Question 1

If an investment's net present value is positive,then:

Accepted Answer

A)  the investment provides a return greater than the discount rate. 
B)  the investment provides a return less than the discount rate. 
C)  the present value of the cash outflows must have been greater than the present value of the cash inflows. 
D)  the investment should be deemed as unacceptable. 
A)  the investment provides a return greater than the discount rate. 
B)  the investment provides a return less than the discount rate. 
C)  the present value of the cash outflows must have been greater than the present value of the cash inflows. 
D)  the investment should be deemed as unacceptable.

Question 2

Peddler Products Inc.requires all capital investments to generate an internal rate of return of 14 per cent.The company is currently considering an investment that is expected to generate annual cash inflows of $25 000 for 5 years.
Required: What amount should the cost of the investment not exceed? Show computations and ignore income taxes.

Accepted Answer

Using factor tables,the cost of the inve

Question 3

Peterson Inc.has the following information available regarding one of the projects it is considering:
$\begin{array}{lr}
  \text {  Initial investment} &\$75000\
 \text { PV of cash inflows } &\$100000\
 \text { Internal rate of return } &15\%\
\end{array}$

The profitability index of this project is:

Accepted Answer

A)  1.33 
B)  .75 
C)  .15 
D)  .33 
A)  1.33 
B)  .75 
C)  .15 
D)  .33

Question 4

Deciding whether or not an investment meets a predetermined company standard is called a:

Accepted Answer

A)  preference decision. 
B)  payback decision. 
C)  screening decision. 
D)  profitability decision. 
A)  preference decision. 
B)  payback decision. 
C)  screening decision. 
D)  profitability decision.

Question 5

Newman Auto Repair is considering the purchase of a hydraulic machine costing approximately $35 000.Using a discount rate of 18 per cent,the present value of future cash inflows are calculated to be $42 000.To yield at least an 18 per cent return,the actual cost of the machine should not exceed the $35 000 estimate by more than:

Accepted Answer

A)  $28 000 
B)  $49 000 
C)  $ 7000 
D)  $ 6300 
A)  $28 000 
B)  $49 000 
C)  $ 7000 
D)  $ 6300

Question 6

Siddon Inc.is considering investing in equipment that costs $20 000.The equipment would be depreciated using the straight-line method with no half-year convention over five years and have no salvage value.If the company has a 40 per cent income tax rate and desires an after-tax rate of return of 12 per cent on investments,the total present value of the depreciation tax shield is:

Accepted Answer

A)  $ 8652 
B)  $14 419 
C)  $ 5768 
D)  $ 908 
A)  $ 8652 
B)  $14 419 
C)  $ 5768 
D)  $ 908

Question 7

Mid-Town Products Inc.purchased equipment costing $100 000.Annual operating cash inflows are expected to be $30 000 each year for five years.At the end of the equipment's life,the salvage value is expected to be $6000.If Mid-Town's cost of capital is 14 per cent,what is the asset's net present value? (ignore income taxes)

Accepted Answer

A)  $ 6109 
B)  $ 2993 
C)  $ 7840 
D)  $23 592 
A)  $ 6109 
B)  $ 2993 
C)  $ 7840 
D)  $23 592

Question 8

Clara's Custom Curtains Inc.is considering the purchase of a new high-tech sewing machine.The machine will have an initial cost of $15 000 and an estimated salvage value of $1000 at the end of its useful life.The company expects annual net operating cash inflows to increase $4000 each year for six years.The company has a cost of capital of 12 per cent.
Required:
A. If the company ignores income taxes, compute the net present value of the machine.
B. If the company takes into account income taxes using a 40 per cent income tax rate, and the machine will be depreciated over its six-year life using the straight-line method, compute the net present value.

Accepted Answer

None

Question 9

A local merchant is considering the purchase of a new machine which has an initial cost of $35 000.Annual operating cash inflows are expected to be $10 000 each year for five years.No salvage value is expected at the end of the machine's life.The company's cost of capital is 14 per cent.
Required: Compute the net present value of the machine.(Ignore income taxes)

Accepted Answer

None

Question 10

A local day spa is considering investing in a machine that costs $60 000.The machine is expected to generate revenues of $25 000 per year for five years.The machine would be depreciated using the straight-line method over its five-year life and have no salvage value.The company considers the impact of income taxes in all of its capital investment decisions.The company has a 35 per cent income tax rate and desires an after-tax rate of return of 14 per cent on its investment.The net present value of the machine is:

Accepted Answer

A)  $36 985 
B)  $10 207 
C)  $25 828 
D)  $22 566 
A)  $36 985 
B)  $10 207 
C)  $25 828 
D)  $22 566

Question 11

Butner Inc.requires all capital investments to generate an internal rate of return of 16 per cent.The company is considering an investment costing $80 000 that is expected to generate equal,annual cash inflows for 5 years.The equal,cash inflows are expected to be:

Accepted Answer

A)  $24 433 
B)  $16 000 
C)  $38 088 
D)  $12 800 
A)  $24 433 
B)  $16 000 
C)  $38 088 
D)  $12 800

Question 12

Cameo Inc. ,a local company specialising in home repairs,is considering replacing its older van with a new and larger one.The estimated cost of the new van will be $65 000.Using a discount rate of 18 per cent,the company calculates a net present value for the new van of $(5000).Based on this information,which of the following statements is true?

Accepted Answer

A)  The actual rate of return on the new van is negative. 
B)  If the company purchases the van,they are guaranteed a rate of return of 18 per cent. 
C)  Using a higher discount rate should cause the net present value to become positive. 
D)  If the actual cost of the new van ends up being less than $60 000,the net present value will become positive. 
A)  The actual rate of return on the new van is negative. 
B)  If the company purchases the van,they are guaranteed a rate of return of 18 per cent. 
C)  Using a higher discount rate should cause the net present value to become positive. 
D)  If the actual cost of the new van ends up being less than $60 000,the net present value will become positive.

Question 13

Mayberry Textiles Inc.is considering the purchase of a new machine which has an initial cost of $400 000.Annual operating cash inflows are expected to be $100 000 each year for eight years.No salvage value is expected at the end of the asset's life.Mayberry's cost of capital is 14 per cent.
Required: Compute the net present value of the machine.(Ignore income taxes)

Accepted Answer

None

Question 14

Which of the following statements is false regarding the interest rate used in NPV calculations?

Accepted Answer

A)  Some companies use their cost of capital as the discount rate. 
B)  It may be adjusted for uncertainty. 
C)  It should be equal to the maximum required rate of return needed to make the investment profitable. 
D)  It may be higher or lower than the investment's actual internal rate of return. 
A)  Some companies use their cost of capital as the discount rate. 
B)  It may be adjusted for uncertainty. 
C)  It should be equal to the maximum required rate of return needed to make the investment profitable. 
D)  It may be higher or lower than the investment's actual internal rate of return.

Question 15

Richardson Corporation has the following information available regarding one of the projects it is considering:
$\begin{array}{lr}
  \text {  Initial investment} &\$800000\
 \text { Net present value } &\$100000\
\end{array}$

The profitability index of this project is:

Accepted Answer

A)  .889 
B)  1.125 
C)  8.000 
D)  .125 
A)  .889 
B)  1.125 
C)  8.000 
D)  .125

Question 16

If a project has an internal rate of return of 12 per cent 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)  The discount rate must have been greater than 12 per cent. 
B)  The discount rate must have been less than 12 per cent. 
C)  The discount rate must have been equal to 12 per cent. 
D)  The discount rate must have been 0 per cent. 
A)  The discount rate must have been greater than 12 per cent. 
B)  The discount rate must have been less than 12 per cent. 
C)  The discount rate must have been equal to 12 per cent. 
D)  The discount rate must have been 0 per cent.

Question 17

Putter Inc.requires all capital investment projects to have a payback period of 4 years or less.Putter is currently considering an equipment purchase that has an initial cost of $80 000.The equipment is expected to have a six-year life and a salvage value of $4000.Assuming cash flows are equal,what does the annual cash flow generated by the equipment need to be in order to meet the payback period requirements?

Accepted Answer

A)  $19 000 
B)  $13 333 
C)  $21 000 
D)  $20 000 
A)  $19 000 
B)  $13 333 
C)  $21 000 
D)  $20 000

Question 18

Tyson Enterprises is considering investing in a machine that costs $30 000.The machine is expected to generate revenues of $10 000 per year for six years.The machine would be depreciated using the straight-line method over its six-year life and have no salvage value.The company considers the impact of income taxes in all of its capital investment decisions.The company has a 40 per cent income tax rate and desires an after-tax rate of return of 12 per cent on its investment.The net present value of the machine is:

Accepted Answer

A)  $ 2891 
B)  $ (5332) 
C)  $(13 555) 
D)  $ 15 225 
A)  $ 2891 
B)  $ (5332) 
C)  $(13 555) 
D)  $ 15 225

Question 19

The NPV method assumes that cash flows are reinvested at:

Accepted Answer

A)  the government's prime rate. 
B)  the internal rate of return. 
C)  the company's discount rate. 
D)  an average of the internal rate of return and the discount rate. 
A)  the government's prime rate. 
B)  the internal rate of return. 
C)  the company's discount rate. 
D)  an average of the internal rate of return and the discount rate.

Question 20

Mid-Town Plumbers Inc.is considering the purchase of a machine costing approximately $4000.Using a discount rate of 20 per cent,the present value of future cash inflows are calculated to be $4000.To yield at least a 20 per cent return,the actual cost of the machine should not exceed the $4000 estimate by more than:

Accepted Answer

A)  $4000 
B)  $8000 
C)  $ 800 
D)  $ 0 
A)  $4000 
B)  $8000 
C)  $ 800 
D)  $ 0

If an investment's net present value is positive,then:

Peterson Inc.has the following information available regarding one of the projects it is considering: Initial investment \7 5000 PV of cash inflows \1 00000 Internal rate of return 15\% The profitability index of this project is:

Deciding whether or not an investment meets a predetermined company standard is called a:

Butner Inc.requires all capital investments to generate an internal rate of return of 16 per cent.The company is considering an investment costing $80 000 that is expected to generate equal,annual cash inflows for 5 years.The equal,cash inflows are expected to be:

Which of the following statements is false regarding the interest rate used in NPV calculations?

Richardson Corporation has the following information available regarding one of the projects it is considering: Initial investment \8 00000 Net present value \1 00000 The profitability index of this project is:

If a project has an internal rate of return of 12 per cent 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 NPV method assumes that cash flows are reinvested at:

Introduction to Managerial Accounting

Product Costing: Manufacturing Processes, cost Terminology and Cost Flows

Cost Behaviour

Job Costing and Overhead Costing Systems

Process Costing Systems

Service and Operations Costing

Departmental Overhead Costing

Activity-Based Costing

Cost-Volume-Profit Analysis

Relevant Costs and Product Planning Decisions

Fixed and Rolling Budgets for Planning and Decision Making

Management Accounting for Cost Control and Performance Evaluation Flexible Budgets and Variance Analysis

Decentralisation and Modern Performance Management Systems the Balanced Scorecard

Accounting for Sustainability Social Reporting,environmental Reporting and Management Accounting

Filters

Exam 11: Long-Term Capital Investmentdecisions

If an investment's net present value is positive,then:

Peterson Inc.has the following information available regarding one of the projects it is considering: Initial investment \7 5000 PV of cash inflows \1 00000 Internal rate of return 15\% The profitability index of this project is:

Deciding whether or not an investment meets a predetermined company standard is called a:

Butner Inc.requires all capital investments to generate an internal rate of return of 16 per cent.The company is considering an investment costing $80 000 that is expected to generate equal,annual cash inflows for 5 years.The equal,cash inflows are expected to be:

Which of the following statements is false regarding the interest rate used in NPV calculations?

Richardson Corporation has the following information available regarding one of the projects it is considering: Initial investment \8 00000 Net present value \1 00000 The profitability index of this project is:

If a project has an internal rate of return of 12 per cent 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 NPV method assumes that cash flows are reinvested at:

Introduction to Managerial Accounting

Product Costing: Manufacturing Processes, cost Terminology and Cost Flows

Cost Behaviour

Job Costing and Overhead Costing Systems

Process Costing Systems

Service and Operations Costing

Departmental Overhead Costing

Activity-Based Costing

Cost-Volume-Profit Analysis

Relevant Costs and Product Planning Decisions

Fixed and Rolling Budgets for Planning and Decision Making

Management Accounting for Cost Control and Performance Evaluation Flexible Budgets and Variance Analysis

Decentralisation and Modern Performance Management Systems the Balanced Scorecard

Accounting for Sustainability Social Reporting,environmental Reporting and Management Accounting

Filters