.

Question 5

If a project's net present value is negative,the internal rate of return is:

Accepted Answer

If a project's net present value is negative, it means the project's cash outflows are greater than its cash inflows, and the project is not generating enough return to cover the required rate of return or the discount rate. Therefore, the internal rate of return must be less than the discount rate.

Question 6

Inglewood Inc.would like to purchase a specialized production machine for $3,500,000.The machine is expected to have a life of three years,and a salvage value of $200,000.Annual maintenance costs will total $200,000.Annual material savings are predicted to be $900,000.The company's required rate of return is 20 percent.
Ignoring the time value of money,what is the net cash inflow or (outflow)resulting from this investment opportunity?

Accepted Answer

Net cash inflow = Annual material savings - Annual maintenance costs - Depreciation
Depreciation = (Cost - Salvage value) / Useful life = ($3,500,000 - $200,000) / 3 = $1,100,000
Net cash inflow = $900,000 - $200,000 - $1,100,000 = ($400,000)
Since the net cash inflow is negative, there will be a net cash outflow of $400,000 each year for three years. Therefore, the total net cash outflow will be $1,200,000.

Question 7

Assume you receive $15,000 in four years and the annual interest rate is four percent.Using the present value formula,how much is that worth in today's dollars (rounded to the nearest dollar)?

Accepted Answer

We can use the present value formula:

Present Value = Future Value / (1 + r)^n

where r is the annual interest rate and n is the number of years.

Plugging in the given values, we get:

Present Value = 15,000 / (1 + 0.04)^4
Present Value = 15,000 / 1.1699
Present Value ≈ $12,822

Therefore, the answer is D) $12,822.

Question 8

If a project's net present value is positive,the internal rate of return is:

Accepted Answer

If a project's net present value is positive, it means that the present value of future cash inflows exceeds the present value of cash outflows, which implies that the project is profitable. To be more specific, the positive net present value means that the project's rate of return is greater than the discount rate. Therefore, the internal rate of return must be greater than the discount rate for the net present value to be positive. Hence, the correct answer is (C) greater than the discount rate.

Question 9

Which of the following statements is true regarding the time value of money concept?

Accepted Answer

The time value of money concept recognizes that a dollar received today is worth more than a dollar received in the future due to the opportunity cost of not having the money to invest or earn interest on it. This is why financial calculations often involve discounting future cash flows to reflect their lower present value.

Question 10

Vista Company wants to replace one of its older production machines.The estimated cost is $180,000.Using a discount rate of 18%,the company calculates a net present value of the new machine to be negative $10,000.Based on this information which of the following statements is true?

Accepted Answer

The net present value of the new machine is negative, which means that the cost of the machine exceeds its future cash inflows discounted at 18%. However, if the actual purchase price is less than $170,000, the net present value may become positive. Therefore, option C is true. The use of a higher discount rate would make the net present value even more negative, so option A is incorrect. The guaranteed rate of return on the new purchase is not 18%, so option B is incorrect. The internal rate of return on the truck cannot be determined from the information given, so option D is incorrect.

Question 11

If a project has an internal rate of return of 25% and a negative net present value,which of the following statements is true regarding the discount rate used for the net present value computation?

Accepted Answer

A project with a negative net present value and a high internal rate of return indicates that the discount rate used for the net present value computation was lower than the internal rate of return of the project. Therefore, the required rate of return (discount rate) must have been greater than 25%.

Question 12

Sanders Company would like to purchase a specialized production machine for $1,000,000.The machine is expected to have a life of five years,and a salvage value of $300,000.Annual maintenance costs will total $50,000.Annual labor savings are predicted to be $280,000.The company's required rate of return is 15 percent.
Ignoring the time value of money,what is the net cash inflow or (outflow)resulting from this investment opportunity?

Accepted Answer

The answer of Sanders Company would like to purchase a...

Question 13

The appropriate rate to be used for evaluating a long-term investment proposal can be referred to as all of the following except:

Accepted Answer

The appropriate rate to be used for evaluating a long-term investment proposal can be referred to as the required rate of return, the discount rate, or the hurdle rate. However, it would not be referred to as the cash flow rate as this is a measure of the flow of cash in and out of the business, not a rate used for investment evaluation.

Question 14

Fusion Inc.would like to purchase a new machine for $85,000.The machine is expected to generate a cost savings of $23,000 per year for five years.The company's cost of capital is 10 percent.Factors for a 10 percent interest rate for five years are shown below:
Future Value of $1 1.611
Present Value of $1 0.621
Future Value of an Annuity 6.105
Present Value of an Annuity 3.791
Using the net present value (NPV)to evaluate this proposal,the company should:

Accepted Answer

To calculate the net present value (NPV), we need to find the present value of the cost savings generated by the machine over five years, and subtract the initial cost of $85,000. 
PV of cost savings = $23,000 x 3.791 (PV of annuity for five years at 10%) = $87,293
NPV = PV of cost savings - initial cost = $87,293 - $85,000 = $2,293
Since the NPV is positive, the company should invest in the proposal. Therefore, the best choice is A.

Question 15

Assume that you invest $100,000 today at an annual rate of eight percent for four years.How much will you have at the end of four years (rounded to the nearest dollar)?

Accepted Answer

The future value of an investment is calculated using the formula FV = PV(1 + r)^n, where FV is the future value, PV is the present value, r is the annual interest rate, and n is the number of years. Plugging in the given values: FV = $100,000(1 + 0.08)^4 = $136,048.64, which rounds to $136,049.

Question 16

Under the net present value (NPV)method,cash flows are assumed to be reinvested at:

Accepted Answer

The NPV method assumes that cash flows are reinvested at the company's discount rate, which represents the opportunity cost of investing in this project instead of elsewhere. Using a different rate, such as the internal rate of return or prime lending rate, would not reflect the true cost of capital for the company and could lead to incorrect investment decisions.

Question 17

Assume you receive $60,000 in five years and the annual interest rate is six percent.Using the present value formula,how much is that worth in today's dollars (rounded to the nearest dollar)?

Accepted Answer

The present value formula is PV=FV/(1+r)^n, where PV is the present value, FV is the future value, r is the annual interest rate, and n is the number of years.

In this case, FV=$60,000, r=6%, and n=5. Plugging these values into the formula, we get:

PV= $60,000/(1+0.06)^5
PV= $44,834.58

Therefore, the answer is C) $44,835, rounded to the nearest dollar.

Question 18

Assume that you invest $10,000 today at an annual rate of five percent for three years.How much will you have at the end of three years (rounded to the nearest dollar)?

Accepted Answer

To calculate the future value of an investment with compound interest, we can use the formula:

FV = PV * (1 + r)^n

Where FV is the future value, PV is the present value, r is the annual interest rate, and n is the number of years.

Plugging in the given values, we get:

FV = 10,000 * (1 + 0.05)^3 = 11,576

Therefore, the answer is choice A.

Question 19

Roske Company is considering a project with an initial investment of $40,000 and annual cash inflows of $8,000 per year for seven years.The company's cost of capital is 12 percent.Factors for a 12 percent interest rate for seven years are shown below:
Future Value of $1 2.211
Present Value of $1 0.452
Future Value of an Annuity 10.089
Present Value of an Annuity 4.564
Using the net present value (NPV)to evaluate this proposal,the company should:

Accepted Answer

The answer of Roske Company is considering a project with...

Question 20

Philly Company wants to buy a new machine and has narrowed its options to two choices.Both machines cost $160,000.The following data shows the expected cash inflows from each machine:

When calculating net present value,Philly uses the same cost of capital for both machines and both machines have a positive net present value.
Based on this information,which statement is true?

Accepted Answer

The answer of Philly Company wants to buy a new...

Quiz 8: How Is Capital Budgeting Used to Make Decisions

Assume you receive $4,800 in two years and the annual interest rate is four percent.Using the present value formula,how much is that amount worth in today's dollars (rounded to the nearest dollar) ?

If a project's net present value is zero,the internal rate of return is:

Thomas Inc.has two independent investment opportunities,each requiring an initial investment of $15,000.The company's hurdle rate is 14 percent.The cash inflows for each investment are provided below. Without making any calculations,which investment will have the higher net present value?

Assume you receive $63,000 in three years and the annual interest rate is five percent.Using the present value formula,how much is that amount worth in today's dollars (rounded to the nearest dollar) ?

If a project's net present value is negative,the internal rate of return is:

Assume you receive $15,000 in four years and the annual interest rate is four percent.Using the present value formula,how much is that worth in today's dollars (rounded to the nearest dollar) ?

If a project's net present value is positive,the internal rate of return is:

Which of the following statements is true regarding the time value of money concept?

Vista Company wants to replace one of its older production machines.The estimated cost is $180,000.Using a discount rate of 18%,the company calculates a net present value of the new machine to be negative $10,000.Based on this information which of the following statements is true?

If a project has an internal rate of return of 25% and a negative net present value,which of the following statements is true regarding the discount rate used for the net present value computation?

The appropriate rate to be used for evaluating a long-term investment proposal can be referred to as all of the following except:

Assume that you invest $100,000 today at an annual rate of eight percent for four years.How much will you have at the end of four years (rounded to the nearest dollar) ?

Under the net present value (NPV) method,cash flows are assumed to be reinvested at:

Assume you receive $60,000 in five years and the annual interest rate is six percent.Using the present value formula,how much is that worth in today's dollars (rounded to the nearest dollar) ?

Assume that you invest $10,000 today at an annual rate of five percent for three years.How much will you have at the end of three years (rounded to the nearest dollar) ?